FOMC minutes note heightened risks

The Federal Open Market Committee (FOMC) released the minutes from its August 10 meeting this afternoon, and comments from the report indicate that policymakers have grown increasingly concerned about the economy.

“The incoming data on the labor market were weaker than meeting participants had anticipated. Private-sector payrolls grew sluggishly in recent months,” according to comments that were reflected in the minutes.

Reasons stated: “Policymakers discussed a variety of factors that appeared to be contributing to the slow pace of job growth.

“A number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and health-care costs made them reluctant to expand their workforces (see Did Bernanke take a swipe at Washington). Instead, businesses had continued to meet growth in demand for their products largely through productivity gains and by increasing existing employees' hours.”

Committee members also noted that “the economic outlook had softened somewhat more than they had anticipated, particularly for the near term, and some saw increased downside risks to the outlook for both growth and inflation.”

Although the FOMC voted to begin buying longer-term Treasuries with proceeds from maturing mortgage-backed debt, there was some concern that such purchases would leave financial markets to the conclusion that large-scale purchases would be in the offing.

Ben Bernanke did focus on policy options that are still available in the Fed’s arsenal in his speech last week, which does suggest that further quantitative easing is around the corner. 

Still, though data have been sluggish recently, a contraction does not appear to be imminent (see consumer spending and consumer confidence reports out this week).

Consumer confidence rises in August

But low level highlights uncertainty

The Conference Board’s Consumer Confidence Index which had declined in July, increased from from 51.0 in July to 53.5 in August. The Present Situation Index fell to 24.9 from 26.4, but the Expectations Index increased to 72.5 from 67.5 last month.  Analysts surveyed by Bloomberg had expected a reading of 51.0.

Lynn Franco, Director of The Conference Board Consumer Research Center said, “Consumer confidence posted a modest gain in August, the result of an improvement in consumers’ short-term outlook. 

“Consumers’ assessment of current conditions, however, was less favorable as employment concerns continue to weigh heavily on consumers’ attitudes. Expectations about future business and labor market conditions have brightened somewhat, but overall, consumers remain apprehensive about the future. 

“All in all, consumers are about as confident today as they were a year ago (Aug. 2009, 54.5).”

Factors depressing confidence

Worries abound that the lack of job creation, uncertainty in the housing market and stubbornly high level of layoffs will continue to depress sentiment and hamper gains in consumer spending.

Consumers did become a little less stingy in July, as spending rose at its fastest pace since March; however,  Ben Bernanke said in his keynote address on Friday that consumer and business spending “"appears somewhat less vigorous than we expected."  And the general trend confirms his view.

Consequently, the economic  recovery has been sluggish and businesses are still reluctant to significantly add new jobs.

And it seems unlikely that spending will accelerate until consumers feel more comfortable with their own situation. Still, the rise argues against those who see a double-dip recession as all but imminent (see Case builds for double-dip recession but odds still favor recovery).

Semiconductor sales benefit from increased world demand

The Semiconductor Industry Association said today that sales of semiconductors increased 1.2% in July to $25.2 billion, which represents a 37% rise from one year ago (see CHART PG 2).

“Worldwide sales of semiconductors were strong in July despite growing indications of slower growth in the overall economy,” said SIA President Brian Toohey.

“The continued proliferation of semiconductors into a broad range of products provides opportunities for industry expansion even in a period of slower overall economic growth. Although recent public statements from a number of major manufacturers have emphasized limited visibility for the near-term, we continue to expect that industry growth for 2010 will be in line with our mid-year forecast of 28.4 percent,” Toohey concluded.

Sales growth is beginning to slow but the industry also continues to benefit from the global recovery, especially in Asia.

One policy option Bernanke wants to avoid

Raising its inflation target

In his long-awaited and closely-followed speech yesterday, Fed Chairman Ben Bernanke discussed how three policy options that could be used to prop up the economy that are still available in the Fed’s arsenal:

1. Purchases of additional longer-term securities
2. Modifying the Fed’s communication
3. Reducing the interest rate the Fed pays on bank reserves.

In each case, he discussed how these might boost the economy and also talked about the drawbacks of each option.

One measure that seems unlikely to be introduced that received some play in Friday’s speech was the idea of “raising medium-term inflation goals above levels consistent with price stability.”

Besides going against the Fed’s dual mandate, which includes price stability, Bernanke said he sees “no support for this option on the FOMC.”

He noted, “Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability….inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer-term plans, while squandering the Fed's hard-won inflation credibility.

“Inflation expectations would also likely become significantly less stable, and risk premiums in asset markets--including inflation risk premiums--would rise. The combination of increased uncertainty for households and businesses, higher risk premiums in financial markets, and the potential for destabilizing movements in commodity and currency markets would likely overwhelm any benefits arising from this strategy.”

Well put.

An overview and analysis of  his remarks are available in my article entitled, Bernanke talks up policy options to ensure growth.

Tough job market, economic worries hinder consumer sentiment

The University of Michigan’s consumer sentiment survey released this morning shows that confidence in the recovery dimmed slightly from the mid-August report.

The index, which did rebound from July’s steep and unexpected drop, fell from 69.6 in the preliminary reading two weeks ago to 68.9.

"The good news is that consumers have shown some resilience in the face of slowing economic growth and the media's double-dip drumbeat," Richard Curtin, director of the surveys, said in a statement reported by Reuters.

"The bad news is that consumers expect lackluster income and job growth for an extended period of time," he added.

The lack of any major boost in consumer sentiment seems likely to hinder further gains in consumer spending, which accounts for about 70% of GDP.

Did Bernanke take a swipe at Washington?

Economists and bankers gathered together today at Jackson Hole, Wyoming to listen to Fed Chairman Ben Bernanke’s views on the economy (text at Fed’s website).

As expected, he acknowledged growth has been far from robust and detailed some of the policy actions the Fed might take to ensure the economy won’t slide into an new recession.

One interesting comment he made regarding the lackluster job recovery:

“Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty.”

Bernanke did not elaborate on what he meant by elevated regulatory uncertainty, but newly-passed healthcare and financial reform and the remote possibility that cap and trade legislation could still pass in a lame duck session of Congress come to mind.

With the economy emerging from the worst recession in over 70 years and a jobless recovery all but guaranteed at least through the end of the year, it is important for the president and Congress to focus on economic activity and help alleviate the burdens millions face on the unemployment roles.

Pet agendas should be set aside until the economy is on a much firmer footing. At that point, robust debate can begin.

Mortgage rates hit another low

Mortgage rates continue to descend and are sitting at another low this week, according latest survey from Freddie Mac.

Freddie Mac’s weekly survey revealed that the key lending rate for home loans slipped from 4.42% last week to 4.36% in the latest week, inclusive of 0.7 points.  The 15-year FRM averaged a record low of 3.86% with an average 0.6 point, down from last week when it averaged 3.90%.

The survey of 30-year mortgages began in 1971, while Freddie Mac began tracking the 15-year fixed rate in 1991.

The slowdown in the economy, diminishing inflation expectations and a general belief that the Federal Reserve will take more aggressive actions to ease the economic slowdown have leaned on the yield for the 10-year Treasury note, which heavily influences rates quoted for 30-year mortgages.

Those able to refinance their current loans have started to take advantage of the bonanza that is currently being offered.

Despite the jump in affordability, record low mortgage rates have done little to support housing in recent weeks, as the hangover from the expiration of the tax credit and a difficult economy have blunted the tailwind from low rates (see Housing market hits the wall…No putting lipstick on this pig).

Weekly jobless claims post first drop in one month

The economy has been battered by bad news this week.  Housing has fallen to new lows and manufacturing continues to slow.  But welcome news from the Labor Department may be signaling some stability in labor market. A bit of caution is in order, however: new trends cannot be established from one piece of data, as jobless claims can be volatile on a week-to-week basis.

Weekly initial jobless claims tumbled from an upwardly revised 504,000 last week to 473,000, below the consensus view of 495,000. The 4-week moving average remains in an upward trend, however, rising 3,250 to 486,750.

At 473,000, claims are still above the average since the beginning of the year of about about 465,000, and the general trend has not been favorable, as evidenced by the chart above and the 4-week moving average, which smoothes away some of the volatility seen in the weekly number.

Though the drop may just be a one week respite, the decline is welcome news amid what has felt like a deluge of unexpectedly weak data in recent weeks.

Lackluster economy, housing troubles suggest forceful action from the Fed may be in the offing

Yesterday and today, the housing industry and analysts who follow what’s happening in the economy received a batch of bad news.  Existing home sales fell to the lowest level in 15 years and the pace of new home sales set a new low.

In the meantime, orders for new durable goods managed to eke out a 0.3% rise in July; however, the gain was far shy of forecasts, and the increase occurred due to a huge rise in orders for aircraft.  Pull out transportation, and durable goods orders fell 3.8%.  More worrisome, orders for capital goods fell 8.0%.

Yes, durables are volatile on a month to month basis, and the weakness in the economy we are seeing may abate when summer ends.  But the gloomy data surely has officials must have Fed officials worried that the economy could be slipping into a new recession.

New measures

The Fed is out of bullets when it comes to lowering interest rates.  Still, expect tougher talk in the statement that emerges at the conclusion of the September 21 meeting. And the possibility is growing that monetary officials could begin more aggressive measures to stoke demand.

It seems unlikely, because traders and analysts might fret that the Fed is in panic mode, but the possibility, though remote, is growing that policymakers could put new steps in place prior to the next meeting.

New home sales at new low

The other shoe drops

Yesterday’s wretched report that existing home sales fell to the lowest reading since 1995 is being followed up today by the government’s report that new home sales slipped last month to the lowest level on record.

Sales of new single-family houses declined by 12.4% in July to a seasonally adjusted annual rate of 276,000, well below the consensus forecast by Bloomberg of a small increase to 340,000 units.  The supply of houses available jumped from 8.0 months to 9.1 months, which may put additional pressure on prices.

Existing home sales make up over 90% of the housing market, while new home sales  account for the rest.   Both, however, have been hit hard in the wake of the expiration of the tax credit, as many buyers decided to move up their purchase decisions and take advantage of the free money that was offered by the government.

Despite record low mortgage rates, potential buyers remain on the sidelines amid concerns about the economy and the potential for further job losses.  The general belief that home prices may not yet have stabilized is also fueling worries.

Additionally, builders (see Home builders continued to struggle …) are having to deal with the still high-level of foreclosures of late-model houses that had previously benefited from the easy access to subprime mortgages.

Until the factors above are rectified, housing is likely to continue to struggle, even with low mortgage rates.

Housing market hits the wall

No putting lipstick on this pig

Fed Chief Ben Bernanke said last month that the “economic outlook remains unusually uncertain.”  One has to look no further than July’s data on existing home sales to see that what Bernanke said is playing out in the housing market.

July’s 27% decline was the largest on record and about double the expected drop that was expected among economists (see Existing home sales plunge to 15-year low).

There’s no putting “lipstick on this pig,” as the steep drop in sales was tied to the expiration of the tax credit, which allowed agreements that were inked by April 30 to close by June 30, and the heightened uncertainty in the job market.

Still, the plunge should not have been completely unexpected.  The Purchase Index, offered up weekly by the U.S. Mortgage Bankers Association, had fallen to the lowest readings since the late 1990s back in May (see MBA Purchase Index points to near-term housing weakness). 

And Pending Homes Sales, which look at contracts signed but not yet closed, took a beating in May, falling 30%.

 

Moreover, new home sales have lost more ground than expected in the wake of the expiration of the tax credit, housing starts and builder permits have come under pressure and sentiment among builders has taken a turn for the worse.

If the timely survey from the U.S. MBA is any indicator of where the housing market is headed in the near term, the market is showing signs of stabilizing, albeit, at a low level.

Still, the jump in supply registered last month could put renewed pressure on housing prices.

Jobless claims in upward trend, Philly Fed turns negative

Weekly initial jobless claims rose to the highest level since November 2009, signaling that an already-struggling labor market continues to tighten amid weak economic growth.

Jobless claims in the latest week increased by 12,000 to 500,000, higher than the consensus forecast from Bloomberg of 480,000.  The 4-week moving average, which smoothes out some of the weekly volatility, jumped 8,000 to 482,500.

The rise in claims is adding to the argument that the economy may not be able to avoid a double-dip recession.

Business confidence appears to be waning, according to the report, while the rise in joblessness suggests that August nonfarm payrolls may disappoint once again.

Philly Fed foreshadowing tougher times

In the meantime, the manufacturing sector, which has helped to fuel the current recovery, is showing signs that growth may be stalling.

The Philly Fed’s Business Activity Index turned negative for the first time in over a year.

Designed to measure manufacturing in the mid-Atlantic region, the survey unexpectedly fell from 5.1 in July to ‐7.7 in August.  A reading of zero marks the line between expansion and contraction.

Indexes for new orders and shipments also suggest sluggish this month;
the new orders index fell slightly, to -7.1, while the shipments index turned negative, declining to -4.5.

The lack of pricing power is also highlighting the difficulty many firms face in the current economic environment, as prices paid fell from 13.1 to 11.8, and prices received dropped from –8.4 to –12.5.  One  thing’s for sure – inflation is not the issue.

Moreover, optimism continues to wane, as the forecast going out six months continued in its downward trend.  However, despite the summer slowdown, the companies surveyed continue to expect business to improve through the rest of the year, albeit, at a slow pace.

Rising industrial production signals continued expansion

Industrial production surged in July, rising a strong 1.1% following a small pullback in June and alleviating fears in some corners that the economy is poised to enter a new recession.  Capacity utilization, which is a function of production, improved from 74.1% in June to 74.8%.

A sizable portion of July’s increase came from an almost 10% rise in auto and auto parts production.  But excluding the big increase in transportation, manufacturing still powered ahead.

Consumer spending has slowed and housing is still in the doldrums. However, manufacturing continues to gain ground and support economic activity, lessening concerns that the economy may slump.

New homes face stiff headwinds

Looking at the latest numbers coming out of the housing industry, it’s not a surprise that yesterday’s report on home builder sentiment showed a somber mood among builders.

Housing starts in July managed a small increase of 1.7% to a seasonally adjusted level of 546,000, shy of the consensus offered by Bloomberg of 565,000. However, the rise occurred due to a 33% gain in the volatile multifamily category.  Ex-apartments, single-family starts were down 4.2% to 432,000.

The more forward-looking building permits continues to reflect an industry that is not yet in recovery.  Permits fell 3.1% in July to 565,000, the third drop in four months.  And permits for single-family homes continue to slide, falling for the fourth consecutive month to the lowest level since April 2009.

Without the large tax credit that encouraged potential buyers to step forward, new home construction has dwindled recently amid stiff competition from late-model foreclosures and consumer worried about layoffs.  The tax credit also moved some purchases forward, borrowing from those that might have occurred later in the summer.

Economic headwinds

The economic recovery has slowed and jobless claims are holding at high levels, negating much of the benefit from increased affordability that has sprung from record low mortgage rates and stable/declining prices.

Until the overhang from risky mortgage loans made in the middle part of last decade are removed (most analysts expect this to occur sometime in 2011) and unemployment falls to more reasonable levels, the new home market will continue to struggle.

Traffic…or lack of drives builder sentiment

Today’s release of the Housing Market Index indicates that confidence among home builders continues to abate.  Down 1 to 13, the latest level is far below a reading of 50, which would suggest residential home builders are neither optimistic or pessimistic.

Let’s take a look at one of the key components that make up the index, prospective buyer traffic.  In August, traffic held steady at 10, the lowest reading since march, which was also touched 17 months ago.

As noted by the chart above, builder sentiment has closely tracked the drop in prospective buyers who have visited model homes. 

Traffic has held at a fairly steady but low level over the past two years, and at a minimum, the new home market has stabilized.  But we are not seeing a solid foundation being put in place that would be the lift off point for a sustained rebound in housing starts.

Empire struggles

The Empire Manufacturing Index takes the temperature of a sliver of the manufacturing sector, as it looks at conditions in just one state, New York. 

The survey is important and does capture the attention of economists because it provides the first look at manufacturing in the current month.  In the wake of the Fed’s action and it’s statement last week that took note of the slowdown, any signs that the soft patch may finally be over, or conversely, any indications that another recession may be setting in, will be closely sought after.

The Empire was definitely mixed.  On the one hand, the headline number improved by two points to 7.1.  A reading above zero indicates expansion.

However, both new orders and shipments fell below zero for the first time in a year, underscoring that the slowdown in housing and consumer spending continues to spread to manufacturers.

Softness in prices was also a telltale sign that conditions have been moderating. Continuing its downward trend for a third consecutive month, the prices paid index fell 5 points to 20.0, suggesting that the pace price increases at the early stages of production is still slowing.

The prices received index, at -2.9, remained negative for a second consecutive month, highlighting the difficulty that manufacturers are having when it comes to raising prices. 

In addition, the portion of the survey the looks at future conditions slipped about 6 points to 35.7, the lowest reading in over a year.

All in all, not very encouraging but not conclusively signaling an impending slump.

Consumer sentiment rebounds

But headwinds keep consumers on the defensive

Following a steep decline in July, preliminary data showed that the University of Michigan’s consumer sentiment survey increased from 67.8 last month to 69.6 in mid-August, slightly above  expectations.

The small increase could lend support to spending during August, but consumers continue to deal with job insecurities, high unemployment and the shaky home prices.

The increase is definitely welcome, but the trend has deteriorated over the past couple of months.  Until the job market firms, small increases in consumer sentiment are probably the best we can hope for.

Rising jobless claims underscores slowing recovery

A 2,000 increase in weekly initial jobless claims to 484,000 puts claims at just 6,000 below peak level reached early in the year.

The worrisome level reflects the uncertainty many businesses are dealing with and also shows why the Fed decided to slowly begin to buy longer-term U.S. Treasuries at yesterday’s meeting (see Fed adjusts course, lowers outlook on economy).

Until demand in the economy picks up and businesses start experiencing rising orders/sales, weekly claims are likely to remain at elevated levels.

Fed meeting begins amid uncertainty, slowing economy

The Federal Reserve began its meeting earlier today amid a slowdown in economic growth and a rising clamor for policymakers to take a more aggressive stance on the economy.

Unemployment remains high and the lack of depth to the recovery will do little to create the a significant number of new jobs.  Moreover, weekly jobless claims are holding at elevated levels, suggesting that business confidence continues  to waver.

Another downgrade to the outlook is expected, but analysts are split as to whether the Fed will announce new measures to stimulate demand.

Options on the table

On the one hand, the FOMC may just acknowledge softer conditions, clearly telegraph that it is closely monitoring the situation, and unequivocally state it is ready to take action if conditions warrant. 

Fed Chief Ben Bernanke’s testimony before a Congressional committee just a few weeks ago seems to suggest this might be the most likely option since he spent only a minimal amount of time exploring this path.

However, private sector job growth in July was weak and June’s already small increase was revised downward. Consequently, others suggest that the Fed will announce a new round of “quantitative easing,” or the purchases of longer-term U.S Treasurys.

Small steps in that direction include re-investing the proceeds of maturing mortgage-backed securities into government notes.  A more aggressive approach the Fed might take would include outright purchases of Treasury bonds.

St. Louis Fed Chief James Bullard (see Fed’s Bullard puts spotlight on deflation) recently argued that quantitative easing was needed to counter a slide into the a Japan-like scenario of deflation.

Bullard believes that by buying government bonds, inflation expectations would rise and help prevent a debilitating spiral into deflation.

His plan does come with risks, however, as the Fed could set the stage for another bubble.  Too much stimulus from the central bank also runs the risk of scaring foreign purchasers of U.S. bonds, which could drive interest rates sharply higher.

Whatever today’s outcome, the Fed must delicately balance the need to boost demand without providing too much stimulus that could cause problems down the road.

A look at recent action in the bond market, i.e., falling yields, suggests that traders expect some type of move into Treasurys.

Productivity winning streak comes to an end

Dip highlights economic slowdown

Nonfarm productivity typically surges in the early stages of an economic recovery because businesses begin to boost output but are slow to hire new workers until they are convinced that the rebound is for real.  With the exception of confidence in the recovery, productivity did surge last year.

Now that the economic activity has hit a few bumps, output (up 2.6%) has slowed. And given the increase in hours (up 3.6%) worked, preliminary data show that nonfarm productivity in Q2 fell at an annualized rate of 0.9%, ending a five quarter winning streak.

The sting from the decline in productivity was alleviated a bit, as last quarter’s increase of 2.8% was revised upward to 3.9%.

Notably, productivity in the manufacturing sector, which expanded at a fairly healthy clip last quarter, grew 4.5%.

In the meantime, unit labor costs managed a tiny gain of 0.2%, but that doesn’t necessarily translate into wage gains because  hourly compensation slipped by 0.7%.

What does all this mean?

First of all, the dip in productivity is a reflection of the slowdown in economic activity and will probably be met by a continued reluctance among employers to add to payrolls.

Second, the lack of wage gains – labor costs are the biggest input for most businesses – further diminishes any risks on the inflation front.  In fact falling hourly compensation is likely to give more ammunition to the deflation hawks that have been squawking while increasing pressure on the Fed to once again take unconventional measures to stimulate the demand.

Weekly jobless claims back at top end of range

Job creation has been mostly stagnant in the private sector, while jobless claims continue to hold in the narrow range they have been in since the beginning of the year.

Weekly initial jobless claims jumped 19,000 to 479,000 in the latest week, and the 4-week moving average  grew by 5,250 to 458,500.

Jobless claims are not only a good barometer of what’s going on in the labor market but also do an excellent job of telegraphing what’s happening in the economy.

If companies in the aggregate see rising sales and detect increased demand, they are much more likely to hold onto workers and we would be seeing a downward trend in claims. Conversely, pessimism should lead to rising claims.

The high level of  weekly claims suggests that growth has been slow but the economy is not on the cusp of entering another recession.

Eyes on  the labor report

Attention is now turning to tomorrow’s labor report. A  decline of 70,000 is expected, per Bloomberg, as temporary census jobs comes to an end.  The economy is expected to generate 100,000 private sector positions, while the unemployment rate may tick up to 9.6% from 9.5%.

ADP’s number, which came out on Wednesday, was a bit gloomier.  Just 42,000 new jobs added in July following 13,000 in June.

Growth in manufacturing bedevils double-dip advocates

Manufacturing growth is showing signs of moderating and a further slowdown  seems likely, based on subcomponent of a key survey, but the engine that has powered economic growth over the last three quarters is not set to peter out any time soon.

The ISM Manufacturing Index, a closely-followed survey that looks at companies that produce durable and non-durable items, fell from 56.2 in June to 55.5 in July, but  the survey is holding above 50, which marks the line between expansion and contraction.

New orders, which looks toward the future, fell 5 points to 53.5 and production slowed by 4.4 points to a still-healthy 57.0.

Good news on the jobs front: employment inched up to 58.6, which indicates manufacturers remain optimistic going forward.

Meanwhile, prices paid edged up a half point to 57.0 and is well off the peak of 78 earlier in the year.  The economic slowdown appears to have dampened growth and leaned on commodity prices.  The bump in the dollar is also helping on the inflation front.

On the flip side, the lack of pricing power early in the pipeline also highlights that fragile nature of the recovery.