De Groote Financial Group August 12, 2016 No Comments

U.S. Nonfarm Productivity Fell an Annualized 0.5% in the Second Quarter…

The drop follows a 0.6% slide in the first quarter.

What it means – Analysts expected a 0.5% rise that would counter most of the drop in the first quarter. Obviously, that didn’t happen. Productivity remains a problem. Economists and Fed officials can’t figure out why the country isn’t utilizing new technology to make more stuff with either the same or fewer inputs. Without productivity gains, it’s hard for companies to pay higher wages, so workers risk a falling standard of living. Regardless of the cause, it goes a long way to explain why American workers are so discontented. We aren’t moving forward, and don’t see things changing in the future.

U.S. Retail Sales Flat in July, Down 0.3% Excluding Autos…

Analysts expected retail sales to grow 0.4%. This was the first negative reading since March.

What it means – The report surprised investors, who had confidently expected a strong number. I have no idea what made people so sure of it. Macy’s reported earnings and is closing 100 stores. That doesn’t sound like throngs of people are rushing to part with their cash. Still, Macy’s stock rose 10% on the news, so go figure. This is just part and parcel of the weird financial world we live in.

U.S. Oil Inventories Rose 1.1 million Barrels, Gasoline Inventories Fell 2.8 million Barrels…

Crude inventories stand 15.4% higher than the same time last year, while gasoline inventories are 9.2% higher.

What it means – We’ve got a lot of oil and gas sloshing around. Gas inventory dropped a bit, but we’re still producing more (10.1 million barrels a day) than we’re using (9.8 million barrels). On the crude side of the equation, Saudi Arabia and other OPEC members are pumping the black gold at a record pace. Even if the members sign a production limit agreement, who cares? They are producing more than the world needs, which is driving energy costs lower.  The Saudi’s and their OPEC brethren might be experiencing pain from lower prices, but they are winning the war of market share. Major energy companies have shelved plans for $100 billion of new projects, which reduces competition with OPEC for years to come. Frackers are waiting in the wings, but they need oil in the $50s at least, if not the $60s, to turn a consistent profit.  The International Energy Agency forecast balanced supply and demand in 2017, which sent oil higher on Thursday, but I think they’re wrong. As long as the middle east is in turmoil and fighting to maintain market share, expect supply to outstrip demand for some time, keeping a lid on prices.

French Tourism Down 10% in 2016…

The French Minister of Tourism reported that visits to the country by foreigners fell 10% so far this year in response to terrorist attacks.

What it means – While this is clearly a problem for French hotels and taxis, it also spells trouble for airlines. Major American and British carriers both reported double-digit declines at the end of July. If terrorist attacks continue on the continent, which seems likely, airlines could be in for more pain in the months and years ahead.

Spanish 10-Year Government Bond Yields Drop Below 1%…

This is the first time in history that Spanish yields have fallen below that threshold.

What it means – It’s not that Spain is so great. The country still sports an unemployment rate just over 20%, and its GDP remains 5% below the peak before the financial crisis. But, as they say, at least they aren’t Italy… or Greece! Prospects for Spain appear better than some of its Mediterranean neighbors, and that’s drawing investors who can’t bring themselves to buy German bonds with negative yields. At the same time, the European Central Bank is steadily eating through all available bonds for its own purchase program, reducing the supply of bonds in general. It’s a strange world that central bankers have wrought.

German Research Firm ZEW Estimates Deutsche Bank Losses Could Outstrip the Company’s Market Cap…

Applying Federal Reserve stress test metrics, the research firm concluded Deutsche could be completely worthless if the global economy took a large hit.

What it means – This seems like a blinding glimpse of the obvious, but I’m glad ZEW affirmed what investors already believed. One look at the stock price, which has fallen more than 70% from its high two years ago, confirms that investors already treat the bank like a zombie. German banks – as well as Spanish, Italian, Greek, and French banks – still carry a lot of non-performing debt that acts like an anchor on the Eurozone economy.

Chinese Producer Prices Up 0.2% in July, Down 1.7% Over Last Year…

On an annual basis, producer prices have fallen every month since March 2012.

What it means – You don’t have to look any further than this statistic to answer the question of what comes next for global manufacturing. China, Inc. has been slowing down for years, putting pressure on commodity prices and causing heartburn at companies like Caterpillar, which has also experienced a sales freefall for years. The relentless decline of producer prices tells us that there is no turn-around in Chinese manufacturing.

14% of American Households Have Negative Net Worth…

The New York Fed reported that about one in seven households owe debts in excess of their total assets.

What it means – It’s easy to dismiss this as another way to characterize poor people, but that’s not the case. The average annual income in such households is $39,000, which is below the median of $54,000 in the U.S., but well above the typical poverty rate of $19,000. It’s more interesting that 43% of such households are run by a person with a college degree, and 12% have post-graduate degrees. The average age is 43. These households tend to have negative home equity if they own their home, and almost half of the bottom third have student loan debt. These are people right in the prime of their spending years, and yet they’re already tapped out. That’s not a good sign for our economy.

First-Quarter Wage Growth Revised from 4.2% to Negative 0.4%…

In a huge reversal, the Bureau of Labor Statistics changed its report from a large gain to a drop. Compensation in manufacturing and durable manufacturing were revised significantly lower.

What it means – This solves the paradox of why people weren’t spending all their extra income. They didn’t have any to spend. It also takes some force out of economic forecasts for stronger growth based on rising wages. No wonder GDP growth remains tepid.

Doug De Groote, CFP®, MBA, CTC
Managing Director

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