Magic Arrows in an Economist’s Quiver
What I’ll really be talking about is economic indicators beyond the usual ones such as interest rates, inflation, the gross domestic product (GDP) growth rate, stock market prices, capacity utilization rates, office vacancy rates, etc. Instead, we’ll look at some different factors that help explain current circumstances or point the way to what’s likely to happen next.
Let’s begin with a fun one, unless your current holdings happen to be knee-deep in it. Gold!
The price of gold has plummeted 33% from a record-high of $1,950 per ounce (U.S. dollars) to a present level of only $1,250. There was a first-stage collapse to about $1,450 brought on by an end to speculation. Then two further events have caused a further price plunge.
Jewelers in India are the largest private-sector buyers of gold in the world. The first-stage price drop to $1,450 per ounce was seen as a buying opportunity. So much so, that India’s imports of the shiny metal surged, the nation’s foreign trade deficit ballooned and the authorities in Delhi were forced to place a ban on further foreign purchases.
A further blow has been delivered by the Federal Reserve, which has firmed up its low interest rate “exit strategy”. A vague resolve to reduce monetary stimulus has evolved into a plan based on one word, “taper”. The Fed will taper purchases of bonds most likely beginning this fall.
If the U.S. economy continues to show improvement in jobs, consumer confidence and housing starts, the $85 billion per month in extra stimulus provided through the Fed’s bond-buying program will disappear by the middle of next year.
The prospect of less monetary stimulus reduces expectations about inflation. Gold has always been viewed as a hedge against rapid price increases.
That notion is based on a fallacy. There are several problems with investing in gold. It may be pretty, but it has little inherent value. It doesn’t pay dividends and in sufficient quantity, it’s bulky and hard to store.
Its proponents will tell you that for thousands of years, it’s been a storehouse of wealth. That’s only because people choose to believe the myth. Trading gold is mainly about purchasing it at one price in order to sell it to someone bedazzled enough to buy it at a higher price.
And no, that’s not the same as for all assets. Real estate, company shares and other commodities serve a purpose.
All widely-traded metals have an industrial use. Even gold’s precious-metal cousin, silver, has a history in the photographic arts and it’s now being used in the production of solar panels.
Other than being stored in vaults, gold’s primary use is in the making of coins and jewelry. The increasingly affluent citizens of newly emerging nations are succumbing to its allure, but many others aren’t.
The drop in gold’s price is a positive indicator for the economy. The fed will soon be reducing its stimulus because the economic news has improved. Unlike most central banks, which focus almost entirely on the inflation boogeyman, the U.S. Federal Reserve has a double mandate.
Beyond maintaining inflation near 2.0% annually, it is tasked with promoting employment.
For the fed to be considering tightening, it must believe there will be ongoing significant declines in the jobless rate, taking the figure from its current level of 7.6% down to about 6.5%.
The U.S. economy has picked up 6.6 million jobs since the bottom of the recession, but it still has a shortfall of 2.1 million versus its pre-recession high. Even at a net increase of 200,000 jobs per month, it won’t be until almost a year from now, May 2014, when total employment will return to its prior peak.
A great deal of media attention is focused on the monthly Employment Situation report from the Bureau of Labor Statistics. But there is another source of information on the U.S. labor market that provides more current information and is published with greater frequency.
It’s the Unemployment Insurance Weekly Claims Report, also known as the Initial Jobless Claims Report, from the Department of Labor. With the exception of some holiday-affected weeks, when it may appear a day earlier, it is released at 8:30 a.m. Eastern Standard Time every Thursday.
The number of first-time unemployment insurance seekers, seasonally adjusted, climbed to a lofty 670,000 in the recession. The recovery began to gain momentum when the figure finally dropped down to around 400,000. Since the beginning of this year, the number has been edging lower, now sitting near 350,000.
At its current level, the economy is adding a substantial number of jobs each month. But the figure needs to fall into a range of 300,000 to 325,000 to meet the target of 200,000 net new jobs per month. Earlier, even in the best of times, initial jobless claims were rarely under 300,000.
Since the number of American jobs in services is now higher than it was before the recession, the previously mentioned shortfall of 2.1 million is all in two sectors – construction and manufacturing.
Construction employment will pick up markedly along with the improvement in housing starts. A “normal” monthly level for U.S. new home starts is between 1.5 million and 1.7 million units, seasonally adjusted at an annual rate (SAAR). They fell as low as 480,000 units in April 2009. In March of this year, they climbed back above one million for the first time since June 2008.
Home prices are increasing between 7% and 12% year-over-year depending on which of four major authoritative sources one consults and that’s making homeowners feel better about their finances. The Conference Board’s index of consumer confidence has risen to its highest level in five years.
But where does all of this leave manufacturing? One informative indicator for this sector is the Purchasing Managers’ Index (PMI) of the Institute of Supply Management.
The PMI has two primary benchmarks. If the PMI has a reading of 50.0% or higher, both the overall economy and the manufacturing sector are expanding. Above 42.2% but below 50.0%, the total economy is growing, but manufacturers are experiencing a downturn.
Below 42.2%, everyone should take a pain killer, crawl into a cave and hibernate.
Between August 2009 and October of last year, there were 39 straight months during which the PMI was higher than 50.0%. On a couple of occasions in the last seven months, it has dipped below that yardstick.
U.S. manufacturing has stepped aside as the economy’s leader, to be replaced by the housing sector. Even some of the strength in auto sales has been related to better homebuilding, as general contractors have updated their fleets of short-haul pick-up trucks.
There’s another advance indicator of what might be about to transpire in manufacturing, “durable goods orders”. Durable goods are products that are expected to last three years or more.
These numbers appear in the report entitled Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders published by the Census Bureau.
In May, total sales of durables were +3.6% month to month, the same as in April, but a major improvement versus March’s -5.9%.
Major sub-sector leaders were communications equipment, +12.6%, and transportation equipment, +10.2%. The latter was particularly helped by new orders in “non-defense aircraft and parts”, +51.0%. This includes purchases of commercial airliners, which are notoriously volatile. For example, March’s percentage change was -43.3%.
That being said, Boeing came away with a relatively good “order book” from May’s Paris air show. In Canada, Bombardier is launching its new C-series jet.
Customers have apparently been waiting to learn the results from the first test flight, which has been moved back to the end of July. Sales so far have been slow.
The study of economics is a world of wonders. Developments in one area have a great deal of influence in many others. The sign posts are there. You just have to know where to look.
Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit
Mr. Carrick’s lifestyle blog is at www.alexcarrick.com and he would welcome a follow on Twitter
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