Sloane Market Commentary
November 26, 2015-
Our heart goes out to our French allies from the loss of 130 lives from the November 13 acts of terrorism. Unfortunately, the financial impact on the French economy is anticipated to exceed $2 billion from reduced consumer spending and tourism.
The biggest long-term story in the US economy is the generational divide between baby boomers and millennials. The boomers, born in the wake of World War II with birth dates spanning roughly 1946 to 1962, were the largest population group in the US for decades. But now millennials, or people born roughly from 1980 to 1995, are taking over.
In its survey, Bank of America found that the divide in optimism between millennials, who are just entering the prime of their lives, and boomers, who are on the backside, is quite stark. Boomers enjoyed one of the US economy’s best runs from around 1980 to 2000, only to see the economy implode twice in the last 15 years. As a result, Boomers have little faith in their local, national, and global economies over the next year.
Millennials, on the other hand, are bullish on the whole thing, with three-quarters of millennial respondents saying they think their local economy will improve over the next year.
Bank of America
The Baltic Dry Index, a measure of shipping rates for everything from coal to ore to grains, fell to 504 points on Thursday, the lowest data from the London-based Baltic Exchange going back to 1985. Among the causes of shipowners’ pain is slowing economic growth in China, which is translating into weakening demand for imported iron ore that’s used to make steel.
China’s ore purchases will expand by just 1 percent in 2016, about half this year’s expansion and the weakest pace in six years, according to data from Clarkson Plc, the world’s biggest shipbroker. Global trade in the raw material will increase the most slowly since 2001. China’s economy is now expected to grow by only 6.5 percent in 2016, the least in a generation (Bloomberg).
Coal, the second biggest source of cargoes, is weakening too. Global trade in the fuel and steelmaking raw material will grow by only 2 percent this year. China’s buying will slide 5.7 percent next year to 159.7 million metric tons.
The fleet is also too big for the amount of cargoes that need to be shipped, a function of record ordering of new vessels when surged in the last decade when rates were reaching records.
2015 Operation Enduring Freedom casualties increased to 16, bringing the total of US casualties in Afghanistan to 2,372 since 2001; and the casualties from Operation Iraqi Freedom have now risen to 4,495 since 2003, up to 6 this year (icasualties.org). To their families, Thank you.
UNEMPLOYMENT: The US Labor Department Bureau of Labor Statistics reported the US Unemployment Rate dropped in October to 5.0% (from 5.1%) due to the addition of 271,000 jobs.
The Massachusetts Office of Labor and Workforce Development reported that the Commonwealth added some 11,000 jobs in October with the Unemployment Rate remaining at 4.6%. The State has added some 62,800 jobs in 2015.
The number of people who applied for U.S. unemployment benefits fell by 5,000 to 271,000 in mid-November, offering more evidence the labor market has rebounded after a summer dip. The average of new claims over the past month, meanwhile, rose by 3,000 to a seasonally adjusted 270,750 (Labor Department). That’s the highest level in eight weeks but still extremely low. Some 2.18 million people collected weekly unemployment checks in the seven days ended Nov. 7. The continuing claims were 2,000 lower compared to the prior week (MarketWatch).
HOUSING: The 30 year average Fixed Rate Mortgage bounced up to 3.95% from 3.82% at the last publication (Freddie Mac).
The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 4.9% annual increase in September 2015 versus a 4.6% increase in August 2015. The 10-City Composite increased 5.0% in the year to September compared to 4.7% previously. The 20-City Composite’s year-over-year gain was 5.5% versus 5.1% in the year to September. After adjusting for the CPI core rate of inflation, the S&P/Case Shiller National Home Price Index rose 3% from September 2014 to September 2015. San Francisco, Denver and Portland reported the highest year-over-year gains among the 20 cities with double-digit price increases of 11.2%, 10.9%, and 10.1%, respectively. Seventeen cities reported greater price increases in the year ending September 2015 versus the year ending August 2015. Phoenix had the longest streak of year-over-year increases, reporting a gain of 5.3% in September 2015, the tenth consecutive increase in annual price gains
U.S. housing starts in October fell to a seven-month low as single-family home construction in the South tumbled, but a surge in building permits suggested the housing market remained on solid ground. Groundbreaking dropped 11 percent to a seasonally adjusted annual pace of 1.06 million units, the lowest level since March (Commerce Department). September’s starts were revised down to a 1.19 million-unit pace from 1.21 million units. October marked the seventh straight month that starts remained above 1 million units, the longest stretch since 2007, suggesting a sustainable housing market recovery.
Rapidly rising household formation, mostly driven by young adults leaving their parental homes and a strengthening labor market, is supporting the housing sector. Although residential construction accounts for just over 3 percent of gross domestic product, housing has a broader reach in the economy, with rising home prices boosting household wealth and, as a result, supporting consumer spending (FOX Business).
MARKETS: The Real Gross Domestic Product (GDP) — the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes — increased at an annual rate of 2.1 percent in the third quarter of 2015, according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.9 percent.
The Conference Board Consumer Confidence Index®, which had decreased moderately in October, declined further in November. The Index now stands at 90.4 (1985=100), down from 99.1 in October. The Present Situation Index decreased from 114.6 last month to 108.1 in November, while the Expectations Index declined to 78.6 from 88.7 in October.
AUTOS: Auto Loans have hit $1 trillion with auto sales up 6% year-over-year. Auto loans are up 11%, representative of the increase in the size of car loans due to rising prices. The average amount borrowed is about $21,700, and buyers owe nearly $18,000 on average. The average new car purchase price now stands at $32,529, according to sales tracker TrueCar. The average car loan balance is rising faster than it is for mortgage loans, according to credit reporting agency TransUnion. Low interest rates and longer loan terms have kept the average payment little changed over the past five years, just under $400 a month. About $9 billion of loans are 60 or more days past due; less than 1% of the loan volume. Such a low delinquency rate is better than the delinquency rates for mortgages and credit cards (CNN Money).
INTERNATIONAL: Japan has technically fallen back into recession; Prime Minister Shinzo Abe said this month that the government needs to raise the minimum wage by an annualized 3 percent to bolster consumer spending. Abe also said his target was to raise the weighted national average minimum wage to 1,000 yen ($8.16). The national average of Japan’s minimum wage was 780 yen ($6.36) per hour last fiscal year, which is only enough to buy a bowl of ramen noodles (Reuters).
Justin Trudeau’s election as Prime Minister of Canada highlights another strained economy. The commodity-based economy is technically in a recession, owing in part to this year’s fall in oil prices. But the country is also suffering from deeper structural problems, including significant consumer debt, and an over-heated housing market in metropolitan markets (World Economic Forum).
THE FED: Fed-watch is on-going despite modest job growth, meager inflation and significant international turmoil; we still anticipate a modest rate movement in Q4.
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J. Frederick Bush Jonathan G. Sloane
About Jonathan Sloane:
After graduating Tufts University (BA Economics ’80 – Medford, MA), Mr. Sloane joined Century Bank, and was named President of its subsidiary, The Bank of Massachusetts (later re-branded, Century Bank/Suffolk), upon its acquisition in January, 1983. With the removal of the restrictive Massachusetts County banking limitations, the two subsidiary banks were merged into Century Bank and Trust Company in 1992, and Mr. Sloane was appointed President of the then $560M institution in 1996.
Mr. Sloane retired from the vibrant and highly profitable $3B company in 2010. He is recognized for his leadership in creating a highly-energized and stable management Team; significant expansion of the Bank’s loan portfolio; early adoption and innovation of company-wide Risk Management strategies; development of corporate, institutional and municipal cash management products; and early adoption of successful fee-based revenue streams; development of an enviable sales culture; and a commitment to corporate philanthropy.
After retiring from Century Bank, Mr. Sloane formed Sloane Partners, a strategic consulting firm focused on business improvement, succession, and exit execution; and recently joined Freedom Trust Company of America, a fiduciary advisory firm where he is the Director of Family Office Services.
Mr. Sloane has an impressive record of community service with leadership positions on public charitable Boards, including, Catholic Charities of Boston, the YMCAs of Greater Boston, Boy Scouts of America (Boston Minuteman Council, and the Northeast Region), New England Province of Jesuits, ADL, Tufts University Board of Overseers, and the New England Baptist Hospital.