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Steven Hansen
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Steven Hansen is an international business and industrial consultant specializing in turning around troubled business units; consults to governments to optimize process flows; and provides economic indicator analysis based on unadjusted data and process limitations.
My company:
Econintersect LLC
My blog:
Global Economic Intersect
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  • Does The Fed Really Understand Economic Dynamics?

    Fed Chair Janet Yellen continued a dovish approach to monetary policy stating that:

    With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year. Of course, the timing of the first increase in the federal funds rate and its subsequent path will be determined by the Committee in light of incoming data on labor market conditions, inflation, and other aspects of the current expansion.

    This quote is from a speech on Friday at the "New Normal Monetary Policy" conference in San Francisco. What does this say to you about forward guidance supposedly being provided? One could guess that they hope they can raise the rates - but whether they can do so is out of their control as monetary policy may not be controlling the economy as expected.

    Moreover, some recent studies have raised the prospect that the economies of the United States and other countries will grow more slowly in the future as a result of both demographic factors and a slower pace of productivity gains from technological advances. At an extreme, such developments could even amount to a type of "secular stagnation," in which monetary policy would need to keep real interest rates persistently quite low relative to historical norms to promote full employment and price stability, absent a highly expansive fiscal policy.

    And Yellen expanded this thought about monetary policy further;

    Such a risk has important implications for monetary policy in the near term, when the ability of the economy to adjust to significant rate increases will be especially uncertain. The experience of Japan over the past 20 years, and Sweden more recently, demonstrates that a tightening of policy when the equilibrium real rate remains low can result in appreciable economic costs, delaying the attainment of a central bank's price stability objective. International experience therefore counsels caution in removing accommodation until the Committee is more confident that aggregate demand will continue to expand in line with its expectations--a view that is also supported by the research literature.

    In any event, the crux of this speech was stating that in all events, the rise of interest rates would be slow and gradual;

    Policy must adjust as our understanding of these factors changes. However, if conditions do evolve in the manner that most of my FOMC colleagues and I anticipate, I would expect the level of the federal funds rate to be normalized only gradually, reflecting the gradual diminution of headwinds from the financial crisis and the balance of risks I have enumerated of moving either too slowly or too quickly. Nothing about the course of the Committee's actions is predetermined except the Committee's commitment to promote our dual mandate of maximum employment and price stability.

    The real problem in the Federal Reserve providing forward guidance appears to be uncertainty about economic direction, which raises the real question of why the Fed is so certain that zero interest based monetary policy is effective in regulating the economy.

    Other Economic News this Week:

    The Econintersect Economic Index for March 2015 continues to show a growing economy, but the rate of growth is decelerating. All tracked sectors of the economy are expanding - but most sectors are showing some slowing in their rate of growth. The negative effects of the recently solved West Coast Port slowdown (a labor dispute which had been going on for months) can be seen be seen in much of the raw data - and it will be an economic drag on 1Q2015 GDP. Although beyond our forecast view, we expect a slight economic bounce in the coming months as a trillion dollars annually of cargo begins to traverse the West Coast Ports again in a normal flow.

    The ECRI WLI growth index remains slightly in negative territory which implies the economy will have little growth 6 months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 282,000 to 300,000 (consensus 293,000) vs the 282,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 304,750 (reported last week as 304,750) to 297,000. The rolling averages have been equal to or under 300,000 for most of the last 6 months.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)

    (click to enlarge)

    Bankruptcies this Week: None

    For all the economic news and analysis this past week [click here].

    Mar 28 7:57 AM | Link | Comment!
  • The Markets Get Their Wish - Weak Data And A Dovish Fed

    This past week was market friendly because it seems assured low interest rates are here to stay. I have discussed the Fed's options on interest rates in my main post today on Seeking Alpha - and the original post is [here]. It is the weak economy the Fed fears - and this week manufacturing came in soft (with significant backward revision) - and now shows a decline over the last three months.

    The headlines say seasonally adjusted Industrial Production (NYSE:IP) improved. This is misleading as manufacturing declined - and has declined for the last 3 months (now evident due to backward revision) - and the reason for the increase in IP was due to a massive jump in utilities. This is a weak report, and under expectations.

    • Headline seasonally adjusted Industrial Production (IP) increased 0.1% month-over-month and up 3.5% year-over-year.
    • Econintersect's analysis using the unadjusted data is that IP growthdecelerated 0.6% month-over-month, and is up 3.5% year-over-year.
    • The unadjusted year-over-year rate of growth decelerated 0.5% from last month using a three month rolling average, and is up 4.0% year-over-year.
    • The market was expecting:
    Headline Seasonally AdjustedConsensus RangeConsensusActual
    IP (month over month change)-0.1 % to 0.5 %+0.3%+0.1%
    Capacity Utilization79.1 % to 79.7 %79.5%78.9%
    IP Subindex Manufacturing (month over month change)-0.3 % to 0.4 %+0.1%-0.2%

    IP headline index has three parts - manufacturing, mining and utilities - manufacturing was down 0.2% this month (up 3.4% year-over-year), mining down 2.5% (up 5.3% year-over-year), and utilities were up 7.3% (up 1.3% year-over-year). Note that utilities are 9.8% of the industrial production index, whilst mining is 15.9%.

    Comparing Seasonally Adjusted Year-over-Year Change of the Industrial Production Index (blue line) with Components Manufacturing (red line), Utilities (green line), and Mining (orange line)

    Unadjusted Industrial Production year-over-year growth for the past 12 months has been between 2% and 4% - it is currently 3.5%. It is interesting that the unadjusted data is giving a smooth trend line.

    Year-over-Year Change Total Industrial Production - Unadjusted (blue line) and the Unadjusted 3 month rolling average (red line)

    Even though manufacturing employees roughly 10% of the population, it accounts for 20% of GDP. Soft manufacturing has a knock-on effect and shows the economy is slowing.

    Other Economic News this Week:

    The Econintersect Economic Index for March 2015 continues to show a growing economy, but the rate of growth is decelerating. All tracked sectors of the economy are expanding - but most sectors are showing some slowing in their rate of growth. The negative effects of the recently solved West Coast Port slowdown (a labor dispute which had been going on for months) can be seen be seen in much of the raw data - and it will be an economic drag on 1Q2015 GDP. Although beyond our forecast view, we expect a slight economic bounce in the coming months as a trillion dollars annually of cargo begins to traverse the West Coast Ports again in a normal flow.

    The ECRI WLI growth index value crossed slightly into negative territory which implies the economy will not have grown six months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 275,000 to 305,000 (consensus 293,000) vs the 291,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 302,500 (reported last week as 302,250) to 304,750. The rolling averages have been equal to or under 300,000 for most of the last 6 months, but this week again exceeded this number.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)

    (click to enlarge)

    Bankruptcies this Week: Korea-based Daebo International Shipping Co., Quicksilver Resources, American Spectrum Realty, Sierra Resource Group

    Please visit our landing page to view all the news and analysis this week.

    Mar 21 7:39 AM | Link | Comment!
  • Real Deflation Coming Soon?

    I have been a long and continuous opponent of the Fed's Zero Interest Rate Policy - it is ok for short periods of time but the consequences of long term interest rate reduction is not well understood. Japan tried it and it got deflation.

    Now we are beginning to evidence deflation setting in - partly accelerated by the strength of the dollar (isn't that what happened to Japan and the Yen?). Coincidence? - maybe but maybe not.

    Next week we will see the Consumer Price Index for February - but we have already seen both the Producer Price Index and Import / Export Price Index which are deflating at a very high rate.

    The Producer Price Index inflation continued its growth deceleration - and overall the PPI is in deflation year-over-year. In all events, the intermediate processing continues to show a very large deflation in the supply chain.

    The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.

    • The BLS reported that the headline Producer Price Index (PPI) finished goods prices (now called final demand prices) year-over-year inflation rate fell from 0.0% to 0.6%.
    • The market had been expecting:
    month over month changeConsensus RangeConsensusActual
    PPI-Final Demand Goods (PPI-FD)0.1 % to 0.7 %+0.3%-0.5%
    PPI-FD less food & energy (core PPI)0.0 % to 0.2 %+0.1%-0.1%
    PPI-FD less food, energy & trade services0.0 % to 0.2 %+0.1%+0.0%

    The producer price inflation breakdown:

    categorymonth-over-month changeyear-over-year change
    final demand goods-0.4% 
    final demand services-0.5% 
    total final demand-0.5%-0.6%
    processed goods for intermediate demand-0.6%-6.4%
    unprocessed goods for intermediate demand-3.9%-25.0%
    services for intermediate demand+0.1%+1.2%

    (click to enlarge)

    In the following graph, one can see the relationship between the year-over-year change in crude good index and the finish goods index. When the crude goods growth falls under finish goods - it usually drags finished goods lower.

    Percent Change Year-over-Year - Comparing PPI Finished Goods (blue line) to PPI Crude Materials (red line)

    Global trade prices are continuing to deflate. Import prices are down 9.4% from a year ago, while export prices are down 5.9% from a year ago. Of course oil prices were up 6.5% this month, but agricultural prices fell 2%.

    • with import prices up 0.4% month-over-month, down 9.4% year-over-year;
    • and export prices down 0.1% month-over-month,down 5.9% year-over-year..
    • the markets were expecting:
     Consensus RangeConsensusActual
    Export Prices - M/M change-0.8 % to 0.5 %-0.1%-0.1%
    Import Prices - M/M change-1.0 % to 0.9 %+0.2%+0.4%

    There is only marginal correlation between economic activity, recessions and export / import prices. Prices can be rising or falling going into a recession or entering a period of expansion. Econintersect follows this data series to adjust economic activity for the effects of inflation where there are clear relationships.

    Econintersect follows this series to adjust data for inflation.

    Year-over-Year Change - Import Prices (blue line) and Export Prices (red line)

    The question remains - can the Fed EVER move away from zero interest? If it does, the dollar will continue to strengthen.

    Other Economic News this Week:

    The Econintersect Economic Index for March 2015 continues to show a growing economy, but the rate of growth is decelerating. All tracked sectors of the economy are expanding - but most sectors are showing some slowing in their rate of growth. The negative effects of the recently solved West Coast Port slowdown (a labor dispute which had been going on for months) can be seen be seen in much of the raw data - and it will be an economic drag on 1Q2015 GDP. Although beyond our forecast view, we expect a slight economic bounce in the coming months as a trillion dollars annually of cargo begins to traverse the West Coast Ports again in a normal flow.

    The ECRI WLI growth index value crossed slightly into negative territory which implies the economy will not have grown six months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 292,000 to 320,000 (consensus 309,000) vs the 289,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 306,000 (reported last week as 304,750) to 302,250. The rolling averages have been equal to or under 300,000 for most of the last 6 months, but this week again exceeded this number.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)

    (click to enlarge)

    Bankruptcies this Week: England-based Towergate Financial filed for Chapter 15 protection, BPZ Resources, Dune Energy, Allied Nevada Gold, Doral Financial (dba Doral Financial Puerto Rico), Standard Register Company, Chassix Holdings

    To read all of our analysis and news for the past week [click here].

    Mar 14 6:27 AM | Link | 1 Comment
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