Brennaman’s Four Points for the Week
1.
Economy – New Releases Reflect Improvement–
This week was full of positive news on the economic front. Manufacturing
intensity has increased as measured by the ISM manufacturing index which rose
to 59.0 in October versus an expected decline from the previous month
(September 57.5) telling us that U.S. manufacturers are ramping up production
to meet growing and expected demand. Unemployment numbers for October
were also released as the unemployment rate dropped to 5.8 from 5.9% in
September continuing the downward trend. This number was bolstered by
additional jobs added to the nation’s rolls for the week and a lower number of
new applications for unemployment compensation. These are signs that our
economy is on the right track even though the pace is well below historical
experience. Perhaps the only flies in the ointment so to speak include
the types of jobs being created, wage levels and the labor participation
rate. The majority of the jobs created have been in the service sectors
followed by manufacturing and production. Typically the wages paid in
service oriented jobs are lower than the other two which translates to lower
wage growth. Wages grew .2% for the month of October and is essentially
statically irrelevant; not the kind of numbers we have seen in any economic
recovery since WWII. Finally, the labor participation rate remains steady
at 62.5% which is a four decade low going back to the 1960’s. The
troubling part of this statistic is the age cohorts between 24 and 55 are even
lower than the overall number. This number has to reverse itself or the
recovery will be a very long one indeed.
2.
Energy – Oil Prices: The Good, The Bad
and The Ugly – The global oil glut as a result of increased production
(domestic and foreign) and slow growth in demand has pushed oil prices lower each
week since mid-summer. In the United States the consumer is enjoying
lower gasoline prices as the national average has dropped below $3 per
gallon. The dramatic decline of oil in such a short period of time has
affected the market in subtle and not so subtle manners ranging from lower cost
of goods and services to cheaper transportation costs and food. The lower
cost of gasoline acts like a tax cut freeing up discretionary money the
consumer can spend in the economy providing additional stimulus to the
expanding economy. Of course there is a downside to this low oil price
scenario. Companies in the oil patch are having a rough go of it this
time around. While they are still making money, the growth of oil patch
earnings has slowed, margins have compressed and forward guidance from the
companies is indicating that there may be more trouble ahead if oil continues
to decline into the $70 -75 per barrel range. These factors have weighed
mightily on the energy sector causing it to be one of the poorest performing
sectors year-to-date. Another area of real concern is the threat to the
U.S. Energy Renaissance. Current production and exploration in the U.S.
is sustainable with oil prices well above the $70-75 range. Lower profits
as a result of lower oil prices may curb domestic exploration until the oil
glut is equalized with demand.
3.
Ukraine – Putin is In A Long Game –
Vladimir Putin remains actively engaged in the affairs of Ukraine. While
unconfirmed by NATO sources it appears that Putin is reasserting Russian
influence in Eastern Ukraine after the Pro-Russian Separatists held elections
last week. Numerous press outlets in the region and in the Far East have
reported Russian Army units and equipment have streamed into Eastern Ukraine
since the elections. Violence, which continued despite the ceasefire
signed in September, has escalated with artillery and mortar fire increasing
daily. Ukrainian President Poroshenko has called upon the separatists to
uphold their side of the accord but the death tally continues to mount.
The situation in Donets’k and Lohansk is nearing the breaking point as the
winter weather is now upon the region. There is a dearth of supplies,
fresh water and electric power to provide the basic necessities such as heat
and security lighting. Putin is in this for the long haul and will bide
his time until he has the humanitarian justification to formally “provide
assistance “to the “Russian Peoples “of Eastern Ukraine since Kiev is unable to
do so. The rest of world can only watch.
4.
FED Watch – In Search of Inflation – With
quantitative easing (QE) winding down and the economy slowly recovering, the
FED is looking for hints of inflation – and finding almost none with the
current level somewhere between 1.6% and 1.8%. As unemployment continues
to improve and the GDP slowly creeps into the normal range, the FED has plenty
of time to evaluate and watch for inflation. The FED has done a good job
in keeping inflation in check even when they have flooded the market with
historical levels of liquidity through three tranches of QE. Inflation is
nearly non-existent since the QE process began. Still no inflation, which
is one of the reasons we are not seeing appreciable wage growth. A little
bit of inflation is needed so businesses can have some pricing power, increase
revenues and provide them the ability to expand their business and pay higher
salaries. The low levels of wages are where we were over a decade ago
coming out of the 2001-2002 recession. This fact alone tells us we still
have a journey ahead of us. A little inflation is good, but be careful
what you ask for because with inflation comes the inevitable interest rate
hikes from m the FED.
"In times of war and not before,
God and the soldier we adore.
But in times of peace and all things
righted,
God is forgotten and the soldier
slighted."
Rudyard Kipling
Have a good week and be sure to thank a
veteran on Tuesday for her or his service – The Eleventh Month, the Eleventh
Day, the Eleventh Hour – Armistice Day 1918 (Now Veterans Day).
Steve
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