Articles from AIER Staff
The recovery’s accelerating credit growth provides a positive sign for the economy and the financial sector.
Our business-cycle leader’s index picked up in May, jumping to 64 following three months at the neutral 50 level. Despite a poor first-quarter performance amid unusually harsh weather, we expect real GDP to return to a moderate pace of growth, with private domestic demand faring even better. We base our analysis on sound fundamentals seen in key areas, including consumer spending, business investment, and to a lesser degree, residential housing. An improving economy should encourage moderate credit growth and an opportunity for lenders to boost income. Commercial bank lending has expanded in key categories for several years as financial institutions capitalize on interest rates that have remained near historic lows.
Recent data suggest a reemergence of inflationary pressures. Overall, 12 out of 23 measures tracked by our inflationary pressures scorecard point to rising price pressures, up from nine last month. Energy prices have rebounded from the plunge in the last half of 2014, while the coincident rally in the U.S. dollar tailed off in March. Since then, the depreciating value of the currency has pushed up import prices.
The Consumer Price Index rose in April for the third straight month. The increase in food prices, which lasted throughout 2014, has stalled this year. At the same time, energy prices have firmed. These two forces largely offset one another, resulting in only a mild increase in the overall CPI. The increase in core CPI, which excludes volatile food and energy prices, remains close to its long-term historical average.
Fed officials continue to explain their thinking and current views on the economy while laying out their framework for reaching a decision on “liftoff.” They need to see continued improvement in the labor market and they need to have “reasonable confidence” that inflation is headed back up to the 2 percent goal. Projections by Fed members for the outlook for inflation suggest confidence has weakened recently.
Fed Chair Yellen noted in a recent speech that the FOMC would proceed cautiously during the period of policy normalization, that she and her colleagues at the Fed are data-dependent, and that interest rates are not on a predetermined course. We expect the first rate increase later this year but only periodic increases after the initial “liftoff.”
Credit growth is typical for a healthy and expanding economy and is a positive development for financial stocks. For some financials, the rebound in equity markets and the improving economy have been positive supports. The low interest-rate environment can benefit issuers of debt but can be a challenge for lenders who earn income on spreads, or the difference between what they charge borrowers for loans and what they pay for the money they lend.
Financial stocks in the U.S. have trailed the rebounding S&P 500, which has marched to fresh records at least 10 times this year, yet conditions suggest support for further gains. Global financial shares have performed best in emerging markets and Asia outside Japan. Sector stocks with the biggest growth potential—and the greatest risk—may be found in Europe and Japan.
As the economy continues its recovery, inflation plods along at a low, positive rate. July saw the broad CPI increase just under 0.1 percent. Core inflation, excluding food and energy, also saw modest monthly growth of 0.1 percent. However, labor market tightening and real disposable income growth have increased the upward pressure on inflation and inflation expectations.
The federal government shutdown caused a delay in the release of inflation data (consumer expenditure survey data) by the Bureau of Labor Statistics. The numbers we report this month were estimated by AIER by applying statistical modeling to historical data. According to our model, the Everyday Price Index rose by an estimated 0.5 percent in September, following a 0.1 percent drop in August. The increase was driven largely by basic consumer products.
(All dollar-denominated series are adjusted for price inflation.)
M1 money supply. An estimate of money balances (primarily currency and demand deposits). When M1 does not keep pace with inflation, bank lending may contract, and hence economic activity.
Yield Curve Index. The cumulative total of the monthly spread between the 10-year Treasury note and the effective federal funds rate. When the yield on the 10-year note is lower than the effective federal funds rate, the index will turn downward (i.e., the yield curve inverts), a signal that interest rates and the economy are headed even lower in the future.
Index of manufacturers’ supply prices. The percentage of purchasing agents who report paying higher prices in the current month compared with the preceding month. A higher index indicates stronger demand for business inputs relative to their supply.
New orders for consumer goods and materials. All new orders for goods and materials used primarily by consumers (less food and energy). The placing of such orders tends to precede production of consumer goods.
New orders for core capital goods. The value of new orders received by manufacturers of nondefense and non-aircraft capital goods. The placing of such orders tends to lead machinery production and production of the goods that machinery later produces.
New housing permits. Tends to lead construction expenditures.
Ratio of manufacturing and trade sales to inventories. The balance between sales and inventories. Faster inventory growth relative to sales suggests a structural imbalance within the manufacturing sector.
Vendor performance. The percentage of purchasing agents who experience slower deliveries in the current month compared with the preceding month. Slower deliveries indicate a higher volume of business activity.
Index of common stock prices. Uses monthly averages of daily indexes of closing prices from Standard & Poor’s 500 stock composite index. Changes in stocks prices reflect changes in investors’ opinions of profit prospects. Index is adjusted for price inflation.
Average workweek in manufacturing. The total of paid labor-hours of manufacturing production workers divided by the number of such workers. Employers tend to reduce the workweek of their labor force before they reduce the size of their workforce.
Initial claims for unemployment insurance. Inverted for analysis. Measures the average number of persons who file first-time claims for unemployment compensation each week in a given month. A decline in general business activity leads to layoffs.
Change in consumer debt. Percent change in the amount of consumer debt outstanding during the month from the amount three months earlier. Consumer debt includes auto loans and credit card debt, but not home mortgages or home equity loans. Borrowing is a source of consumer purchasing powerCoincident Indicators
Nonagricultural employment. The number of persons on the payrolls of all establishments, except agriculture. Labor is used in the production of goods and services and employment is the main source of household income and purchasing power.
Index of industrial production. The physical volume of goods produced by the manufacturing, mining, and electric utility sectors. Although the industries covered account for about 25 percent of GDP, they account for the bulk of the volatile movements in business activity.
Personal income less transfer payments. Derived by subtracting transfer payments, which are often counter cyclical, from total personal income. Personal income is the main component of consumer purchasing power.
Personal income includes compensation for labor, proprietors' income, rental income, and income from interest and dividends. Transfer payments include government payments for programs such as Social Security and Medicaid.
Manufacturing and trade sales. The aggregate value of sales by the manufacturing, wholesale, and retail trade sectors of the economy.
Ratio of civilian employment to population. The number of persons 16 years of age or older who are employed in the nonfarm sector divided by the total non-institutional population 16 years of age or older. A rising ratio may indicate tightness in the labor market.
Gross Domestic Product. The market value of all final goods and services produced within the nation’s borders. This is the broadest measure of economic output, spending, and income.Lagging Indicators
Average duration of unemployment. The average number of weeks that unemployed persons have been looking for work. This is an indication of tightness in the labor market. Changes in this series are inversely related to business fluctuations. The series is inverted for analysis.
Manufacturing and trade inventories. The aggregate dollar book value of inventories of materials, goods in process, and finished goods stocked by the manufacturing, wholesale, and retail sectors of the economy. It peaks after the economy begins to slow, as sales fall short of projections.
Commercial and industrial loans. The amount of short-term business loans and commercial paper issued. Declining profits usually increase the demand for loans.
Ratio of consumer debt to personal income. The credit used to finance personal consumption (excluding home mortgages and home equity loans) relative to the aggregate value of incomes received by individuals, unincorporated businesses, and nonprofit institutions. This ratio is an indication of the willingness and ability of consumers to incur debt in relation to their income.
Change in labor cost per unit of output, manufacturing. The relationship between the volume of production of manufactured goods and the cost of the labor involved in that production. Rising labor costs signal a squeeze on profits.
Composite of short-term interest rates. The monthly average of the 30-day commercial paper rate and the 3-month Treasury bill rate. Rising interest rates suggest a developing credit squeeze.