Lingering impact of recession haunts consumers

The steep contraction the economy experienced in the months after the failure of Lehman Brothers and the subsequent freezing in the credit markets are well behind us and the improvement in consumer sentiment, as measured by the University of Michigan’s survey, has improved considerably.

But the fallout from the worst recession in decades has severely impacted the labor market.  With the unemployment rate probably poised to break past 10%, consumer confidence has barely budged out of the range it has been over the last 6 month.

So it shouldn’t come as a surprise that  job insecurities and worries about finances pushed the index from 73.5 in September to 70.6 in October.

The majority of consumers reported that their finances had worsened in October for the thirteenth consecutive month—the longest and deepest decline in the sixty-year history of the survey, according to the University of Michigan.

The economy has begun to climb out of the deep hole it fell into over the last 18 months, but many of us are not feeling much better about the economy. 

And with the Christmas shopping season just around the corner, a lack of visible improvement in consumer attitudes may depress spending in the final months of the year.

Chicago PMI surges ahead

The Chicago Purchasing Managers' Index jumped from 46.1 in September to 54.2 in October, easily beating the Bloomberg estimate of 48.5 and hitting its best level in over one year. A reading above 50 indicates that Midwestern manufacturers are expanding production.

The upbeat reading is welcome and the trend is favorable, but the index tends to be volatile. The ISM Manufacturing Index, which is a look at manufacturing on a national basis, is more closely followed and will provide a cleaner look at goods producers when it is released next week.

Q3 GDP revisited

Early data released yesterday showed the Great Recession that began in late 2007 unofficially ended in Q3 as the economy expanded at an annual rate of 3.5%.

I think it’s worth taking a moment to see what drove the economy forward last quarter and try to determine what might happen over the next several months.

First of all, 2.36 percentage points of of growth, nearly two-thirds of the gain, came from an improvement in personal consumption.  Since personal consumption makes up 70% of total economic activity, stingy consumers, who have been hunkering down, opened up their billfolds and helped to drive the first increase in GDP in five quarters.

Drilling down a bit further, durable goods made up 1.79 percentage points, including 1.47 percentage points from  automobiles and parts.  What does this all mean?  Simple, cash for clunkers played a major roll in Q3’s economic turnaround.

Moreover, 0.48 percentage points came from higher government spending. So it doesn’t take a math whiz to realize that over half the rise in GDP came from the government’s stimulus package.

Unfortunately, the sugar high the auto industry received from the cash for clunkers program has quickly faded, and we probably won’t see gains from the auto sector extending into Q4.

But there are some bright spots going forward. 

Businesses are starting to ramp up production again, with inventory accumulation adding 0.94 percentage points to economic activity.  And because excess stockpiles were rapidly depleted in the earlier months of the recession, we may continue to see improvements in this category.

Consumer spending may be a bit tenuous going forward since job anxieties remain high and balance sheets are still in need of repair.  If nonfarm payroll growth begins to tick higher by year end and continues to occur into 2010, consumer spending may finally begin to contribute to growth on a more permanent basis.

Hence, there are good reasons to be cautiously optimistic.

Jobless claims point to little improvement in the labor market

The economy has started to grow again as evidenced by the first report on Q3 GDP, but companies continue to shed jobs at  a pace that suggests we have not yet seen a peak in the jobless rate.

Weekly initial jobless claims dipped a scant 1,000 to 530,000 in the latest week, while the 4-week moving average fell 6,000 to 526,250.  At an uncomfortably high level above 500,000, next week’s report on nonfarm payrolls is probably set to disappoint.

Continuing claims, however, dropped 148,000 to 5,797,000. Still, the decline is more likely to be occurring because standard six-month benefits are running out.

 

Although manufacturing is growing again as companies rebuild depleted stockpiles, and the stock market continues to foreshadow an improving economy, the labor market has yet experience the turnaround.

Job growth typically lags in an economic recovery. And the modest growth we’ve seen so far suggests a jobless recovery may be on the horizon.

IFO shows Germany business confidence improves

Business confidence in Europe’s largest economy continues to gather steam amid signs that the global economy is improving.

Germany’s IFO Business Climate Index increased by 0.6 points to 91.9 in October, the best reading in just over a year. Moreover, expectations regarding future growth continue to push ahead.

Available survey indicators continue to signal an ongoing stabilization of economic activity, according to the European Central Bank. “In particular, the euro area should benefit from a recovery in exports, the significant macroeconomic stimulus under way, and the measures taken to restore the functioning of the financial system.”

Germany is heavily dependent upon exports and was hit hard by the global recession.

Semiconductor sales power up

Semiconductor sales jumped 5% in August to $19.1 billion, the he Semiconductor Industry Association (SIA) reported earlier in the month.

“Continuing recovery of consumer spending led the sixth-consecutive month of sequential growth in semiconductor sales,” said SIA President George Scalise. “Various incentive programs for energy-efficient products, ranging from automobiles to home appliances, have bolstered demand for semiconductors, which deliver critical enabling technology for reducing energy consumption.

Growing sales of netbook personal computers have also helped, Scalise continued.  “Notwithstanding the slow recovery of demand from the enterprise sector, we are encouraged that industry momentum has turned positive following the steepest downturn in more than a decade,” he concluded.

Existing home sales roar ahead

Following a modest pullback in August, existing home sales jumped an impressive 9.4% to an annual rate of 5.57 million units in September, exceeding the Bloomberg forecast of 5.35 million units and the highest reading since July 2007.

Existing home sales make up over 90% of all housing sales, and the fifth increase in six months, coupled with the best reading in over two years, indicates the housing market is well on the road to recovery.

One caveat: the National Association of Realtors said, “Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to make a trade and buy another home.” Historically low interest rates are adding to the upbeat mood.

Policymakers are concerned that an abrupt end to the tax credit, which is set to end on November 30, could bring the improvement in housing to an abrupt halt for several months, and realtors have been heavily lobbying for an extension of the credit.

Still, total housing inventory fell 7.5%to 3.63 million, which represents an 7.8-month supply at the current sales pace, down from an 9.3-month supply in August. Unsold inventory totals are 15.0 percent below a year ago.

“The current housing supply is the lowest we’ve seen in two and a half years,” NAR economist Lawrence Yun said. “If we could continue to absorb inventory at this pace, home prices would return to normal, modest appreciation patterns next year."

That comment seems to go against the conventional wisdom that a new wave of foreclosures next year will likely pressure prices. Stay tuned.

Jobless claims disappoint but trend still favorable

Weekly initial jobless claims moved higher for the first time in a month, increasing from last week’s upwardly-revised reading of 520,000 to 531,000.  This tops the consensus of 519,000, according to Bloomberg.

The 4-week moving average remained in a downward trend but declined by just 750 to 532,250.  News was a bit brighter for continuing claims, which declined by 98,000 to 5.9 million, though much for the decline is probably coming from recipients who no longer qualify for the six months of standard benefits.

Weekly jobless claims can be volatile but provide nearly a real-time look at economic activity.  The decline from earlier in the year has been painfully slow but shows that companies are gradually growing more optimistic about economic prospects.

But with the unemployment rate poised to crack 10% for the first time since 1983, leaders in Congress are starting to talk about another stimulus package.  In my view, a more efficient use of the original $787 billion plan would suffice.

Fed's Beige Books gives reason for cautious optimism

The Fed's Beige Book, which is a summary of economic conditions in each of the Federal Reserve's 12 districts, indicated that economic activity has either stabilized or displayed modest improvements in many sectors since the last report.

"Leading the more positive sector reports among districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed. Commercial real estate was reported to be one of the weakest sectors."

It is no surprise, in my view, that the Fed is detecting an improvement in manufacturing and in residential real estate given that much of the data out recently are reflecting gains. Consumer spending has been more tenuous, while commercial real estate may be the Achilles heel of the economy.

Home builders receive reality check

The housing market has bottomed and appears to be on its long-awaited road to recovery, in my view.  But rock bottom mortgage rates and the first-time home buyer tax credit are not luring potential buyers back into the new home market the way many policy makers would like to see as evidenced by the latest data on the industry.

Yesterday, the NAHB/Wells Fargo Housing Market Index slipped from 19 in September to 18 in October, pointing to a drop in builder sentiment as the $8,000 tax credit for first time home-buyers nears expiration at the end of November. 

A reading of 50 is neither pessimistic nor optimistic.

As noted by the chart below, a drop in prospective buyer (green line) also impacted confidence.  But builders continue to heavily lobby for an extension of the tax credit , noting that “the massive hurdles that builders face in obtaining construction financing and appropriate appraisals on new homes could derail the fragile recovery in housing just as it is starting to take shape.”

A more detailed look at  the index since March 2008 is provided below.

Meanwhile, housing starts inched up just 0.5% in September to a seasonally-adjusted annual rate of 590,000 units, while building permits slipped by 1.2% to an annual rate of 573,000 units. 

The sluggish numbers last month were mostly due to sluggish starts and permits of multi-family units as single-family starts and permits gained 3.9% and 3.0%, respectively.

Still, the NAHB, in keeping with its lobbying efforts, said, “Builders are being extremely cautious right now in their efforts to maintain a modest inventory of new homes for sale.

“On top of the fact that it is nearly impossible to obtain construction financing for new units, there are widespread concerns about what will happen to demand with the expiration of the $8,000 first-time home buyer tax credit at the end of November.”

Natural gas supplies keep growing

Natural gas supplies are more than ample heading in the early part of fall, with another 58 billion (bcf) being added in the latest week, according to the Energy Information Administration.

This represents a net increase of 58 bBcf from the previous week. Stocks were 450 Bcf higher than last year at this time and 474 bcf above the 5-year average of 3,242 bcf.

The price of the commodity used to heat more than 50% of U.S. homes has risen off the bottom, but at roughly $4.50 per mmbtu, it’s still far from the highs hit in 2008.

Most homeowners who use natural gas should be in for a pleasant surprise when they open their bills during the colder months, assuming we don’t see a frigid winter that gobbles up supplies and lifts prices.

Philly Fed pulls back, expansion still intact

The Philly Fed Index takes the pulse of manufacturing in the mid-Atlantic regions on a monthly basis, and the latest survey shows that manufacturers continue to increase production but at a slower pace.

In October, the index slipped 2.6 points to 11.5, coming up shy of the consensus forecast offered by Bloomberg of 12.5. 

Indexes for general activity, new orders, and shipments all registered positive readings for the third consecutive month, but they suggest only marginal growth. Indexes for employment and work hours remained
negative, but trends suggest that employment losses have moderated in recent months, according to the survey. 

Costs pressures, however, are beginning to rise.

Optimism has faded somewhat when looking at sentiment going out six months, but indicators of future activity remain near levels not seen since
2004.

Empire on a roll

Separately, the Empire Manufacturing Index for October surged and remain in a sharp upward trend as activity in New York continues to accelerate.

The general business conditions index climbed 16 points to 34.6, the highest level in five years. The new orders index rose 11 points, and the shipments index shot up 30 points, to 35.1.

The survey tends to be a bit volatile and the Philly Fed’s survey is considered more reliable, but October’s first look at manufacturing is bolstering hope that goods producers are seeing a sharp rebound in parts of the country.

Weekly jobless claims at 2009 low

Weekly initial jobless claims fell again in the latest week, falling 10,000 to 514,000 and reaching the lowest level since the start of the year.  The 4-week moving average is also trending lower, dropping 9,000 to 531,500 and continuing claims slid 75,000 to 5.99 million.

Falling weekly claims are signaling that companies are growing more optimistic about job prospects, while the lowest level in weekly claims in over nine months suggests an improvement in nonfarm payrolls for the month of October.

ZEW still upbeat but slips in latest month

The influential ZEW survey, which measures institutional in Germany, slipped 1.7 points in October to 56.0.  Though a little below expectations, the level remains well above the historical average of 26.7.

Sentiment among analysts in Europe’s largest economy has soared since late last year, and in my view, got a little ahead of itself (see June 16 post Germany optimism on upward trajectory).  Germany’s economy is export based and an improvement in the global picture, along with a rise in 2Q GDP, suggests a recovery has likely begun.

However, risks remain and Europe’s banking system still faces headwinds from unrealized loan losses. Hence, sentiment may be peaking.

Inventories getting back in line with sales

Here’s something that came in under the radar last week that I feel needs to be pointed out.

Wholesale inventories remain in a sharp downward trend, falling 1.3% in August. A solid 1.0% rise in sales was mostly responsible for the decline, indicating that the drop in goods sitting in warehouses is occurring mostly because of increased demand and not falling production.

And this has brought about a sharp decline in the inventories-to-sales ratio, or how many months it would take businesses to liquidate all inventories, which now stands at 1.20.

This as good news as it means that companies that manufacture goods will soon need to boost production or risk missing profitable opportunities, in my view.

Although positive in that the steep decline should soon translate into manufacturing gains, it does highlight how quickly manufacturers reacted to the steep drop in demand late last year by halting production and cutting back on workers.

U.S. trade gap aided by lower imports

The government announced this morning that that total August exports of
$128.2 billion and imports of $158.9 billion resulted in a trade deficit of $30.7 billion, down from $31.9 billion in July.  Analysts surveyed by Bloomberg had anticipated a gap of $33.0 billion.

In addition to a small dip in imports, the nation’s balance of payments was also aided by a minor increase in exports as the global economy continues to display small improvements.

As the chart from the Commerce Department reveals, the U.S. trade deficit has improve dramatically during the recession because companies no longer need to import as many goods amid falling demand.  In addition, oil prices are down roughly 50% from a year ago, which has also dented the deficit.

Of course, sagging demand has also reduced world demand for U.S. goods and services.  As the U.S. economy begins to recover, however, the best news on the trade deficit appears to be behind us.

Gasoline demand roars ahead

Crude oil supplies  fell by 1 million barrels in the latest week, gasoline inventories increased by 2.9 million barrels, and distillates, which include heating oil, rose a modest 700,000 barrels.  All remain above the upper boundary of the average range for this time of year.  

What interests me at the moment is the fact that gasoline demand is up an impressive 6.2% in the week ending October 2 versus one year ago, even as total economic output remains well below a year ago and unemployment is much higher. 

Convention wisdom would suggest that a much higher unemployment rate and depressed economic activity would dampen demand of gasoline.  But  the opposite has happened.

Source: Energy Information Administration

Gasoline priced above $4 per gallon likely encouraged some drivers to stay off the roads, but gasoline south of $2.50 per gallon may have been just what was needed to get some of these former conservationists back into their automobiles.

An RBA surprise: Australia hikes key rate

The Reserve Bank of Australia became the first major central bank to increase interest rates amid signs the global economy is recovering, hiking its key lending rate by 25 bp to 3.25%.

The RBA said the "global economy is resuming growth," and "the recovery will likely continue during 2010 and forecasts are being revised higher." Despite doubts in some corners, the central bank noted that "growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets."

More rate increases seem likely as the RBA said, "It is now prudent to begin gradually lessening the stimulus provided by monetary policy." It seems extremely doubtful that Europe, the UK, or the US will follow suit anytime soon.

Recovery appears to be broadening

Some of the recent data that has been out on the economy is underscoring how delicate the economic recovery has been so far, but the latest look at the service sector suggests that a broad swath of the economy is finally beginning to expand.

The ISM Non-Manufacturing Index rose from 48.4 in August to 50.9 in September, the first time it has been above 50 since August 2008 and the best reading in 16 months.  A reading above 50 is expansionary.

Even better, the the Non-Manufacturing Business Activity Index increased 3.8 percentage points to 55.1, indicating that economic activity is accelerating.  Unfortunately, job losses continued to mount as the employment subcomponent barely edged up to 44.3, which isn’t a big surprise given the large number of layoffs that occurred in last month’s nonfarm payroll number.

Nonetheless, with signs that the recovery is broadening, job losses should slowly improve in the coming months as it appears that the expansion is starting to move beyond housing and manufacturing.

Pending home sales index points to further gains

Recent news coming out suggests the economic recovery is still in place but there have been a few bumps along the way.  But today’s release of a closely-watched gauge of future existing home sales indicates the recovery in housing appears to be picking up steam.

The Pending Home Sales Index jumped 6.4% in August to 103.8, its seventh-consecutive monthly increase and the best reading since March 2007.  The forward-looking survey now stands 12.4% above a year ago.

However, Lawrence Yun, the chief economist for the National Association of Realtors, tried to downplay today’s upbeat number, noting that not all contracts are turning into closed sales within an expected timeframe.

“The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules,” he said. “No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month.”

The question that continues to loom large is whether Congress will extend the tax credit for buyers, which has been proven to be one of the few effective measures in the stimulus bill passed earlier in the year by Congress.

ISM shows moderating growth

Following eight-consecutive monthly improvements in a key survey of manufacturing, the ISM Manufacturing Index fell 0.3 points to 52.6 in September, shy of the consensus forecast provided by Bloomberg of 53.5.

"The manufacturing sector grew for the second consecutive month in September (as the level remains above 50). While the rate of growth moderated slightly when compared to August, the recovery broadened as the number of industries reporting growth increased from 11 to 13.

Both new orders and production are growing, but at a slower rate when compared to August,” the chair of the Institute for Supply Management said.

New orders fell 4.1 points to 60.8 but are holding at a healthy level and are pointing to future gains in manufacturing.  Exports, which are benefitting from growth overseas, slipped just 0.5 points to 55.0.

Consumer spending jumps, inflation remains tame

Aided by the cash for clunkers program, consumer spending shot up 1.3% in August, which compares favorably to the Bloomberg estimate of 1.1%. Personal income was much more subdued, increasing 0.2%, which brought the savings rate down from 4.0% to 3.0%.

Gains were not just limited to automobiles as nondurable goods and services also registered modest increases.

However, the jump in spending, which is welcome as the economy begins to emerge from the worst recession since the 1930s, did depress the savings rate.

September is likely to show a drop in spending as the one-time shot in the arm from the cash for clunkers program disappears, but hopeful signs in other categories suggests that consumers are becoming a little less concerned about the economy.

Moreover, the core PCE Price Index, which is a broad look at inflation and is favored by the Fed, increased just 0.1% for the fourth-straight month, giving policymakers plenty of room to keep interest rates low and encourage economic activity.

Jobless claims rise, trend still favorable

The general trend has been to the downside, but the latest reading on jobless claims is showing that progress is slow.

The Labor Department reported this morning that weekly initial jobless claims increased 17,000 to 551,000. while the 4-week moving average, which smoothes out some of the week-to-week volatility, fell by 6,250 to 548,000.

A drop in continuing claims of 70,000 to 6.09 million may be suggesting that a few of the unemployed are finding jobs, but with the unemployment rates at its highest level in 26-years, it seems more likely that the drop in continuing claims is probably tied to the expiration of standard 6-month benefits.

Despite recent gains in economic activity, especially in housing and in manufacturing, many firms continue to cut jobs amid a generally uncertain outlook.