Economists are fanning the inflation flames over the latest U.S. economic productivity numbers. According to the U.S. Labor Department, productivity was down from October through December 2005. The slide was the sharpest since the third quarter of 2000.
The Labor Department defines productivity as the measure of how much work an employee produces during an average hour on the job. For October through December 2005, productivity fell at a 0.6% annual rate during the quarter. Productivity had risen 4.5% during the previous quarter. The Labor Department reports that labor costs were up 3.5% for the period.
According to Bloomberg: "The productivity slowdown reflects the weakest quarter for growth in three years and fewer opportunities for companies to extract more from their workforces, economists said.
"Those efficiency gains have helped keep a lid on inflation during the current expansion. The Federal Reserve this week raised its benchmark overnight lending rate a 14th straight time and suggested they may not be finished."
Some economic observers say that could mean a slide into an inflationary environment.
"The Fed sees the possibility of labor markets becoming tight, which could push up costs at some point," Glenn Haberbush, an economist at Mizuho Securities USA Inc. in New York, told Bloomberg. "At this point we haven't seen wage pressures, but it's something the Fed is watching."
The good news is that the jobless numbers are down and the employment outlook is relatively rosy for 2006. The Labor Department reported that
Bloomberg also reports that a Labor Department report tomorrow may show that the economy gained 250,000 jobs in January, up from 108,000 in December. Business spending should also be up, the news service says.
"With corporate balance sheets and cash flow strong, we look for investment spending to remain strong, pushing up growth in the capital stock and adding to labor productivity growth in 2006," Joseph Abate, senior U.S. economist at Lehman Brothers Inc. in New York," told Bloomberg.
The economy actually added 193,000 jobs in January as the December data was revised to reflect 81,000 more jobs than were previously reported. That brought the overall national unemployment rate down to 4.7% from 4.9% in December.
The Federal Reserve is cautioning banks to get their financial houses in order – or face serious problems collecting on loans from boxed-in mortgage holders.
Federal Reserve Governor Susan Bies outlined those concerns in a Feb. 2 speech to the American Law Institute and American Bar Association in Washington.
Bloomberg News was on the scene covering the speech and quotes Bies as saying: "There are certain rapidly growing business lines in banking operations that are placing pressures on risk-management systems."
She also said the Federal Reserve is keeping a watchful eye on unregulated hedge funds, particularly focusing on Wall Street firms that offer brokerage services to hedge funds.
"U.S. regulators earlier this month proposed tighter 'guidance' for financial institutions that make commercial real estate loans," Bloomberg reports.
"Last year, regulators warned that banks may be at risk from issuing too many interest-only and adjustable-rate mortgages, which some borrowers may have trouble repaying. Bies said both types of lending may pose risks for banks, should credit conditions worsen or the housing market slow."
Bies is also troubled by the trend of banks extending commercial real estate loans to higher-risk customers.
She told the Washington audience that bank regulators "share a concern that some institutions' risk-management practices are not keeping up with the growth in their" commercial real estate exposures. Such lending in recent years "has occurred under fairly benign credit conditions and, naturally, those conditions are unlikely to continue indefinitely," Bies said.
Bies says the Fed is paying close attention to how hedge funds work with the financial services industry.
"What we've been doing is focusing on prime brokerage activity by saying: 'What are you doing to know your customer, to know that they're doing appropriate things, that they've got the strength,'" she said.
Bloomberg says that investment-banking companies like Morgan Stanley, Bear Stearns and Goldman Sachs earn ample brokerage fees from hedge funds by lending shares and cash, clearing and settling trades and providing risk-analysis software.
"Hidden leverage" at hedge funds has been "an issue in the past because of lack of transparency to whoever their prime broker is," Bies said. "We're beginning to really see that the hedge funds are trying to have multiple brokers. Now, whether this is to hide some because we're asking them to know more about their customer, or whether maybe we're getting the next wave of competitors entering the market" isn't clear, she said.
Bies also noted that high-risk interest-only and variable-rate mortgage loans represent a third of all mortgage loans in the industry. In 2003, such loans comprised about 10% of all mortgages.
While the quality of those loans remains strong, regulators are worried that lenders may not "fully address the level of risk in nontraditional mortgages, a risk that would be heightened by a downturn in the housing market," Bies said.
Bloomberg notes that the Federal Reserve has called for stricter lending procedures on mortgages and for more oversight on "unconventional loans."
December's warm, profitable glow has carried over into January for U.S. retailers, as a host of major retail chains reported surprisingly brisk sales for the month.
Thanks to gift-card purchases, stronger consumer confidence and a warm weather pattern across much of the U.S., Wal-Mart, Target, Gap and Nordstrom all beat analyst sales estimates in January.
Target and Wal-Mart led the way, reporting 5.2% and 4.7% sales gain, respectively, for January.
"The majority of retailers had better-than-expected sales and healthy traffic," said Pat McKeigue, an analyst with Boston's Independence Investments LLC, in an interview with Bloomberg.
"Gift cards were enough to give it some improvement. You had jobs data that continues to be solid. Jobs are key."
The U.S. Labor Department reported a gain of 250,000 jobs for December. According to January's numbers, which just came out this morning, 193,000 new jobs were created, with unemployment (4.7%) at a five-year low.
Retail sales figures were unexpectedly good across the board, says the International Council of Shopping Centers (ICSC), which reported an average 5.3% gain for stores that had been open at least one year. The association had projected sales of just over 3% for January.
"It's a very good number, but since January is the smallest month of the year, it's not a number you would extrapolate too much from," said Mike Niemira, the ICSC's chief economist.
The ICSC says that specialty apparel retailers posted the largest gains, with an increase at 6.9% for the month, compared to their fiscal 2005 average gain of 2%. Discounters generated a 3.7% increase, while department store sales rose 2.7%.
Growth in February will continue, albeit at a slower pace. Wal-Mart is forecasting a February gain of 2 to 4% and Target predicts an increase of 2.5 to 4.5%, says Bloomberg.
"The Washington-based National Retail Federation estimated that $18.5 billion in gift cards were sold in 2005, a 6.6% increase over the previous year," says Bloomberg. "In 2005, 28% of gift-card recipients used their cards in January, the International Council of Shopping Centers said."
Just like Goldilocks and the three bears, mid-cap stocks may prove to be "just right" for investors in 2006.
While large-cap stocks dominated the second half of the 1990s, and small-cap stocks did likewise in the first half of this decade, mid-cap stocks went pretty much unloved and unlamented.
But that seems to be changing, says John Merrill, founder of Houston's Tanglewood Capital Management and creator of the All Seasons Retirement Portfolios™.
Merrill predicts mid-cap stocks will shine over the next few years.
"Mid-caps led in performance in 2005, and … have outperformed both large and small indices over the long-term," he says. "And mid-caps are ideally positioned. After five years of small-cap leadership, where do you think the winners have grown to today?"
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