A look at 2Q advance GDP components

A broad look at today's advance 2Q GDP report is available in my article, GDP falls 1%, worst appears over.

Here, I want to look at changes in some of the sub-components that make up GDP. Changes are on an annualized basis.

........1Q09........... 2Q09

• 0.6%........ -1.2%......... Consumption
• -50.5....... -20.4......... Gross private domestic investment (GDPI)
  
• -2.6 .............5.6.......... Government spending
  

Contributions to percent change in real GDP:

• 0.44......... -0.88.......... Consumption
• –8.98...... -2.64........ GPDI
  
• -2.36........ -0.83......... change in inventories (sub category of GPDI)
  
• -0.52.......... 1.12......... Government spending
  
• 2.64............ 1.38......... Net exports of goods and services

Although consumer spending made up 70.5% of the economy and manufacturing accounted for just 11.2% of total economic activity in 2Q, the volatile nature of the sector has exacerbated the recession as the chart above highlights.

The contribution provided by the balance of trade should not come as a surprise because the US trade deficit has narrowed, and exports improved in the month of May.

If we see another gain in exports in June, there is the possibility we could see an upward revision to GDP; however, inventories continue in a downward trend, which would detract from the broad measure of output.

Eventually, businesses will see the need to rebuild falling languishing stockpiles, which will aid economic activity.

One final point, the 50.5% decline in GDPI in 1Q is nearly incomprehensible. The drop in 2Q shows pressure is easing. But the contraction in manufacturing that we have witnessed highlights how badly the falloff in demand that followed the credit squeeze last year jarred manufacturers.

Chicago PMI gains ground but remains negative

The Chicago Purchasing Managers' Index, which is a look at manufacturing conditions in the Midwest, increased to 43.4 in July, up from 39.9 in June. The index is more volatile than the ISM Manufacturing survey, which will be released on Monday and is a closely-followed look at conditions across the country. A reading of 50 suggests neither growth nor contraction in the sector.

At its current level, the Chicago PMI stands at its highest reading since last October, signaling that recessionary conditions continue to ease. But at 43.4, it sits below the ISM, which may be due to the heavy concentration of auto-related companies in the Midwest.

Companies involved in manufacturing have slashed production at a rapid pace in order to move excess inventories. We have seen goods on hand fall, and as sales begin to pick up, inventories should more closely line up with demand. When that happens, production will once again begin to rise.

 Economists polled by Reuters had forecast a July figure of
43.0.
(seasonal adj)

                       July  June    May    April  March  Feb
NAPM-Chicago           43.4  39.9    34.9   40.1   31.4   34.2
Production             43.3  39.3    38.1   38.1   32.7   34.7
New Orders*            48.0  41.6    37.3   42.1   30.9   30.6
Order Backlog*         32.1  37.6    26.3   36.9   21.3   29.3
Inventories            25.4  34.2    31.5   30.6   34.9   33.0
Employment*            35.3  28.9    25.0   31.8   28.1   26.2
Supplier Deliveries*   49.6  43.1    43.0   45.4   48.4   51.0
Prices Paid            35.0  36.3    29.8   28.4   34.1   37.8
The * indicates components used to calculate index.
Source: Reuters

Japan deals with nasty data

CPI falls at record pace, jobless rate rises

The core rate of inflation in Japan, which excludes fresh food, fell at its fastest pace ever, while the jobless rate increased to a six year high.

The core CPI declined 1.7% from one year ago, down from May's drop of 1.3%, signaling that deflationary pressures are growing in the world's second largest economy.

Meanwhile, the jobless rate increased from 5.2% in May to 5.4% as rising exports and an improvement in manufacturing failed to buoy the labor market. Adding to the glum mood, the jobs-to-applicants ratio came in at 0.43, the worst ever.

The ratio measures the number of jobs versus the number of applicants, and the poor showing suggests unemployment is likely to go higher.

Natural gas inventories continue climb

Natural gas inventories increased 71 billion cubic feet (bcf) in the latest week to 3,023 bcf.

Working Gas in Underground Storage Compared with 5-Year Range

A more in-depth commentary is available at Examiner.com.

Jobless claims rise

Trend is in the right direction

Weekly initial jobless claims rose 25,000 in the latest week, in line with expectations, as the problems making seasonal adjustments over the last month that have been tied to auto layoffs "return to trend," according to Bloomberg News.

The four-week moving average fell 8,250 to 559,000 and weekly claims remain below 600,000, the level we saw before the seasonality issues surfaced.

The bad news: claims are still well above the level that would suggest the economy is no longer contracting. Weekly jobless claims are one of my favorite indicators of economic activity because it is a barometer on business sentiment.

A low level of claims signals confidence, while a high levels tells me that companies are still feeling the sting of the recession and feel the need to make job cuts.

The good news: the direction is encouraging and indicates the recession continues to ease.

Meanwhile, continuing claims fell 54,000 to 6.2 million. The downward trend in continuing claims, though, must be tempered by the fact that some of those who are still unemployed have come to the end of their six-months of compensation and are no longer counted in the federal statistics.

Beige Book shows recession easing, conditions stabilizing

The Fed's Beige Book is a summary of economic conditions in each of the twelve districts that make up the Federal Reserve and is based on comments from businesses and other contacts outside the central bank.

The report suggests that economic activity continued to be weak going into the summer. But most districts indicated that the pace of decline has moderated since the last release or that activity has begun to stabilize, which corresponds with remarks from many multinationals that point to stability heading into the second half of 2008.

Manufacturing remained "subdued" but was slightly more positive than in the previous Beige Book. Comments varied but on the whole they appear consistent with a forecast of modest and uneven recovery in manufacturing output beginning during roughly the coming six to twelve months.

The labor market remains weak, which has "virtually eliminated upward wage pressure." Wages and compensation are holding steady or falling in most districts. Upward price pressure was "minimal," the Fed's report noted.

In the meantime, residential real estate markets is still weak, but many districts reported signs of improvement. The Minneapolis and San Francisco regions cited large increases in home sales compared with 2008 levels, and other districts reported rising sales in some sub-markets.

Commercial real estate leasing, however, was described as either "weak" or "slow" in all 12 Districts, although the severity of the downturn varied somewhat across Districts.

Separately, a look at the difficult decisions Fed Chairman Ben Bernanke must grapple with over the next year are highlighted at Examiner.com.

Mortgage applications lag

Purchase Index stuck in neutral

Housing starts have jumped, new home sales just recorded the largest monthly increase in eight years, pending home sales are on an upward march, and existing home sales have been edging higher.

Even housing prices appear to be bottoming.  But the weekly survey of mortgage applications continues to lag, and a miniscule drop in the Purchase Index is the latest in what can only be described as a disappointing trend.

Given the preponderance of evidence that seems to be signaling that housing has already hit a bottom and is starting to recover, the Purchase Index, which should be acting like a leading indicator, may not be capturing all of the activity in housing.

Refinancings down in week

The Refinance Index is well off highs recorded back in the spring and fell modestly in the latest week amid an uptick in mortgage rates.

Not surprisingly, higher rates discourage homeowners, and the boom we saw in March and April when rates dropped south of 5% for a 30-year fixed mortgage has faded.

Germany’s IFO business climate at 9-month high

The IFO Business Climate Index in Germany increased from 85.9 in June to 87.3 in July, reaching its highest level since October 2008. 

The institute that conducts the survey of 7,000 German businesses said firms are “no longer quite so dissatisfied” with current conditions, and it “seems that the economy is gaining traction.

The expectations component of the survey rose from 89.5 to 90.4, the highest reading in over a year.

Germany’s economy, which is the largest in Europe, is heavily dependent on exports, and it fell on hard times when global demand shut down late last year.

The rise in business confidence is partly related to improving exports and the more upbeat situation in China, while the US economy seems poised to expand in the second-half of the year.

As the chart above reveals, the economy has not yet emerged from the economic slump, but sentiment indicates the recession is easing.

The improvement bears watching as Germany, which had been among the hardest hit in Europe by the recession, could  surprise on the upside.

Signs point to bottom in housing

Worst appears past

If the economy is to start a permanent recovery and finally pull itself out of the worst recession in over 70 years, the three-year-plus decline in the housing market must come to an end.

Exports are showing signs of life and many major corporations signaled that they are seeing signs of stability. However, a weak housing market and falling prices would likely keep pressure on banks and limit gains in the economy. Fortunately, recent data are beginning to paint a brighter picture for the beleaguered industry.

Yesterday, new home sales, which make up less than 10% of the market, posted its largest gain in eight years. And the data comes on top of strong increases in single-family housing starts that were recorded over the past two months.

Today, the S&P/Case-Shiller Home Price Index recorded its first monthly rise in almost three years, which follows the 0.9% rise in May home prices reported last week by the Federal Housing Finance Agency.

In the meantime, pending homes sales have jumped but existing home sales, which make up over 90% of the market, have displayed more modest gains.

The National Association of Realtors blames the smaller-than-expected increase in existing sales on new rules for appraisals, which have delayed or scuttled some deals.

One index that has yet to signal a bottom is the Purchase Index from the Mortgage Bankers Association. This weekly look at mortgage applications remains stuck near the bottom, and I'm unsure why we haven't seen an improvement. And the overhang from foreclosures is a risk that still must be considered.

But given that all the other major indicators are suggesting the worst is past, it appears the housing market is finally making its long-awaited turnaround.

The ingredient for a housing bottom is not falling starts

Rising sales are the cure

Today's out-sized increased in new home sales, coupled with strong gains in housing starts over the past two months, puts to rest the view that home builders must stop building new homes so potential buyers can soak up the excess houses on the market.

Yes, that argument makes sense for many manufactured items, and we saw Corning (GLW) today mention that increased demand was first met by inventories before the largest maker of LCD glass in the world started to re-open idle production lines. See story.

But housing is different. A potential buyer may be swayed by a steep discount on an empty home that sprung from a contract cancellation. But many buyers want to pick out the model, the counter tops, the carpet, and numerous other options.

Hence, starts had been in decline not because builders were trying to ride themselves of inventories but because traffic and interest had been waning.

Housing starts jumped two months ago because traffic had begun to accelerate, and now new home sales are nearly 17% off January's low.

New home sales spike higher

The market is primed for a turnaround

New homes sales jumped 11.0% in June to a seasonally-adjusted annual rate of 384,000, easily beating the Bloomberg forecast of 350,000. Sales remain 21.3% below one year ago but are now 17% off the January low and are at the highest level since November 2008.

Moreover, June's impressive increase - the largest in eight years - brought the supply of houses on the market from 10.2 months to 8.8 months, the lowest reading in almost two years per Bloomberg. And that's excellent news because falling inventories should help put a floor under prices.

A number of factors likely conspired to jump-start sales, including the $8,000 first-time home buyers tax credit, historically low interest rates, and steep discounting by home builders.

Today's report, coupled with indications of a bottom in existing home sales and the jump in builder confidence off extremely depressed levels, are probably signaling the worst is over for home sales.

Housing prices remain problematic, however, but the drop may finally be attracting reluctant consumers who have been sitting on the fence. I'm not yet predicting a quick recovery in sales, but pent up demand following three years of weakness could be a powerful tailwind that may support a new upward cycle in the market.

GDP leads off week's economic calendar

The first look at 2Q GDP out on Friday will likely be the week's top economic report in what is shaping up to be an average number of reports this week.

Gross Domestic Product contracted at a steep pace in 4Q08 and again in 1Q09 as consumer spending fell sharply and business spending receded.

Since March, business inventories have been on a downward path and industrial production has weakened, but we've seen some stability in consumer spending and exports have picked up modestly.

Economic data have been showing signs of stabilizing and most economists anticipate another drop in GDP, but according to Bloomberg, a small 0.7% annualized decline is anticipated.

New home sales for June will be released on Monday, providing the latest snapshot at the troubled housing industry. Builders have been facing stiff competition from foreclosures and the glut of homes on the market but have also been plagued by cancellations, as homeowners still face difficulty unloading their current properties.

But sales have been relatively stable over the past four months and have found support from the $8,000 new home buyers tax credit and historically low interest rates. Economists expect sales to rise 2.3%.

Though rising sales would definitely be a plus for the construction market, new home sales make up less than 10% of total sales so the focus remains on existing home sales.

Other releases to look for include consumer confidence on Tuesday, durable goods on Wednesday, jobless claims on Thursday, and the Chicago PMI on Friday.

Bank of Canada declares recession over

Yesterday, the Bank of Canada (BoC) kept its overnight lending rate at 0.25%. Not much of a surprise, but interestingly, the BoC pretty much declared the recession is over.

In its press release that accompanied the rate decision, the BoC said, "Global economic activity appears to be nearing its trough, and there are increasing signs that activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system."

The BoC went on to say that it has long anticipated economic growth in Canada would resume in the second half of this year and pick up in 2010. Indeed, growth in Canada "should resume this quarter." Clearly more definitive than what the US Fed has been saying.

Canada may be the smaller northern neighbor of the US, but it is an important trading partner. In May, the US exported $16 billion in goods to Canada versus $17.9 billion to the entire European Union, according to the US Bureau of Economic Analysis.

Although Canada appears to be emerging from the recession, the central bank reiterated its conditional commitment to hold policy steady until 2Q of 2010.

Consumer sentiment inches higher from mid-month

But job worries abound

The University of Michigan's Index of Consumer Sentiment rose from 64.6 in mid-July to 66.0 but fell from June's reading of 70.8. The Director of the Reuters/University of Michigan Surveys of Consumers said last month that consumers are convinced that the steepest declines in the economy are over but few anticipate a quick end to the recession.

The rise from November's low of 55.3 clearly signals that many believe the worst is past, but July's step backwards suggests consumers remain tentative about a recovery amid rising unemployment and job insecurities. Just "14% of all consumers" believe the labor market will improve in the year ahead, according to the survey.

Moreover, the results indicated that recent income gains were reported by the fewest consumers in the more than sixty-year history of the survey.

And a worsening financial situation was reported by the majority of consumers, with financial reversals as common among upper as lower income households.

Sentiment is important because consumer spending makes up 70% of GDP. If the public continues to focus on debt reduction and savings, it seems unlikely that we will experience anything other than a very mild economic recovery.

Overall, not very encouraging but following four-straight monthly increases in sentiment, a pullback shouldn't be all that surprising.

Other indicators, including both ISM's, the Leading Index, and a number of recent earnings reports suggesting stabilization indicate that a mild recovery is likely to start this year.

Mass layoffs remain a problem

Employers took 2,763 mass layoff actions in June that resulted in the separation of 279,231 workers, as measured by new filings for unemployment insurance benefits during the month, the Bureau of Labor Statistics reported yesterday.

An event is considered a mass layoff when at least 50 people are let go by a company.

The number of mass layoffs was down by 170 from May and has likely peaked, but job losses remain high. 

The jobless rate is a lagging indicator in an economic recovery, i.e., it is one of the last statistics to improve after the economy begins to recover.

Though the Federal Reserve believes the economy will start its long-awaited rebound this year, the unemployment rate is not expected to peak until the end of the year, according to the Fed’s best estimate.

Jobless claims rise

Weekly initial jobless claims jumped 30,000 in the week ending July 18 to 554,000, just below the forecast provided by Bloomberg of 560,000. The four-week moving average, which smoothes out some of the weekly volatility, fell 19,000 to 566,000.  Continuing claims fell 88,000 to 6,225,000.

The Labor Department has said the big drop seen in weekly claims over the prior two weeks occurred because of the timing of auto layoffs this year, which have distorted seasonal adjustments.

It appears that we are seeing some evening-out in the distortions, but if claims can hold their current level, they will be well off their peak, suggesting a small improvement in labor market conditions.

Oil inventories slip but gasoline rises

US commercial crude oil inventories fell 1.8 million barrels from the previous week. At 342.7 million barrels, the EIA said crude oil inventories are above the upper boundary of the average range for this time of year.

Total gasoline inventories increased by 800,000 barrels last week and are near the upper limit of the average range.

Not much to say about today’s report from the Energy Information Administration. There’s plenty of oil in storage and gasoline supplies are more than adequate.

MBA Purchase Index struggles

There hasn’t been much good to report when it comes to looking at the Mortgage Bankers Association Purchase Index.  Pending home sales have picked up but gains aren’t being reflected in the Purchase Index.

A more detailed look and an increase in the Home Price Index is available at Examiner.com.

Dr. Copper signaling more gains in economy

Dr. Copper has been called the favorite economist by a number of analysts because of "his" uncanny ability to forecast economic activity. The reason is simple: supply and demand.

Two months ago, I posted an article, What can we glean from Dr. Copper?, which focused on the rebound in price and emerging signs of an economic recovery.  Since then, prices have risen another 20%.

  

Source: Metalprices.com

What’s so special about copper?

Copper is a key industrial metal that sees increased usage during expansions and falling demand during a contraction. Simply put, prices go up and down depending on demand.

After peaking at $4 per pound one year ago, the price collapsed after the credit crisis last September, foreshadowing the worst global recession in 60 years.

But the price has perked back up since January, signaling that the global economy appears to be on the mend. Investor/speculative interest may be playing a partial role in the rally but as the chart below suggests, demand appears to be picking up as stockpiles decline.

Source: Metalprices.com

Much of this demand appears to be coming from China as fixed investment spending is up 30% from a year ago.  Copper is likely getting support from the government's stimulus plan as imports this year or at record levels, according to Bloomberg News.

Headwinds remain but with the price of copper in an uptrend, it appears that the global economy is set to improve.

A second look at China and GDP

Is stimulus working too well?

Last week China reported that GDP accelerated in 2Q by a year-over-year rate of 7.9%, up from 6.1% y/y in 1Q.

I spotted an interesting article about China's recovery in the latest Economist that highlighted how strong China’s economy may be and the economic stimulus implemented by the government may be too much of a good thing. 

The Economist noted that GDP grew at an annualized rate of 16.5% in the quarter just ended, according to Goldman Sachs, making it the economic envy of the world.

Note that U.S. GDP is reported on an annualized basis by taking actual growth in a quarter and roughly multiplying by 4.  Year-over–year growth looks at where the economy is at the end of the quarter and simply calculates the percentage increase or decrease versus the prior year.

Source: The Economist

If Goldman Sachs is anywhere near correct (and they probably are in the ballpark). China’s stimulus plan is providing needed support at a time when exports are suffering from a deep global recession (Please take note: fiscal stimulus works best when funds are quickly spent on projects that have high economic returns, not high political returns).

But the Economist also said that the government has removed many of the restrictions on lending that had been designed to prevent overheating in the economy as well as cap rising inflation.

Inflation is nonexistent right now in the Asian powerhouse, but worries are beginning anew that runaway growth could fuel new bubbles.

Bernanke talks recovery, low rates

Fed Chairman Ben Bernanke provided his semiannual report on monetary policy before a House committee this morning and opened by saying that aggressive policy actions taken around the world last fall "may well have averted the collapse of the global financial system," an event that would have had extremely adverse and protracted consequences for the world economy.

Bernanke may have miscalculated how badly the economy would eventually suffer because of reckless practices on Wall Street and among mortgage lenders, but his response, coupled with actions taken by major central banks, did avoid a catastrophe.

But much of his testimony focused on the economy and credit markets. Credit is still tight, he said, but there have been some "notable improvements" in the financial markets as the extreme aversion to risk has eased.

Better conditions in credit markets have been accompanied by "some improvement in economic prospects." Moreover, the drag on exports appears to be waning as many trading partners see "signs of stabilization."

The FOMC expects output will increase slightly over the remainder of 2009, and the recovery will be gradual next year, with the unemployment rate forecast to peak at the end of the year. See L, W, U, V - the alphabet soup of economic recoveries.

He reiterated that interest rates will stay low for an extended period of time, which is not surprising given that unemployment is expected to remain at unacceptable levels. Still, the Fed is aware of longer-term inflation risks and is prepared to begin withdrawing liquidity when the appropriate time arrives.

Nonetheless, Bernanke will be walking a monetary tightrope as he must balance the need to support any fledgling recovery with concerns about rising prices.

Fiscal responsibility

Bernanke applauded Congress for passing a stimulus package but talked about the need to restore fiscal balance.

"Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in the costs of Medicare and Medicaid." He added that choices will be difficult but postponing action will only make things worse.

That may asking for too much from lawmakers. Congress has acted in a fiscally responsible manner on rare occasions, and it seems likely that tough choices will only be put off again.

Obama, UnitedHealth Group and windfall profits

President Obama is taking a more aggressive tone in his battle to get health care reform passed this year, criticizing the "windfall profits" health care firms and executives are earning.

Windfall profits. I can't help but be reminded how this term has been closely tied to "Big Oil."

Today, the HMO and health insurer UnitedHealth Group (UNH) reported 2Q net income of $859 million, or $0.73 per share, on revenues of $21.7 billion.

A 3.9% net profit margin hardly qualifies as a windfall profit, Mr. President.

Fed's Lockhart sees recovery this year

But pace of expansion likely to be modest

Current economic conditions are mixed at best, Atlanta Fed Chief Dennis Lockhart said today in prepared remarks, but the economy appears to be in stabilization mode. "Stabilization necessarily precedes recovery. A recovery has not yet taken hold but should begin before too long."

Lockhart pointed out deep recession are usually followed by strong recoveries. This time around he said, "I expect real growth to resume in the second half and progress at a modest pace. I do not see a strong recovery in the medium term."

And there are risks to "this subdued forecast," with problems in commercial real estate potentially disrupting his forecast.

The CMBS (commercial real estate mortgage-backed securities) market is very weak, Lockhart said, and banks generally have no appetite to roll over loans on properties that have lost value in the recession.

Refinancing problems will not directly affect GDP—it's commercial construction that factors into GDP—but he is concerned problems in commercial real estate finance could adversely affect the otherwise improving banking and insurance sectors.

Leading Index jumps for third-straight month

We received another batch of good news today from the Conference Board, which reported the Leading Economic Index increased 0.7% last month. Even better news - June's gain comes on top of an upwardly revised 1.3% increase in May and a 1.0% rise in April.

An economist with the Conference Board said, "The recession has been losing steam since the spring, although very large job losses continue. Nevertheless, confidence is slowly rebuilding. Financial markets are less volatile. Even the housing market is stabilizing. If these trends continue, expect a slow recovery this autumn.”

In my view, the sharp turnaround in the Leading Index seems to be suggesting a quicker rebound. However, with housing sales still near a bottom and home prices continuing to fall, coupled with stagnant consumer spending, a more gradual turnaround this year appears more likely.

One thing I'll be closely watching is weekly jobless claims. Claims have fallen sharply over the past two weeks. But the difficulty in adjusting for seasonal auto layoffs has been the chief reason, according the the Labor Department.

If we exit July and claims shake out near current levels or edge lower, odds of a stronger rebound will improve.

Components

For those interested, the Leading Economic Index is made up of ten separate components designed to telegraph future economic activity. The seven that flashed positive signals were:

• interest rate spreads
• building permits
• stock prices
• weekly initial claims (inverted)
• average weekly manufacturing hours
• index of supplier deliveries (vendor performance)
• manufacturers' new orders for consumer goods and materials

The three negative contributors were:

• real money supply
• manufacturers' new orders for nondefense capital goods
• index of consumer expectations.

Bernanke, home sales on the docket in light week

Earnings last week stole the spotlight from the economic calendar, and that is likely to happen again this week. Though the economic data may not have much of an impact as investors key in on major profit reports and any guidance, there will be a couple of important events to look at.

Fed Chief Ben Bernanke's semi-annual testimony on monetary policy on Tuesday and Wednesday will capture financial headlines. Bernanke is likely to comment on Fed plans to buy longer-term government securities and may be pressed by lawmakers to expand the plan.

He is also likely to signal that unemployment may go higher but a weak recovery may start sometime later this year.

Existing home sales on Thursday will also be of interest. Pending home sales have come off the bottom but existing sales have yet to reflect a solid acceleration.

Timing may be an issue since pending home sales look at contracts signed but not yet closed. The National Association of Realtors has blamed low appraisals for scuttling some of the deals.

Eurozone outlook still subdued

An interesting piece put out last week by the three leading European economic institutes signaled that the 16-nation economy will remain in a recession through the end of the year, but the steepest declines in economic activity are over.

The report said that GDP dropped 2.5% quarter-over-quarter (q/q) in 1Q, after a fall of 1.8% in 4Q 2008. Economic prospects remain subdued, but the contraction of activity is likely to be less sharp in the coming quarters. Real GDP is forecast to shrink by 0.6% q/q in 2Q and by 0.4%, respectively, in 3Q and 4Q.

The fall in industrial production is likely to continue but at a progressively slowing pace: recent business surveys indicate an improvement in production sentiment but the "economic environment remains unsupportive."

With inflation well below the European Central Bank's target of "close to but below 2%," and the key lending rate still stubbornly stuck at 1.0%, central bankers in Europe still have room to cut as worries remain about how the major bank's will weather the recession next year. Another words, the ECB could be more supportive.

Inflation, which is its sole focus based on its mandate, is expected to rise to 1.0% by the end of the year, up from -0.1% currently. Yes, there is plenty of room to relax policy even more.

Michigan leads with highest unemployment rate

The Bureau of Labor Statistics released the unemployment rates for each of the 50 states, and Michigan took the unenviable honor of leading the nation and watching its unemployment rate rise from 14.1% in May to 15.2% in June.

The report highlights how layoffs in the auto industry have taken a severe toll on the state's economy.

Other states that ranked high included California at 11.6%, Florida at 10.6%, and Nevada, which came in at 12.0%. The recession in California has gotten plenty of attention nationally because of the problems the state's economy has had on its budget.

On the flip side, North Dakota registered the lowest, with an unemployment rate of just 4.2%, followed by Nebraska and South Dakota, at 5.0% and 5.1%, respectively.

All in all, 16 states, including the District of Columbia, now have an unemployment rate that exceeds 10.0%. Unfortunately, that number seems destined to rise.

Housing starts impress

Bottom forming?

Housing starts increased 3.6% in May to an annual rate of 582,000, beating the consensus forecasts that called for a small rise. Starts were led by a robust 14.4% increase in single-family starts, but the volatile multi-family group fell almost 26%, giving back some of May's out-sized gain.

Building permits, which provide a glimpse at future activity, increased a healthy 8.7% to an annualized rate of 563,000.

Housing starts have been relatively flat since the beginning of the year, suggesting a bottom may be forming in a group that has been heavily battered by the recession. Moreover, the Housing Market Index released yesterday continues to show that sentiment among home builders is coming off extremely depressed levels.

Some on the Street are suggesting that housing starts must continue to fall in order to soak up excess inventory. Typically in manufacturing, production must be slashed in order to get inventories back to more reasonable levels.

But in this case, falling starts is likely be a signal that traffic through new model homes continues to decline. The increase in starts, in my view, is a sign that potential buyers are slowly coming off the sidelines. The caveat, however, becomes the contingency attached to the contract that allows the buyer to back out of the purchase if he/she cannot sell the existing home.

Separately, a look at GE and Bank of America's earnings is available at Examiner.com as well as an interesting look at the impact of an ETF on natural gas prices.

Housing Market Index at ten-month high

Internals of report temper enthusiasm

The National Association of Home Builders/Wells Fargo Housing Market Index increased 2 points in July to 17, the highest since September, signaling that confidence among the builders continues to come off extremely depressed levels.

A reading of 50 suggests home builders are neither optimistic nor pessimistic.

New home sales are still in a down trend as builders grapple with numerous foreclosures and price competition, but sales make up less than 10% of the entire residential real estate market.

Today's reports is encouraging, but the NAHB's chief economist pointed out, “Although today’s HMI is positive news that helps confirm the market is bouncing around a bottom, the gain was entirely contained in the component gauging current sales conditions, while the component gauging sales expectations for the next six months remained virtually flat for a fourth consecutive month."

Tomorrow, housing starts will be reported and are expected to remain nearly unchanged from the previous month.

Philly Fed points to further weakness

The latest survey released by the Philadelphia Federal Reserve suggests that the region’s manufacturing sector is still experiencing weakness.

The Business Outlook Survey, which looks at manufacturing in the mid-Atlantic region, fell from –2.2 in June to –7.5 in July and interrupted a four-month string of increases. A reading of zero suggests economic output is neither expanding nor contracting. Economists had been looking for a reading of about –5.0.

New orders edged up but remained just below zero, and layoffs are still a serious concern.

Firms reported less widespread declines in input prices again this month. The prices paid index, although still negative at ‐3.5, increased nearly 10 points and has risen 28 points over the last three months. Not too much of a surprise because commodity prices are off the lows.

Prices received, however, dropped 5 points to –21.5.

The drop in the headline figure was a little larger than had been expected but isn’t that worrisome in light of prior gains.

Freefall in jobless claims muddied by seasonality

Weekly initial jobless claims fell by 47,000 in the week ending July 11, the second consecutive drop that exceeded a decline of 40,000 and the lowest reading since the beginning of the year.

However, the Labor Department has cautioned that the timing of layoffs in the auto industry this year has made adjusting for seasonality much more difficult. I like the trend but we are going to have to wait a few more weeks in order to see if the drop is for real or just a seasonal quirk.

For a more thorough analysis, see my article at Examiner.com.

China GDP accelerates

China's economy expanded by 7.9% in 2Q, up from 6.1% in 1Q and barely ahead of what most economists had estimated. Even more impressive, fixed asset investment, which includes roads, infrastructure, etc., continues to accelerate, rising 33.6% versus a year ago. So far it looks like the government's stimulus is overcoming weakness in the global economy and exports.

Although a solid rebound in activity appears to be developing, the government cautioned that "there are many difficulties and challenges that remain," momentum is unstable, and the recovery pattern is unbalanced. A spokesman added that proactive policies designed to support growth will continue.

US exports picked up in May, signaling a recovery may be in the works in Asia, and Intel (INTC) just reported a strong quarter and expects sales to climb in 3Q.

The upbeat comments from the world's largest maker of semiconductors are encouraging and and are giving way to renewed optimism that other multinationals may offer similar remarks.

Fed minutes see recovery starting this year

The FOMC released the minutes from the prior meeting and noted that most Committee members view the economy as "quite weak and vulnerable to further adverse shocks," while credit is still tight in many sectors.

But most believed that downside risks to economic growth had diminished somewhat since the April meeting, and US output is expected to begin growing again this year. The Fed also revised upward its outlook for economic activity during the remainder of 2009 and for 2010.

Committee members did not believe that increasing the amount of Fed purchases of government securities was warranted at this time. "Although an expansion of such purchases might provide additional support to the economy, the effects of further asset purchases, especially purchases of Treasury securities, on the economy and on inflation expectations were uncertain."

The Fed will eventually face the delicate task of looking at how to remove the excess liquidity without starving the green shoots that have started to pop up.

Another words, you shouldn't over water but not enough of the precious liquid could stifle a recovery.

Consumer prices jump on energy

The Consumer Price Index increased 0.7% in June, matching expectations, as a 7.4% surge in energy prices led the way. The core rate of inflation, which strips away food and energy, rose a more modest 0.2%.

Year-over-year, the core rate is up 1.7%, well within what the Fed considers to be price stability. However, the compounded-annual rate based on the last three months for core prices is 2.4%, and it has been holding fairly steady since March.

That seems surprising given the severity of the recession, the excess capacity in the US and around the world, stable labor costs, and falling commodity prices versus a year ago. And stickiness in the core rate has to be a little worrisome for the bond market, which views inflation as its mortal enemy.

Going back to the Fed's January statement that accompanied interest rate decisions, policymakers have noted, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

This clearly has not happened.

In my view, inflation won't be a problem through the end of the year and probably well into next year. But if the year-over-year core rate of inflation dropped to 1.0% or slightly lower, it would give the Fed some breathing room on the price front when (yes, when) the economy starts to rebound.

Empire Manufacturing the latest green shoot

The Empire Manufacturing Index is a narrow look at manufacturing as the survey from the New York Fed covers just New York state.  But it  gets some play because it is the first look at goods producers in July (or for that matter, any current month).

The index increased 9 points in July to –0.6, the best reading in about a year and essentially pointing to flat conditions. Even better, the new orders index rose above zero for the first time since September 2008, climbing from -8.2 to 5.9.

If we see improvements in the Philly Fed Index out on Thursday and the ISM Manufacturing Index (the national survey) keeps rising, it’s possible we could get a positive reading in industrial production for July.

New orders will be of interest.  In particular, the export component of the ISM will be something I’ll be looking at given signs of improvement in Asia, especially China.

Business inventories on downward track

Companies continue to let goods on hand slide as business inventories fell 1.0% in May to $1.4 trillion. Sales dipped just 0.1% to $966.1 billion.

The painful adjustment, or destocking as many call it, brought the inventories-to-sales ratio, which measures how many months it would take to liquidate all stockpiles if production ceased, from 1.43 to 1.42.

In a $14 trillion economy, one can quickly see how $1.4 trillion in goods can influence overall GDP.  Sales started quickly falling late last year and are down 17.8% from May 2008.

Companies were caught off guard by the buyers strike that ensued after the freeze in the credit markets and had to quickly squelch production. Hence, inventories are down 8.0% from a year ago, contributing to the contraction in GDP.

US surveys that measure manufacturing are indicating that manufacturers are still cutting back on production but the pace of decline has eased considerably.

An interesting chart in The Economist showed that the JP Morgan global Purchasing Managers Index has jumped from just below 30at the end of last year to about 50.  A reading above 50 suggests increased production, while a reading below 50 suggests cutbacks in production.

Maybe a V-shaped recovery for global manufacturers, with Asia leading the way, is shaping up.  Some of this, however, has come from Japan, which is replenishing dwindling goods and may not be sustainable.

Higher gasoline prices, autos lift retail sales

PPI jumps on higher gasoline, food costs

A 0.6% rise in retail sales for June barely exceeded the estimate provided by Bloomberg News, but the respectable increase was masked by a jump in auto sales and higher gasoline prices.

Excluding a 2.3% rise in autos, sales increased a less-than-expected 0.3%. Pull out the 5.0% surge in sales at gasoline stations, the ex-autos, ex-gas stations figure was down a disappointing 0.2%.

Some analysts blamed wet and cool weather for the poor showing we saw in June same-store sales, but job uncertainties and the steep recession still have consumers focused on savings and debt repayment.

Looking at the graph provided above, sales continue to muddle along and appear to have put in a bottom.

Wholesale inflation leaps

Led by a 1.1% rise in food and a 6.6% rise in energy, the Producer Price Index jumped 1.8% in June, more than double the forecast by economists.

The core rate, which removes the volatile food and energy categories, was up a disconcerting 0.5%, the highest reading since October. Year-over-year, core prices are still up 3.4% even as economic output has plunged.

We are starting to see modest price pressures at the earlier stages of production, likely due to increased costs for raw materials that have been showing up around the globe.

But the unsettling rise in both the headline and core rate was probably just a one-month aberration.

Energy prices have been receding and it seems unlikely that the 3.4% rise in the cost of light trucks and the 2.0% increase in autos. both which contributed to the higher core rate, will continue.

ZEW winning streak comes to an end

Germany’s closely-followed ZEW Indicator of economic sentiment unexpectedly ended its string of eight-consecutive monthly increases, falling from 44.8 in June to 39.5 in July.  The historic average  is 26.3.

The Center for European Economic Research (CEER) said “considerable risk for the future development of the German economy is whether lending to firms and households works out.

“In contrast, the surprisingly positive figures for incoming orders and industrial production have positively affected business expectations.”

Those of you who have viewed my comments in the past know I believe analysts got way ahead of themselves. The survey began to reflect improving levels of confidence in November just as the impact of the credit crisis was ready to cripple economic output in Europe’s largest economy.

And from the chart above, you can see the large swings that have occurred in sentiment over the decade. Germany’s IFO appears to be doing a better job reflecting current and future expectations and has not been subjected to the big mood swings seen in the ZEW.

June retail sales may look lackluster

Retail sales for June will be released tomorrow and most analysts are looking for about a 0.5% rise. Following a 0.5% rise in May, such an increase would normally be welcomed.

But June's same-store sales numbers from many of the nation's retailers were disappointing, and the jump in gasoline prices may mask what could turn out to be a disappointing month.

A better indicator will be sales less autos and gasoline stations. This so-called "core number" will provide a more accurate view of what consumers want to do with their disposable income.

Mortgage rates and a roller coaster

Mortgage rates surged at the end of May, leaving many who had been hoping to snag the deal of a lifetime for a refi or a new home home bewildered.

Then rates suddenly moved lower. At Examiner.com, I look into factors that are likely to impact mortgage rates in the near term in my article, Are mortgage rates headed back below 5%.

Semiconductor sales on upward path

The decline in semiconductor revenues has been steep, but the chart provided by the Semiconductor Industry Association suggests a bottom in worldwide sales of chips may have already occurred.

May’s increase of 5.4% “reflects the third-consecutive month of sequential growth for the semiconductor industry,” the SIA said.  Not surprisingly, the largest percentage gain occurred in the Asia-Pacific region.

I know the term “green shoots” has been a bit over used and, but it looks as if shoots are definitely sprouting for makers of semiconductors following a nasty drop in sales.

OECD data point to improvement

The OECD composite leading indicators (CLIs), released yesterday by the 30-nation Organization for Economic Cooperation and Development, are showing “tangible signs of an improvement” in the outlooks for most OECD economies.

Composite Leading Indicators, OECD-Total
Possible trough in the OECD area

Potential recovery signals are emerging in Italy and France, with indications of troughs beginning in Canada, the UK, the US, China and India, the OECD said. The trough signals are more tentative in Russia.

The CLI for the OECD area increased by 0.8 points in May, while the CLI for the US increased by 1.0 point, extending a 0.3 point rise in April.

Sentiment in the US appears to be painting a different picture,  however.  US equities are off June’s high, Treasury yields have fallen, and speculators have begun to flee the crude oil market.

But the data are telling a different story. Both the ISM Manufacturing Index and the ISM Non-Manufacturing Index continue to suggest the recession is easing in the US, the Leading Index has posted strong gains, and weekly jobless claims, which is a superb indicator of economic activity, is still slowly coming off its peak.

In addition, the latest information on the US trade gap revealed a modest pick up in exports, which may be another anecdotal sign of firming demand in Asia.

For a more detailed breakdown, see CLI continues to show signs of improvement.

Higher oil leads surge in import prices

Led by a 20.3% jump in oil prices, the Import Price Index surged 3.2% in June, easily outstripping the consensus forecast of a 1.9% rise per Bloomberg News.

Ex-energy, prices edged up 0.2%. We are not going to see much in the way of import-price inflation anytime soon. Oil prices have begun to recede and the increase in the headline figure is likely a one-time event.

Moreover, there is plenty of excess capacity around the world and that should also keep a lid on inflation coming in from overseas. The modest increase, however, seems at odds with the severity of the recession.

The drop in the dollar could be playing a partial role as a falling US currency makes it more expensive to import goods. But there are lags that occur between currency movements and prices. Nonetheless, the increase ex-oil is only the latest in a string of reports that seems to be deflecting the deflation argument.

Germany exports show signs of life

This morning's report that the US trade gap narrowed due to a jump in exports follows data out yesterday in Germany showing exports improved modestly.

Germany is Europe's largest economy and has been hit very hard by the slump in global demand because of its heavy dependence on manufacturing and sales overseas. What we are seeing in Germany, coupled with the US report, may be more anecdotal evidence that demand in Asia is firming.

I'll be looking for improvement in exports in the coming months as well as commentary and guidance from the multinational corporations that are set to report second quarter earnings.

Trade deficit narrows to nine-year low

The US trade deficit narrowed more than expected in May as exports rose and imports slipped. Exports increased $1.9 billion to $123.3 billion and imports fell by $0.9 billion to $149.3 billion.

That put the deficit at $26.0 billion, or about $3 billion less than many economists had expected.

You have to look hard to find any benefits from a recession, especially as big as this one, but the dramatic drop in the trade gap qualifies.

The reason is fairly simple: falling oil prices have cut the nation’s energy bill in half and the decline in consumer spending has reduced the imports of all kinds of items.

Of course, the global recession has dented exports. But May’s data may be suggesting that demand around the world (Asia?) is stabilizing as exports benefited from a $2.1 billion increase in the sale of industrial supplies and materials.

Too soon to say for sure if this will continue because one month doesn’t qualify as a trend but it’s worth keeping an eye on.

Final point - exports are part of the GDP equation, and the rise, if it continues into June, will support the 2Q number.

Record drop in Japan wholesale inflation

Japan's Corporate Goods Price Index, which looks at wholesale inflation or goods companies sell to one another, fell a record 6.6% from a year ago and the downward trend continues to accelerate.

Japan was mired in deflation in the early part of the decade, and it took a global recovery and record oil prices to bring prices above the flat-line. But the country's export-dependent economy suffered tremendously in 4Q08 and 1Q09, while the strong yen added to deflationary pressures.

Falling prices could encourage officials at the Bank of Japan to maintain a cautious outlook at the next meeting.

Wholesale inventories recede

No surprise here. Wholesale inventories fell 0.8% in May on top of the 1.3% decline in April as businesses continue to reduce excess goods on hand that built up from the near collapse in sales late last year and early this year.

Sales improved by 0.2%, pulling down the inventories-to-sales ratio - how many months it would take businesses to liquidate inventories, from 1.31 to 1.29. The ratio stood at a lean 1.12 a year ago.

But all of the increase in sales came from higher petroleum sales, which are likely due to increased prices. Pull out oil and sales were down slightly.

What does all this mean? We may need to see some more de-stocking of goods before companies start ramping up production again, but the liquidation cycle, as painful as it may be, is needed in order to get inventories back into balance.

Seasonal adjustments account for drop in jobless claims

Weekly jobless claims fell an unexpectedly-large 52,000 to 565,000, the lowest reading since early January.  The four-week moving average, which smoothes out the volatile series of data, continued on its downward path, falling 10,000 to 606,000.

Good news? Yes, but any enthusiasm should be tempered by the difficulties in accounting for seasonal adjustments this time of year.

Bloomberg News and Reuters reported that a Labor Department spokesman said that earlier-than-normal shutdowns by automakers for retooling to get set for new models were a big factor in the drop.

But the chart above does reflect that the worst in job losses is over and the decline did help stocks in early action. 

Separately, continuing claims jumped 159,000 to 6.88 million, highlighting the struggle unemployed workers are having landing new jobs. Businesses may be letting fewer workers go, but they aren’t yet in a hiring mood.

T. Boone Pickens drops plan for wind farms

Oil man turned wind man T. Boone Pickens announced yesterday that he will no longer pursue his giant plan to build wind turbines in the Texas panhandle that would have generated up to 4,000 megawatts of electricity when completed in about 4-5 years.

Financing is hard to get right now and falling oil and natural gas prices likely contributed to the decision. A lack of transmission lines also worked against him.

Rewind back to last year. Crude was $145 per barrel oil and soaring commodity prices provided the backdrop for his announcement as Pickens injected himself into the presidential campaign with his plan to use wind power for electricity and natural gas to power automobiles.

I'm sorry to see Pickens scuttle the project. The spending on wind turbines would have supported economic activity and provided a clean source of renewable energy at a time when the nation must continue to exploit all forms of energy.

IMF upgrades economic outlook

The International Monetary Fund released its latest projections for economic growth for 2009 and 2010 and said that the global economy is "beginning to pull out of the recession" but the recovery is expected to be uneven and sluggish.



The US is expected to see 0.8% growth in GDP next year, up from the April forecast of 0.0%, while the IMF sees improvement in China and developing nations.

Japan will get a lift from improved consumer confidence, progress in inventory adjustment, aggressive fiscal policies, and strong performance by some other Asian economies, the IMF said.

But the eurozone may continue to languish. Rising unemployment will weigh on consumption and activity, as will the economy’s heavy dependence on a still-ailing banking sector.

The president of the ECB has been encouraging banks in Europe to raise capital. Last month an ECB financial stability expert said new banking problems may emerge next year if the recovery is slow. See ECB expert issues warning.

RBA takes more optimistic view

The Reserve Bank of Australia held its key lending rate at 3.0% and issued an accompanying statement that said the "global economy is stabilizing...Growth in China has strengthened considerably, which is having an impact on other economies in the region, including Australia."

It also noted that downside risks to the outlook have diminished.

RBA is definitely becoming more upbeat about the economy, and its comments about China bode well for nearby countries, though Japan is still struggling.

Second quarter earnings season is upon us in the U.S., and I'll be interested in comments from multi-nationals that do business in China and any remarks they may offer regarding the outlook for the second half of the year.

Japan core machinery orders slump

Core machinery orders are a good indicator of capital spending in Japan, and May's unexpected drop is signaling that recent upbeat economic data are not convincing companies in the world's second largest-economy that now is the time to raise outlays.

Orders fell 3.0% in May, the seventh drop in eight months, versus the forecast of roughly a 2% rise. Manufacturing reports have suggested a degree of strength, but the Tankan survey, a closely-followed look at business confidence, rose less than expected in 2Q. And it is beginning to appear that an expected rebound in 2Q GDP may be short-lived.

Little encouragement from JOLTs

The Bureau of Labor Statistics reported today that May job openings edged up to 2.6 million but remained at a cyclical low of 1.9%. A recent high of 3.4% was reached two years ago. The hires rate ticked down from 3.1% to 3.0%, the lowest since the series began in December 2000.

Not much in the way of encouragement from the BLS as far as jobs are concerned but that's to be expected following recent labor market reports. The data contained were taken from the monthly report, Job Openings and Labor Turnover, or JOLT.

Key service report has recession easing

The economy is not yet expanding but a key measure of the broad service sector suggests the contraction continues to moderate, easing worries that June’s nasty payroll report overstated problems in the economy.

The ISM Non-Manufacturing Index increased from 44.0 in May to 47.0 in June, just ahead of the consensus forecast and the highest level since last September.  A reading of 50 is a signal that the service sector is neither expanding nor contracting.

Most subcomponents rose, including employment, while the prices paid increased 6.8 points to 53.7, the first time above 50 in eight months and another indication that a bottom in the economy may be near. It’s also the latest nail in the deflation coffin, in my view.

Today’s ISM report is consistent with most economic data out recently and suggests that June’s nonfarm payroll number may have unnecessarily added to fears that an upturn won’t begin until 2010.

And it’s possible that May’s smaller-than-forecast job loss may have been the result of seasonal factors that weren’t accounted for by the Labor Department, and June’s lousy reading overstated the weakness.

Averaging May and June, 394,500 jobs went away, and that’s a solid improvement compared to the first four months of the year. If jobless claims started edging higher, that would be a cause for concern but that seems unlikely at this point.

Employment lags

I’ve stated in the past that the labor report is a lagging indicator, and for those new to the blog or are just beginning to take an interest in the economy, a lagging indicator is simply that – an indicator that lags behind activity.

Sadly, jobs will be the last to pick up after an economic rebound. 

Economy puts Obama in a bind

First let me say that President Barack Obama is not to blame for the current economic mess. He did not cause the recession, he only inherited it. But like all presidents, he must deal with a situation he didn't create. How he responds will have a long-lasting influence on the rest of his presidency.

Obama, with the help of allies on Capitol Hill, passed a major economic stimulus plan in the early days of his administration. So the president now wants to focus on his ambitious agenda.

One "little" problem: Since taking office in January, 3.4 million jobs have disappeared, and the unemployment rate looks like it will pierce 10%. See Thoughts on the unemployment report. Consequently, the public may be getting a little impatient for an economic turnaround, and the way politics works - the guy at the top usually gets the blame.

Polls, polls and more polls

The daily presidential tracking poll from Rasmussen now puts Obama's presidential approval at -2, 33% strongly approving and 35% strongly disapproving, the worst in his short presidency (when he took office, Rasmussen recorded a +28). And his total approval stands at 53%, tying the lowest reading.

Zogby doesn't give the young president much in the way of encouragement either, with just 51% of likely voters giving him a thumbs-up in a survey taken in mid-June.

But things are a little better over at the Gallup organization, as surveys from the respected pollster put Obama'a approval rating at 60%.

Nonetheless, Democratic party leaders have to be watching the polling numbers closely.

The majority party could get a little lucky and find itself enjoying the fruits of a V-shaped recovery.

But if the unemployment rate reaches 10% and continues its upward march, the economic whammy engulfing the nation could hit Capitol Hill like a tsunami come next November.

Thoughts on the unemployment report

June’s larger-than-expected drop in nonfarm payrolls and 26-year high in the unemployment rate are sobering reminders that the worst recession since the 1930s has not yet released its grip on the nation’s economy.

It’s disappointing to see another 467,000 jobs disappear, especially given the solid improvement we saw in May.  And calls are growing that another stimulus plan is needed to dislodge the economy from its slump and begin creating jobs.

I’m not sure a new stimulus plan is necessary, but I do believe the funds already earmarked from the current plan have to be released more quickly and in a way that is more focused on economic activity. 

That seems unlikely since planned government expenditures take time to move through the pipeline, and a new bill is needed in order to re-direct funds.

But I digress so let’s get back to the job situation. The chart (data source: BLS) below compares nonfarm payrolls since the start of the current recession with job losses from the 1981-82 recession, adjusted for population growth.  Month 1 equals the first month of the recession.

Although losses in the early 1980s were steeper early on, the credit crisis that nearly blew apart the financial system back in September turned a mild recession into what is now being called The Great Recession, flattening the job market.

Comparing the unemployment rate provides us with mixed results.

Unemployment was much higher in the early 1980s when the Volcker-induced recession began – the ratcheting up of interest rates to squash inflation.

And the peak of 10.8% is quite a bit higher than June’s 9.5% rate; however, unemployment has risen faster this time around, and the current rate appears headed on a collision course with 10%.

Some good news, relatively speaking

But I’m determined to end this post on what I believe is a positive note.  Unemployment is a lagging indicator and won’t start heading lower until the economy has started on its long-awaited ascent.

But jobless claims are a current indicator and provide a weekly snapshot of business confidence.

Though the downward trek has been painfully slow and weekly claims have been stuck above 600,000 since the end of January, the trend is headed in the right direction. 

Coupled with a number of other key indicators that show the recession is easing, I feel the economy will eventually bottom sooner rather than later.

Consequently, the pace of layoffs will soon be reflected in the weekly number, just as the Challenger report released on Wednesday revealed that larger firms are throttling back on layoff announcements.

Steep recessions are usually followed by strong  recoveries. See Steep recessions and subsequent recoveries.  But housing is still stuck near he bottom and consumers remain reluctant to spend. As a result we appear to be setting up for a W- or U-shaped recovery.  See L, W, U, V – the alphabet soup of economic recoveries.

ECB holds rates steady

The eurozone economy has not yet stabilized, but the European Central Bank kept its key lending rate at 1.0% as expected, the highest among large economies.

Looking ahead the ECB expects the eurozone economy to eventually stabilize and then begin a gradual recovery, with positive quarterly growth rates expected by mid-2010.

Available indicators of inflation expectations over the medium-to-longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term.

ECB President Jean-Claude Trichet said that the negative rate of inflation was expected and is forecast to hold below zero over the coming months. Though inflation in the minus column should be temporary, Trichet anticipates inflation will “remain dampened over the policy-relevant horizon.”

The ECB stubbornly resisted any movement on rates through the first half of 2008 and even tightened last July. Central bankers across the pond finally began cutting rates after it was clear that the housing crisis in the US threatened to sink the eurozone economy.

Still, Trichet and Company need to do more and another reduction in interest rates as well as an expansion in bond purchases are needed. A rise in the jobless rate to 9.5%, a ten-year high, is the latest sign of economic weakness.

Banks in Europe have enough capital to withstand losses through the end of the year and into 2010 as long as Europe experiences a strong recovery. And Trichet encouraged new efforts to raise capital.

But an ECB financial stability expert warned last month that banks could see rising problems and new defaults in the event of a gradual recovery. And that is exactly what policymakers are forecasting. See ECB expert issues warning.

Another gloomy payroll number

Four consecutive months of improvement in the nonfarm payroll data came to an end in June, with payrolls dropping a worse-than-forecast 467,000.  The unemployment rate ticked up from 9.5% to 9.6%.

Details are available at Examiner.com, but I wanted to share an additional chart that highlights how severe this recession has battered the labor market.

The data collected from Labor Department figures show that since employment hit its peak in the current cycle, employment has declined by 5.5%.

The drop this time around is much worse and longer than the severe recessions experienced back in the mid-1970s and the early 1980s. And it has now exceeded the short but steep recession of 1957-58.

Based on current trends and still-high jobless claims, it seems likely that we will have another sluggish number in July.

Jobless claims tick lower

In the meantime, weekly jobless claims dropped 16,000 to 614,000.  The trend has been very slowly improving but remains stuck at unacceptably high levels. Continuing claims fell 53,000 to to 6.7 million and appear to have peaked.