U. Michigan consumer sentiment edged up

Still in narrow range

The Conference Board’s survey on consumer confidence, which includes a look at the outlook for employment, has detected modest gains in sentiment, but the University of Michigan’s survey of consumer sentiment, which does not measure job market attitudes, is  not coming to the same conclusion.

Consumer sentiment did increase from 72.2 in April to 73.6 in May, and it was also up from the preliminary reading earlier in the month of 73.3.

Based on the chart above, consumer sentiment has been nearly flat since the beginning of the year, potentially creating some headwinds for consumer spending.

Rising personal income not matched by increased spending

Aided by an increase in employment, personal income rose 0.4% in April, matching March’s increase.  But consumer spending, which posted decent gains in February and March was flat.

Nothing to be to alarmed about, especially after decent gains in recent months – average annualized gains in spending since 3Q have come in at almost 5%.

The rise in income, which was not matched by an increase in spending, helped boost the savings rate from 3.1% to 3.6%, the first rise since December.

Consumer spending is the engine that drives economic activity, accounting for about 70% of GDP.  The rise in the savings rate, coupled with recent gains in employment, are likely to help fuel spending in the coming months.

However, jobless claims remain high, suggesting that employment gains will be limited, which in turn, may hamper any rise in spending.

Jobless claims fall but trend is discouraging

Weekly initial jobless claims fell in the latest week, dropping 14,000 to 460,000.

However, looking at the chart below, the improvement in jobless claims that began in early 2009 has pretty much stalled.

Evidence is piling up that the recovery which began in manufacturing is spreading to the broad service sector.  Consumer spending is improving modestly and consumer confidence has edged higher.

At this point, economic gains should be encouraging employers to not only hang on to current employees, but to also add workers.  Job creation has picked up, based on government data, but jobless claims are holding at elevated levels.

At a minimum, the high level of jobless claims suggests that employment gains may be minimal in the coming months.

MBA Purchase Index points to near-term housing weakness

New home sales have jumped nearly 50% over the past two month, thanks to the tax credit the government has offered first-time and repeat buyers.

The big question being asked is how much will the market drop off in the wake of the expiration of the tax credit.

The U.S. Mortgage Bankers Association’s Purchase Index is providing a few clues, and its initial take on the market is not encouraging, as the Purchase Index fell 3.3% in the latest week, which comes on top of a steep 27% decline in the prior week.

Currently, the Purchase Index is at the lowest level since April 1997, suggesting that home sales, both new and existing, are set to slump following the end of the government’s incentive.

TED spread has been moving higher

Reaction to Europe showing up in key measure of risk

Yesterday, I took a look at the 3-month LIBOR rate and discussed how the recent increased has been tied to tension in the credit markets flowing from southern Europe.

Today, I want to take some time and discuss another gauge that measures risk in the credit markets – the TED spread.  The TED spread looks at the difference between the 3-month LIBOR and the 3-month U.S. T-bill.

The 3-month T-bill is considered a risk-free rate of return because the investment is short-term and is backed by the full faith and credit of the U.S. government.

When credit markets are functioning normally, we are likely to see a very narrow spread because there is very little risk for banks to park excess reserves in either a T-bill or lend it to another bank for 90 days.

Think back to the 1990s or the mid part of the last decade. Lending funds short term to a large U.S. or European bank is an easy way to earn a little extra cash over a T-bill with a virtual guarantee of the return of principal. But in theory, it’s not quite risk free; hence, the slightly higher interest rate.

TED spread

But the sovereign debt crisis in Europe has caused an increases in skittishness among banks, who fear that a default by Greece could quickly lead to write downs at major European banks and possibly threaten the solvency of some institutions.

Therefore, funds available among banks has fallen, leading to a rise in the 3-month LIBOR rate.

Thus far, the increase in the TED spread is a reflection of what is happening in Europe, and the modest impact on credit markets is not enough to harm economic activity, in my view.

And the rise pales in comparison to what happen in the wake of the Lehman crisis, when an already elevated level between 85-100 soared to over 460, indicating credit markets were nearly frozen and the financial system was near the breaking point.

America holds very little paper from Greece, but Spain, which has been in the spotlight lately, owes U.S. institutions almost $200 billion, according to the New York Times, highlighting how interconnected countries around the world are.

The TED spread did fall slightly today, but the key measure of risk is worth watching, as it provides a good reading or temperature of  the financial markets.

Credit markets tighten as European debt fears spread

LIBOR on upward trajectory

Stocks in the U.S. turned decidedly lower at the opening but managed to rally through the day to finish almost unchanged, but credit markets continue to slowly tighten as fears grow that the fiscal woes engulfing Greece could spread to other countries and banks in Europe.

The 3-month LIBOR rate rose nearly 3 basis points (bp) to 54 bp today, the highest since July 2009 and more than double the rate seen from early December through mid-March, which preceded the problems that forced the EU to craft a huge bailout of Greece.

LIBOR is the London Interbank Offered Rate which banks can borrow unsecured funds from other banks.  Typically, the rate will hold steady when there are few if any expectations that the Fed is set to adjust interest rates.  The rate can and does drift higher when most analysts and traders expect a rate hike, while forecasts of rate cut will weigh on LIBOR.

Currently, creaks in the financial system have caused a reluctance among those banks with excess funds to lend out to banks their surplus amid concerns that problems down the road could delay or prevent repayment.  Another words, the dwindling supply of cash to lend, without a corresponding dip in demand, is causing rates to rise.

So far, the credit markets have been adapting to the problems overseas, but the rise in LIBOR could put upward pressure on adjustable rates when they reset as well as put upward pressure on consumer loan rates at a time when the recovery is still in its early stages.

But the gradual increase is also a reflection of growing tensions in the global financial system, even with the massive bailout package that was announced earlier in the month. 

The steady but slow rise suggests governments have been able to temporarily address crisis in southern Europe, but major changes in fiscal policy, which may be difficult to implement, are a key part of the solution.

Labor data disconnect

Employment up but other indicators flashing yellow

Since December, employers have added an impressive 530,000 positions to payrolls, according to the establishment survey, with 483,000 coming from the private sector.

Though more volatile, the household survey, which is used to calculate the unemployment rate and is believed to do a better job capturing trends at small businesses, showed that companies added 550,000 in April and 264,000 in March.

The unemployment rate, however, ticked up from 9.7% to 9.9% because over 800,000 individuals jumped back into the labor force last month.  Likely reason: most believe that an improving economy is starting to generate new jobs and formerly discouraged workers are starting to look again.

Not all is rosy

It’s going to take time to whittle away at the unemployment rate. Unfortunately, other data are yet to confirm a noticeable pick up in hiring.

The Institute for Supply Management releases two detailed looks at economic activity, measuring the pulse of manufacturing and the service sector.

Manufacturing was hit especially hard in the recession and steep cuts in production resulted in massive layoffs in the industry.  But production has coming roaring back, and as the chart below reveals, manufacturers are once again hiring.

And that has been confirmed by the establishment survey, which showed goods-producers added an impressive 44,000 to payrolls last month.

A reading of 50 suggests firms are neither firing or hiring.

But manufacturing makes up just a small part of the economy. Improvement in the service sector is critical to future economic growth and overall job gains.

According to the ISM survey, the the drop in employment in the service sector has just about come to an end, but there hasn’t been any pick up in hiring either.

Weekly jobless claims have also been stuck at elevated levels for about five months after steadily declining from its peak early last year.

Why one government survey shows fairly robust hiring while another one is signaling uncertainty is a mystery.  And we aren’t getting any confirmation from the ISM that jobs are finally being created in the largest sector of the economy.

We could see downward revisions in the next month or two to March and April’s strong gains.  Or lagging weekly claims and the ISM employment index for non-manufacturers may just be a sign that near-term job growth will be limited.

With business spending ramping up, consumer spending turning higher and manufacturers experiencing what can only be described as a V-shaped recovery, signs are pointing to an improving labor market.  We just aren’t getting all the key measures of employment to flash the all-clear sign.

Jobless claims going nowhere fast

April saw a sizable increase in nonfarm payrolls, business and consumer spending is picking up and manufacturing is expanding at a fast clip, but you would never know that the recovery is gaining momentum by looking at weekly jobless claims.

Weekly claims unexpectedly jumped 25,000 in the latest week to 471,000, and the 4-week moving average rose 3,000 to 453,500.



An expanding economy and rising employment should be reflected by a growing confidence among businesses and a reluctance to fire workers. But the setback in the latest week suggests otherwise.

Yes, we are well below the peak of early 2009, but the lack of progress suggests employment growth will be mild in May.

Wholesale inflation benign

The rate of inflation at the wholesale level, which is measured by the Producer Price Index, fell 0.1% in April due to falling energy and food prices.

Take out food and energy, and the core rate was up 0.2%.

Year-over-year, headline inflation at the wholesale level is up 5.4%, as energy prices remain much higher versus one year ago.  But outside energy, and a few select commodities, there is very little inflation in the pipeline as evidenced by a core rate that is up just 1.0% from one year ago.

Blame the high rate of unemployment, very mild wage gains and the excess slack in the U.S. and around the world that makes it difficult to boost prices.  And with the dollar gaining strength, import price inflation should remain in check.

Because the Fed does not have to deal with inflation right now, expect policymakers to keep rates low, especially because officials don't want to create any additional waves in Europe right now.

Mixed signals

Housing starts rise – no surprise given the expiring tax credit.  Building permits retreat. Also no surprise.

At a minimum, the market for new homes has stabilized based on the gradual increase in building over the past year.

A more detailed look is available at Examiner.

Home builder confidence on the rise

Buyer interest inspired from an expiring tax credit designed to stimulate housing market helped push the confidence of home builders to the highest level in two and a half years.

Released today, the National Association of Home Builders/Wells Fargo Housing Market Index increased from 19 in April to 22 in May, the second consecutive monthly increase and the best level since August 2007.

Obviously, buyers are reacting to the just-expired $8,000 tax credit for first time buyers and the $6,500 credit for repeat buyers.   And those who recently purchased a new or existing home are getting  the added bonus of very attractive financing, as the 30-year fixed mortgage has been hovering at or near 5%.

If history is any guide, we would expect a letdown following the demise of the tax credit.  Following the previously-expected expiration of the credit on November 30 – before Congress extended and expanded the measure, interest in new and existing homes fell sharply, likely because the credit encouraged some purchasers to move up plans in order to take advantage of the extra cash.

However, we can find some encouragement from the expectations component of the survey, which moved ahead even as competition from foreclosures and short sales hangs over the market.

The tax credit has done the job which it was supposed to do – getting fence sitters to take action, but the remedy that is truly needed to fix the ailing housing market is an expanding economy and job growth.

Before we (or I) get too carried away with today’s report, it’s important to point out that a reading of 50 indicates builders are neither positive nor negative on the market.  Though home builder confidence is improving, at 22, sentiment is still weak by historical standards.

Jobs are increasing but jobless claims still too high

Despite strong job growth last month, weekly jobless claims continue to be a problem, holding well above 400,000 each week and having shown little improvement since late 2009.

The Labor Department reported this morning that weekly initial jobless claims fell 4,000 to 444,000.


With all of the signs that the economic recovery is picking up steam, including an impressive increase of 290,000 jobs in April, one would suspect that weekly claims would be in a steady downward trend, probably below 400,000.

That has not been the case. Yes, claims are well off early 2009’s high, but progress has stalled.

Claims and job creation

There is not a one-to-one correlation between jobless claims and nonfarm payrolls, but the high level of claims suggests that we won’t be seeing the high level of unemployment fall in the near term.

Robust and consistent gains in payrolls and a falling unemployment rate will only be achieved when claims are consistently and solidly below 400,000 and trending lower.

Wholesale inventories on the rise

Sales gallop ahead

Wholesale inventories increased a modest 0.4% in March, while sales continued to accelerate, rising a healthy 2.4%. 

Production is rising in response to an improving economy, but manufacturers still seem a little bit hesitant to ramp up production, as seen by the drop in the inventories-to-sales ratio from 1.16 to 1.13, a record low.

The inventories-to-sales ratio measures how many months it would take businesses to liquidate all goods on hand at  the current sales pace. 

Because stockpiles are at at a low, further increases in production are likely, further fueling economic activity.

U.S. measures of risk rising

But not yet worrisome
The three charts below are key measure of risk in the financial system and measure how will large banks and institutions are to lend to each other.

Risk is slowly creeping back into the banking system, as fear grows the Greece’s fiscal crisis may spread to Portugal, Spain and beyond.  We’re nowhere near the numbers seen post-Lehman crisis, but the uptick definitely bears monitoring.

In Europe, it’s a different matter, with counterparty risk rising dramatically on worries that debt writedowns could have a major impact on individual bank balance sheets. 

Fears about the future of the euro have taken a big toll over the past week.

TED spread

3-month LIBOR

2-year U.S. dollar swap spread

All charts offered from Bloomberg.

Weekly jobless claims down three in a row

Heading into tomorrow’s release of nonfarm payrolls and the unemployment rate, weekly jobless claims ran its winning streak to three weeks, with claims falling 7,000 to 444,000. The 4-week moving average fell 4,750 to 458,500 and continuing claims dropped 59,000 to 4.6 million.

The recent drop is welcome, but as the chart above reflects, claims have been hovering – stuck might be a more accurate description – in a narrow range for almost five months.

Despite the stubbornly-high level of weekly claims, economists surveyed by Bloomberg are optimistically predicting that 200,000 will have been created in April, when the data hit tomorrow at 8:30 a.m. The unemployment rate is expected to drop from 9.7% to 9.6%.

If economists are correct, the jump in employment would be the clearest sign yet that the jobless recovery is fading into the review mirror and a self-sustaining rebound is emerging.

ISM services index registers respectable growth

Employment lags

Following four consecutive monthly increases, the ISM Non-Manufacturing  Index held steady at a healthy 55.4 in April, indicating that the service sector of the economy continues to expand at a modest clip.

New orders pulled back, but at a solid 58.2, the subcomponent points to further gains for the economy.

But job growth remains elusive.  The Institute for Supply Management said employment eased to 49.5, indicating that the lag in hiring persists.

Economic activity has broadened in recent months; however, corporate uncertainty, a still-modest recovery, and the focus on the bottom line are among the factors that are preventing job creation.

Europe's debt problems and LIBOR

Back in the fall of 2008, credit spreads soared as investors rushed out of riskier assets and plunged into the safety of Treasuries. While we are seeing spreads widen considerably in Europe - the yield on Greek bonds has soared compared to bonds issued by Germany, changes in spreads have been mild in the U.S.

Nonetheless, the 3-month LIBOR rate has started to tick higher. After bottoming and about 25 basis points, the rate has inched up over the past six weeks or so to 36 basis points.

That's not anything to be alarmed about at this point. Still, the upward drift bears watching.

Tax credit continues to support housing

Wall Street ignored good economic data on housing today and instead, chose to focus on sovereign debt worries in Europe.  Nevertheless, I wanted to take a moment to focus on continued gains in housing, compliments of the government’s tax credits for first time and existing home buyers.

The Pending Home Sales Index, which looks at contracts signed but not yet closed, increased 5.3% in March to 102.9, as buyers rushed to beat the impending deadline of April 30 – the date a contract is required.

Interest rates are low and the feds have sweetened the deal by providing extra cash.  As the chart reveals, the incentive is working.

However, I suspect that sales will drop after the deadline.  A more permanent fix to the housing problem requires job growth and stabilizing/rising home values. 

When foreclosures fade and the unemployment rate falls, the stage will be set solid gains in housing sales.

Manufacturing hits its stride

ISM at highest in almost six years

Manufacturing activity continues to accelerate in the U.S., as evidenced by the latest survey released by the Institute for Supply Management.

The ISM Manufacturing Index increased from 59.6 in March to 60.4 in April, the fastest pace since June 2004. A reading above 50 indicates the sector is expanding.

Expect a continued or even a quickening of the pace in upcoming months.

New orders jumped 4.2 points to a very strong 65.7 in April, while companies reporting that they believe customer inventories are too low dropped a steep 6.0 points to 33.0 - very near a cyclical low.

Furthermore, the prices paid component continued its upward march, rising 3.0 points to 78.0. But the jump in commodity prices is a reflection of strong demand at the early stages of production and should not be viewed as worrisome on the pricing front.

Plenty of slack remains in the industrial sector, and wages, the biggest cost for most businesses, are barely moving.

One definite piece of good news for job seekers - employment rose from 55.1 to 58.8, signaling that manufacturers are bringing workers back to production lines to meet rising demand.

However, when it comes to the broader economy, gains in the service sector have been less pronounced and job creation has been much more muted. Plus, weekly jobless claims have been stuck at elevated levels.

A brief look at the last 18 months

After manufacturing activity ground to a screeching halt in late 2008, the small but volatile sector has come roaring back.

By no means are we firing on all cylinders, as capacity utilization remains at an historically low level. But the recovery has been impressive, and goods producers are well on their way to climbing out of a very deep hole.

Finally, it's worth pointing out that the ISM survey never topped 60 during the extended recovery in the 1990s, peaking at 59.4 in late 1994, according to data supplied by the ISM.

No doubt, manufacturing is leading the recovery at this stage of the business cycle.

Expanding GDP

The end of last week brought us another piece of good news, as the advance GDP report showed that the economy continues to expand.

Though not as robust as the 5.6% annualized increase in Q4 of last year, the 3.2% rise is encouraging given metrics that drove the the numbers. Unlike Q4's increase, which was fueled by a large rise in inventories, personal consumption spending jumped by the fastest pace in three years, confirming data out near the end of the quarter that showed consumer spending is accelerating.

Business spending also continued at a strong pace, while manufacturers continued to stockpile inventories, though not at the rate seen last quarter.

One week spot: new home construction detracted from growth.

Nonexistent inflation

As the recovery shows signs of deepening, inflation practically came to a halt outside of energy. The Fed's favorite gauge of prices, the core PCE Price Index, rose at an annual rate of just 0.6%.

Inflation is normally a lagging indicator and is probably at or near the bottom. But with prices barely rising, policymakers at the Fed have plenty of room to keep rates low without being overly concerned that inflation might heat up.