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Weekly Update: Things that make me go, 'Hmm'

As of 06-21-2013

Dear readers: Because I was on vacation this past week, I was unable to gather and review the news of the week from my sources, so I’m sharing some tidbits that intrigued me but hadn’t made it into my weekly missives. My regular off-the-news weekly piece returns next week.

Macro Watch

Think of it as the turtle recovery According to the National Bureau of Economic Research, the past 11 business cycle expansions lasted 58 months on average. The current one started during June 2009, so it is 48 months old. It is also the weakest post-war expansion. The question, will slow growth prove longer lasting and more durable? Robert Gordon, a professor at Northwestern University and a member of the NBER committee that determines when recessions begin and end, was quoted by Bloomberg News as saying, “The current expansion can continue another four to five years.” He notes there are very few of the excesses that have set the stage for recessions in the past. The core CPI inflation rate is only 1.7% year-over-year, the core PCE Index is the lowest on record at 1.0%, and there is lots of pent-up demand. All of this suggests the expansion can keep going for quite a while.

The real cost of homeownership is very low …  Empirical Research says the right way to look at affordability accounts for the all-in cost of homeownership, including interest rates, property taxes, maintenance, tax benefits and the imbedded expectations about risk and appreciation. When we compare that inclusive composite to rents or incomes, the picture is striking: homeownership costs are about as low as they’ve ever been, everywhere. And, in the formerly hot markets it’s a mirror image of 2006. The increase in rates should be weighed against the trajectory of home prices and the availability of credit. If the rise is a gradual one, tied to increasing confidence, it may not be a problem at all. Continuing declines in the share of borrowers that are underwater should add to the confidence of buyers and lenders alike and restart trade-up activity. The still-low inventory levels and uptrend in asking prices suggest more gains are on the horizon.

… But ownership doesn’t always have its privileges A study by Dartmouth economist David Blanchflower and Andrew Oswald of the University of Warwick says the push to create a homeownership society actually causes higher unemployment and suppresses new businesses. This study could be used by mortgage lenders to predict risk spots for future defaults, especially when considered alongside a 2010 report by the Federal Reserve Bank of Atlanta that found a 1% uptick in unemployment caused risk of delinquency to rise 10% to 20%.

Government Watch

ACA’s unintended—but not unexpected—consequences The Affordable Care Act is probably having a much bigger impact on employment at small and medium-size businesses, Cornerstone Macro says. The workers who do not have health insurance overwhelmingly work for smaller firms, often in low-wage jobs. These small businesses will face higher costs in some cases and the uncertainty over the law’s impact is causing many small businesses to be cautious in their hiring. Since all of the net hiring that takes place in the economy is from small businesses and start-ups, the health care law is probably already having a material negative impact on employment. A mere 9% of companies surveyed by Mercer believe that the Affordable Care Act will add less than 1% to their health-insurance costs next year. Close to 60% believe their costs will rise by 3% or more. The survey also revealed that companies are worried about communicating the changes to employees.

Don’t sweat sequestration I The sequester is probably a wash for financial markets because in the long-term it is positive for the markets if federal spending drops from its historically high levels. In the long run, the economy will likely grow faster if more resources are left to the private sector. Some studies have found that P/E multiples should be higher when federal spending is lower. Also, given the nation’s long- term budget problems, a decline in federal spending makes a fiscal crisis less likely. However, the kind of spending cuts taking place are less optimal for GDP growth than cuts to entitlement spending. Entitlement programs are transfer programs that don’t generally have any investment component like infrastructure, R&D, or education spending do.

Don’t sweat sequestration II Fiscal tightening at the federal level will amount to about $311 billion in 2013, or nearly 2% of GDP. Next year it is likely to be negligible. What’s more, because of improving finances at state and local governments, the fiscal tightening at the state and local level has largely already stopped. This shift toward a neutral fiscal policy should provide a more favorable backdrop for GDP and remove a headwind for the equity markets.

Jobs Watch

All roads lead to jobs A well-established U.S. economic relationship—frequently called “Hauser's law”—can be phrased as such: as the business cycle matures, federal government receipts trend toward 20% of GDP. What's remarkable is that this occurs historically, regardless of the marginal income tax rate (which has fluctuated a lot historically). Importantly, federal receipts in fiscal 2012 were only 16% of GDP. Put another way, Strategas Research says, a key reason for the large U.S. budget deficit has been high unemployment. That is, the business cycle is not yet mature in the U.S.—unemployment has not yet fallen to the natural rate. Worth noting, the unemployment rate rarely goes sideways, and only tends to go up significantly recessions. The unemployment rate should continue to improve.

Labor market may be on sounder footing than you think Deutsche Bank reports that, over the past three months, monthly nonfarm payroll growth has averaged 155K (and is up a stronger 194K over the past six months). Despite very modest top-line GDP growth, final sales to private domestic purchasers have increased a faster 3.6% over the previous two quarters, the strongest pace since 2005’s third quarter (+4.1%). The improvement in the labor market should continue. This is based on two key observations: One, home prices are showing broad-based gains—every region in Case-Shiller is now up in year-over-year terms. The 20-city index is up 11%. This is due in large part to a dramatic decline in home inventories and rising household formations (a function of faster job gains). Two, initial jobless claims have averaged about 350K since the beginning of the year, which is a five-year low. In the past, payroll growth has always accelerated when claims breached the 350K level!

This case of ‘U.S. beats Europe’ is no cause for celebration The percentage of young adults without jobs is greater now in the U.S. than much of Europe. This “grim shift” will have far-reaching ramifications for the economy and for these young people's life-long earning capabilities. It is difficult to pinpoint exactly why unemployment has been so high in this age group; experts point to a variety of factors.

Medical Watch

Time for a checkup? There’s an app for that The emerging segment of medicine known as “Quantified Life” health care could dismantle today's medical industry. The movement has gained momentum with an expanding number of "self-tracking" apps, not only for health, but many aspects of one's personal life, with the goal of improving efficiency and effectiveness, quality of life, and productivity at work. Technology advances are beginning to incorporate the use of artificial intelligence and big data analytics software to enable predictive applications. The recent introduction of Google Now, which scours a person's Gmail and calendar and other databases to deliver anticipated useful information, such as flight delays, represents an initial anticipatory system. However, the potential of personal analytics goes far beyond rudimentary analysis of a person's daily routines. Not only will Quantified Life health care help usher in a new era of personalized medicine and generate new medical knowledge, doctors will increasingly be able to treat patients before they become ill.

The $6 million man (unadjusted for inflation) A recent analysis in Science highlights how new advances in bioelectronics are increasingly making the merger of man and machine a reality. They include a 3D-printed functional ear with superior hearing capability, embedded sensors that can monitor body temperature, heart rate, and blood pressure, skin with superior touch sensitivity attributes, and the marrying of tissue and electronics at the cellular level, with a vast array of potential applications.

Not so comfortably numb Americans are probably the most medicated people on the planet. Around 130 million of us take a prescription drug every month. More than 125K Americans die from prescription drug reactions and mistakes each year, representing the nation's fourth-leading killer. That's three times the number of people who die in car accidents. And that doesn’t include those harmed by taking illegal drugs.

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Consumer Price Index (CPI): A measure of inflation at the retail level.
Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.
Personal Consumption Expenditure (PCE) Index: A measure of inflation at the consumer level.
Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.
The S&P/Case-Shiller Home Price Indices measure track changes in the value of the residential real estate market in major metropolitan regions.
Federated Equity Management Co. of Pennsylvania
Copyright © 2014 Federated Investors, Inc.

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