Coincident Economic Indicator
Reflecting the power of stronger liquidity growth from the Fed's QE 3 program my coincident
indicator, measured yr/yr, rose from 1.0% in mid - '13 to 3.0% for Nov. '14. The +3% reading
was the strongest since early 2011, and represented solid, balanced growth. The CEI slipped
to 2.5% last month reflecting weakness in real retail sales and production following a strong
Nov. The slippage was not enough to derail the trend of improvement and I await Jan. data
to see if the trend remains intact. The CEI for the final quarter suggests real GDP growth of
Economic Supply / Demand Balance
On a yr/yr basis, production increased by 4.9% in 2014. Capacity growth however, gained by
3.2% and registered its strongest improvement since 2011. Faster capacity growth has been
tempering the rise of capacity utilization thereby lengthening the time it will take for the
economy to overheat and tamping down cyclical inflation pressure. The relative balance
between productive capacity and demand gives the Fed more time stretch out a return to
policy normalization via raising short interest rates if it so chooses.
Business Profits Indicators
US business sales before adjustments rose an estimated 5.7% in 2014. The US was a sales
growth leader among major economies last year, so many larger US based companies with
global reach did not fare as well on the top line. The powerful rally in the US $ over the last
four months of the year led to translation losses in sales and earnings for the globals as well.
Finally, the rapid decline in oil prices and related downstream items plus weakness in
sensitive materials prices hurt the petro production sector and basic industry sales and profits.
Business pricing power eroded sharply over Half 2, especially for basic supplies producers.
Ability of the average company to increase margins was enhanced by stronger volume
growth and constrained modestly by a mild selling price / cost squeeze and rising depreciation expense.
To conclude, a year of bright promise for business profits was constrained as the year wore
on and the same constraints are carrying over into 2015.
A Nasty May Be Ahead
Knowing senior managements as I do, I would not be surprised if plenty of CEOs use the
current weakness in gasoline and fuels prices to pocket cost benefits as consumers of
energy and try to muscle wage growth lower on the pretext that wage earners are getting
an enhancement to real wages via reductions in prices at the pump and for heating and
cooling. This spares margins but undercuts purchasing power in the economy.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!