We have seen a number of unusual situations with significant economic impacts this year. Japan experienced devastating earthquakes and tsunamis that have affected large portions of the country. North Africa and the Middle East has seen political unrest with major consequences to the governmental structure of some key players in the region. The United States has seen natural disasters affecting large sections of this country. All of these events could not have been predicted but have had real economic impact in the affected areas as factories have been shut down or destroyed, as crop land has been damaged and usual growing patterns disrupted, and as people impacted by these events have had to spend time and energy dealing with the crises and their aftermaths. However, it is important to note that the underlying picture of both domestic and global economies on the mend from a recessionary environment has not changed even in the face of so many challenges.
Commodities and Inflation
As I mentioned last month, higher commodities prices create higher levels of inflation, creating a drag on economies. Lower commodities prices are good for an economy as consumers then have more money for discretionary spending. That is still the bottom line when it comes to commodities and their effect on an economy. So what are the current trends in commodities prices?
The Dow Jones UBS Commodities Index has seen a 12% drop since the spring of this year.1 While commodities prices are higher than they were a year ago, we are seeing an easing. Oil prices driven high by political change in the Middle East have begun to pull back. Some U.S. car prices increased slightly as supply problems originating in Japan decreased competition in the market. These increases are expected to be rolled back as Japan’s recovery continues and competition in the sector returns to normal levels. In addition, the Producer Price Index (PPI) shows the price producers receive for their products. The PPI shows a decrease in food product prices for May.2 This will take some time to reach consumers, but will add to an easing in grocery prices for the average household.
The latest Consumer Price Index (CPI) release covers data through May.3 The release has a handy chart noting the figures for several major categories over the past 6 months. Most categories show a peak in recent price increases in either February or March. This would include food, energy (including gasoline and fuel oil), and all items in general. Additionally, oil and gas prices began to decline in May. An expected continued drop in oil prices will be felt throughout the economy as a whole as consumers pay less to commute, transportation companies see lower expenses for hauling goods, and vacations require less portions of family budgets.
Understanding this set of figures does get a bit tricky as the CPI measures inflation – the rate of increase in prices. This does not mean the highest price was seen in March for any of these categories. It means the greatest monthly increase was seen in March. Prices continued to rise a bit in April, but at lower rate. May saw either low levels of increasing prices or price declines for each category. This means prices are still higher than they were a year ago in all major categories, but the increases have eased – and reversed in the case of oil and gas.
Unemployment is still historically high. The Bureau of Labor Statistics release of May numbers shows a rather stagnant jobs market. There was a bit of hiring in May, but not enough to change the overall unemployment rate. Analysts are predicting the creation of more jobs from an unexpected area – our recent natural disasters. The tornadoes and floods that have devastated large sections of the country have created damage that needs to be cleaned up, homes and businesses that need to be rebuilt, and infrastructure that needs repaired. The destruction that we have seen has been extensive enough that large numbers of people will need to be put to work in repairing the damage so many communities have sustained. Much of this work will be in construction and other related sectors that have been so badly hit over the past few years. While this is certainly not the way any of us would like to see the unemployment rate decrease, it is the reality of the situation we are in currently. There is much repair work to be done and many unemployed with the skills to do so.
You may have heard of the Conference Board as their measure of consumer confidence is widely quoted upon release. They also publish a lesser known survey of CEO confidence. Their latest CEO Confidence report published in April is a bit dated, but is still of note. It shows 85% of CEO’s stating business conditions are better than they were 6 months previously.5 Half of CEO’s predict increased hiring within their industry this year. Both of these numbers are increases from the previous quarter.
Previous recessions have shown that it usually takes about a year and a half for the unemployment rate to decline to normal levels after the end of a recession. We are lagging behind this metric.6 However, this was a major recession and a longer recovery time is to be expected. Unemployment generally does not begin to climb until after a recession is well underway. It also does not decrease until after a recovery is well underway. Given that we have had a slow recovery it is not surprising to see a slow recovery in employment.
Housing is still a big drag on the recovery. Many areas are still seeing high numbers of foreclosures as banks work through backlogs created by a lack of proper documentation. We are starting to see a glimmer of positive news on this front though. While the latest Case-Shiller Index does show prices down somewhat from a year ago, it also shows prices having increased over the previous month.7 One month does not make a trend. It is too early to tell if this month-over-month increase is significant, or an anomaly. Still, a report that shows only minor price declines from February to March followed by either increases in prices or very slight declines for the vast majority of the country for March to April is heartening news.
2011 started well but began slowing in early spring. Both large scale crop loss from freezing weather and a large swath of the country being hit by tornadoes have impacted 2011 so far. Change always brings about the possibility of negative consequences. Natural disasters are historically followed by rebuilding that has positive connotations to it.
The Bureau of Economic Analysis (BEA) revised first quarter GDP growth to 1.9% and finalized 2010 fourth quarter growth at 3.1%.8 The same release of figures noted corporate profits estimated to be $48.7 billion for the first quarter, as compared to $38.2 billion for the fourth quarter of 2010. Bottom line, companies are making money. Housing is still a weak spot and unemployment is still high. However, we are seeing growth. We have seen the unemployment rate ease over the past year. The lowering of oil prices will help the economy. The economy may not be recovering as quickly as most of us would like, but the facts and figures do show an economy that is slowly working its way back to pre-recession levels.
1) http://www.morningstar.com/cover/videoCenter.aspx?id=382300 (Inflation Peaking video report, 6/23/2011)
2) http://www.bls.gov/news.release/ppi.nr0.htm (July 14, 2011 Producer Price Index News Release)
3) http://www.bls.gov/news.release/cpi.nr0.htm (July 15, 2011 Consumer Price Index Summary)
4) http://www.bls.gov/news.release/empsit.nr0.htm (June 3, 2011 Employment Situation Summary)
5) http://www.conference-board.org/data/ceoconfidence.cfm (April 7, 2011 CEO Confidence Survey)
6) cnbc.com CEO Blog: Why GDP Growth Has Not Provided Jobs Yet, 6/28/2011
7) http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff–p-us—- (April Seasonal Boost in Home Prices According to the S&P/Case-Shiller Home Price Indices 6/28/2011)
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