May 12, 2014
Last week: Some improvement in trade, domestically and globally, was the big news this week. The forward indicators have been pointing to some improvement in global industrial conditions, which may be developing, as evidenced by the trade data. The other big story is financial, in terms of the Federal Reserve continuing to unwind quantitative easing. This is leading to renewed speculation about the timing of a return to a more normal yield curve in interest rates. And the irony is that the domestic economy is beginning to pick up enough steam to contemplate raising interest rates, which would mean higher mortgage rates, which would possibly slow the improvement in home building and buying. How much, and over what time frame, is a story that will unfold perhaps over the next year and a half.
Retail Sales, April (Bureau of the Census)
Vehicle sales (at a 16 million pace in March) reflect some catch up from widespread inclement weather at the start of the year. Non-auto retail spending will reflect the same trend. Going forward, the retail pace will be dictated by the pace of hiring and any pickup in wages. Retailers, still stuck with piled-up inventory, are hoping continued good news on the labor front allows consumers to put into action some long delayed buying plans, which in turn will bring the inventory-to-sales ratio back down to something closer to normal.
Producer Price Indexes, April (Bureau of Labor Statistics)
Energy prices remain relatively stable. Food prices are stable now but could start to move a little higher. “Core” prices (which exclude food and energy) remain very low, rising by no more than 0.2 percent per month. The big worry is that they might start rising even more slowly, as non-energy commodity prices stop rising at all. In a soft economic environment, there is little reason to think these raw commodity prices will start rising faster this summer.
Consumer Price Indexes, April (Bureau of Labor Statistics)
Globally, inflation is slow. Domestically, it is simply holding steady, but at a very slow pace. “Core” prices (which exclude food and energy) have been rising by no more than 0.2 percent per month for more than a year. Even with the economy starting to grow faster, faster price increases are probably not going to develop this spring or summer. Energy prices are running below year-ago comparisons. Food prices, however, are responding to low crop output, the result of a severe and prolonged California drought. Medical-care inflation has slowed while the cost of housing remains steady. Without much change in either of those two components, retail inflation will not change significantly.
Housing Starts and Building Permits, April (Bureau of the Census)
Home building has been running close to a million starts (annualized). Demand has held up, even with mortgage rates moving a little higher. And with foreclosure activity winding down, more demand has to be met by increased construction. The home-owner end of this market could be impacted if mortgage rates rise faster. Apartment building, however, is the stronger segment of this market, and even with higher mortgage rates, this won’t change. In fact, with 200,000 new jobs a month and higher mortgage rates, demand for apartments could intensify.
Fact of the Week
The national unemployment rate is now down to 6.3 percent. But among those 24 years of age or younger, it is over 9 percent. Moreover, a new report, In Ths Together: The Hidden Cost of Young Adult Unemployment, notes that governments (federal and states) lose almost $9 million in taxes not collected from pay not earned. Add in the number not working and not in school (and since they are not looking for a job, they are not counted in the labor force) and the cost skyrockets to $25 billion.
What is the cost to individuals? Starting their careers with bouts of unemployment, delaying their earnings experience and not developing their skill set could result in a collective loss of $20 billion in money not earned over thier working lives.
Nor is this strictly an American problem. Youth unemployment is higher in several other countries, much higher in a few countries like Spain. In fact, across the globe there is an army of unemployed and unengaged youth. There are approximately 75 NEETS (Not in Employment, Education, or Training) across the globe. What’s more, the slower the global economy grows, the faster the number of NEETS will grow. And by extension, the call on public resources and the limit on those resources increases, precisely because they are not engaged in economic activity.
Source: The Conference Board
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