Conference Board’s Consumer Confidence Index diverges from U of Mich. consumer sentiment

What the U of Mich. survey gaveth last week, the Conference Board has taketh away.

We received some upbeat news last week on consumer sentiment, as measured by the University of Michigan survey, but another view of consumer confidence released this morning by the Conference Board is painting a different picture.

The Consumer Confidence Index fell 5.2 points to 60.8 in May, signaling the many of us soured on the economy during May.



“A more pessimistic outlook is the primary reason for this month’s decline in consumer confidence. Consumers are considerably more apprehensive about future business and labor market conditions as well as their income prospects,” Lynn Franco, Director of the Conference Board Research Center said.

“Inflation concerns, which had eased last month, have picked up once again. On the other hand, consumers’ assessment of current conditions declined only modestly, suggesting no significant pickup or deterioration in the pace of growth.”

The Consumer Confidence Index tends to do a better job measuring our outlook about the labor market, versus the University of Michigan’s survey, which likely accounts for the differing views on sentiment last month.

Still, the unexpectedly large drop comes as a surprise to most economists. Growth has not stalled and consumer spending continues to rise, albeit at a slow pace.

But the housing market has been strained and weekly jobless claims have jumped in recent weeks.

We’ll get a better look at the labor market on Friday when May’s employment report is released.
A survey by Bloomberg reveals that analysts expected 210,000 new private sector jobs, down from 268,000 in April.

McDonald’s, however, is likely to account for at least 50,000  new jobs in May, as the leading fast-food franchise beefed up on staff at the end of April and early May.

Consumer sentiment improves for second month

Surprise! Finally some good news.

The Reuters/University of Michigan’s Consumer Sentiment Index increased from 72.4 in mid-May to 74.3 at the end of the month, exceeding the Bloomberg forecast of 72.5. Further, the index is up almost 5 points from the April reading.



There had been some suggestions, including myself, that Bin Laden’s death at the beginning of the month may have temporarily lifted consumer spirits.  And polls following Saddam’s capture lent credibility to this line of reasoning.

But the continued rise in confidence suggests that more is at work here, and despite the headwinds facing economic activity, the mood is improving.

An easing of sky-high gasoline prices may be helping and further declines would likely aid consumer confidence and lend support to retailers.

And there’s more good news, as short-term inflation expectations eased.

“The one-year inflation expectation fell to 4.1 percent from 4.6 percent, its first decline since September 2010. The survey's five-to-10-year inflation outlook held steady at 2.9 percent,” Reuters said.

All in all, the latest data on sentiment and inflation are likely to receive a warm welcome at the Fed, which has been tasked with keeping inflation under wraps while promoting economic growth.

More bad news for housing–pending home sales tumble

The soft foundation in the housing market is showing no signs of stabilizing following the latest data from the National Association of Realtors.

The Pending Homes Sales Index, a forward-looking indicator based on contract signings and not closings, fell a steep 11.6% to 81.9 in April, signaling that weakness in existing homes sales is likely to surface near the end of May and into June.



Blaming an economic soft patch in April caused by “sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims,” the NAR expressed disappointment and said the pullback implies a slower than expected market recovery in upcoming months.

And the leading organization for realtors continued to press banks to loosen what it considers to be overly tight credit standards.

Weather can be a factor as any realtor will tell you, but softer growth over the past couple of months, still-tight credit and the uncertainty over where housing prices may be headed are likely playing the biggest roles in the lackluster housing market.

A stronger economy, significant job creation, much better consumer confidence and stability in home prices would go a along way in curing what ails the market.

Rising weekly jobless claims signal slowdown is continuing

Weekly jobless claims are a great barometer of economic activity because of its timeliness – data are less than one week old – and the release provides us a very accurate view of business confidence and business activity.

The weekly figure and the recent trend are analogous to taking the cholesterol, blood pressure, respiration and the pulse of the economy.

Why? Because falling layoffs are an indication that business activity is picking up, as employers are reluctant to lay off workers they will need to smoothly process an uptick in sales.

Conversely, rising layoffs are a solid indication that new customers aren’t coming through the door, and current customers, if not cutting back, are reluctant to ramp up new orders.



That’s why the recent rise in jobless claims has been discouraging.  And Fed members must be a bit jittery at this point as they get set to end QE2 purchases in about four weeks.

Weekly initial jobless claims rose to 424,000, up from an upwardly revised 414,000 in the prior week. The 4-week moving average slipped by 1,750 to 438,500, while continuing claims fell 46,000 to 3.69 million.

The latest numbers aren’t signaling that growth is coming to a standstill, but the already modest economic recovery has lost momentum despite heavy stimulus from the Fed and the government.

Interest rates remain at rock bottom levels, the Fed has poured trillions of dollars into the economy, the government ramped up spending, payroll taxes have been cut, yet millions remain unemployed.

Credit standards at banks, however, are still tight, and consumers, who are already laden with debt, just aren’t comfortable loading up on even more credit.

Given the state of the housing market, falling home prices, job insecurities and a banking system that’s still on the mend (and let’s not forget the spike in gasoline prices),  it’s not a surprise that this recovery has not responded to the shock therapy that would typically spark a healthy recovery.

And it may be a while before the excesses of the past decade or two are finally wrung out of the system.

Rise in new home sales signaling stability

New home sales continue to wallow near the bottom, and home builder confidence remains stuck in the basement, but sales did unexpectedly rise for the second consecutive month and the supply of homes of sale continues to recede, with one major caveat. More later.

The U.S. Commerce Department reported this morning that the sale of new homes rose 7.3% in April to a seasonally adjusted annual pace of 323,000, while the supply of homes on the market based on sales fell from 7.2 months to 6.5 months.



The actual supply of houses slipped from 180,000 to 175,000, the fewest number of houses available for sale since the government began tracking new home sales in 1963! That’s really quite stunning given the sizable increase in population over the past 48 years.



And the lack of supply available speaks volumes about the drop in home builder confidence, as builders have reined in excess home production in response to very poor conditions.

One the one hand, the lack of inventory could quickly set the stage for a rebound in housing if demand were to suddenly materialize.

Longer-term, housing formation is expected to pick back up, Bloomberg News noted three weeks ago.

“Between 750,000 and 1 million new households will be created in 2011, predict UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau.

However, the shadow inventory of houses that banks hold has been and will very likely continue to be a stiff headwind for the market.

The New York Times reported on Sunday that banks and mortgage lenders own 872,000 houses. Moreover, they are in the process of “foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.”

As the first chart reflects, the market appears to be trying to bottom out, but builders are still facing stiff competition from a heavy supply of newer model homes that are either in foreclosure or are bank owned. And let's not forget short sales.

Until we see a more realistic level of job creation and potential buyers no longer fear further price declines, stating that a recovery in the new home market is at hand appears to be a bit premature.

More realistically, we're just bouncing along the bottom.

LEI dips in April

Thursday’s economic calendar was marked by a number of economic reports, but I would be remiss if I did not talk about yesterday’s release of the Conference Board’s Leading Economic Index.

The Leading Index is not typically a market-moving event because analysts can generally peg where the numbers will hit because the ten components that make up the index are generally known prior to the monthly release.

The Conference Board’s Leading Economic Index

The LEI fell 0.3% in April following an upwardly revised 0.7% rise in March and a 0.9% increase in February. April’s dip is the first decline since June 2010, when the already sluggish recovery temporarily entered a period of slower growth.

Six of the ten components that make up the index fell, with the largest being weekly jobless claims.

Ataman Ozyildirim, an economist at The Conference Board, noted, “Overall,  the composite indexes still point to strengthening business conditions in the near term, although the path may be uneven.”

Ken Goldstein, also at the Conference Board, added, “Economic growth will likely continue through the summer and fall, but the pace of economic activity may be choppy.”

The decline in April is consistent with much of the recent data, which has been pointing to a slowdown in economic activity.

Weekly jobless claims – an excellent barometer of economic activity – have risen in recent weeks and are holding at an elevated level above 400,000.

The ISM Services Index detected a deceleration in activity last month, while housing continues to struggle and regional surveys of manufacturing during May have detected modest weakness.

Further, a $1 per gallon jump in gasoline prices from a year ago has complicated the recovery in consumer spending.

A new recession seems unlikely at this point, but any moderation in economic activity will probably hinder job creation. And that may put policymakers at the Fed on edge, as the contemplate the end of their second round of QE.

Philly Fed points to slowdown in manufacturing

Following a weaker reading in the Empire Index out on Monday, the Philly Fed’s Business Activity Index slowed from 18.5 in April to 3.9 in May, its lowest reading since October.  A reading of zero indicates that manufacturing in the mid-Atlantic region is neither accelerating nor contracting.


















Source: Federal Reserve Bank of Philadelphia

Most of the subcomponents in the index declined, suggesting a broad-based slowdown is continuing into May.

New orders,  a proxy for future activity, fell from 18.8 to 5.4 and shipments slid from 29.1 to 6.5. Price pressures remain but receded amid the recent dip in commodity prices.

In the meantime, manufacturers are less optimistic going forward, according to the six-month outlook, with the index falling from 33.6 to 16.6.

Industrial production last month was unchanged, as the kink in the supply chain caused by the earthquake in Japan hit auto manufacturers last month.

Given the early look at May’s data, it appears that softness is the sector is continuing.

Jobless claims fall but remain elevated
Despite the recent spate of unsettling economic news, the second weekly decline in unemployment claims indicates that economic activity is not grinding to a halt.



Weekly initial jobless claims fell 29,000 in the latest week to 409,000, while the 4-week moving average edged up 1,250 to 439.000. Continuing claims slid 81,000 the 3.71 million.

Special factors that were not accounted for in the seasonal adjustments were responsible for the surge to 478,000 claims a couple of weeks ago.

Although the recent decline to the lowest reading in four weeks is reassuring, the elevated level – claims have been above 400,000 for six weeks – suggests the recent progress in the labor market may slow.

And the upward drift also implies the economy has hit a bump in the road.

Treasury runs up against $14.3 trillion debt ceiling

On Monday the government hit the nearly $14.3 trillion debt ceiling, eliminating its ability to borrow additional funds in order to meet current obligations.

Since Congress has not raised the debt ceiling,  the U.S. Treasury Department put a plan into motion that will stave off any default for about 11 weeks.

In the meantime, Democrats hope to raise the debt limit and prevent a default, while Republicans hope to extract spending concessions in order to rein in the burgeoning federal deficit.



Both sides appear to be far apart, but given the recent dip in Treasury yields, investors aren't betting on a default.

Still, the headlines provide us with the opportunity to look at the growing federal deficit (chart 1), spending and revenues as a percent of GDP (chart 2), and an overall view of spending and tax receipts (chart 3).



The surge in spending and the huge drop in revenues was tied to the worst recession since the 1930s.  The Office of Management and Budget’s numbers do point to a narrower deficit through 2016, but its economic and employment forecasts appear to be a bit aggressive.



Notably, the CPI is up almost 30% since 2000, according to government data, but spending has surged more than 100% over the past decade.

Bank lending continues to struggle

With the exception of commercial and industrial loans, bank lending continues to struggle under the weight of tight lending standards and the general reluctance among the public to take on new debt commitments.

As of March 31, 2011 bank credit at all commercial banks (blue line) is down 2.4% from one year ago, according to data supplied by the Federal Reserve.

Consumer lending at all commercial banks (orange line) has fared even worse, falling 7.3% from a year ago.

Bank credit all commercial banks (y/y percent change)

Source: Federal Reserve

Only commercial and industrial lending (red line), which took the biggest hit during the recession, is headed in the right direction, rising 5.7% year-over-year. Further, loans have been accelerating rapidly.

Credit the strong recovery in manufacturing, as firms expand to meet modest demand at home and stronger demand overseas.

More worrisome, however, is the lackadaisical mood among consumers.

Consumer spending accounts for 70% of the economy, and the continued decline in consumer loans suggests spending won’t be a big contributor to economic activity any time soon.

Lending standards have been tight in the wake of the 2008 credit crisis, and a cautious mood is also holding back outlays as well as GDP.

Housing starts flounder

Home builders continue to face stiff headwinds, as housing starts unexpectedly declined and forward-looking permits suggested the industry isn’t coming out of its slump.

Housing starts fell 10.6% in April to a seasonally adjusted annual rate of 523,000. Weakness in multi-family construction was weak, but single-family starts also slipped, losing 5.1%.

Building permits, which provide a peek at how the industry is likely to perform in the coming months, also gave up ground.  Permits fell 4.0% to 551,000 annualized units.

Single- family permits, which offer a greater degree of clarity on the new home industry, dipped 1.8% to 385,000.

 

There’s really not a whole lot of good news to come out of today’s report.

Single-family housing starts and building permits remain in a gradual downward trend, which reasserted itself after Congress let the homebuyers tax credit expire last year.

And the uncertainty in the economy, tight lending standards and worries that housing prices will continue to drift lower are also hampering builders.

Mortgage rates have been falling in recent weeks, and Freddie Mac reported last Thursday that the 30-year fixed mortgage rate stands at 4.63% (inclusive of 0.7 points), the lowest reading in five months.

But low cost financing did little to help the market last year when the rate on a 30-year loan approached 4%, and given the uncertainties that remain, it may do little to lend support this time around.

Longer-term, housing formation is expected to pick back up, Bloomberg News noted in a May 1 story.

“Between 750,000 and 1 million new households will be created in 2011, predict UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau.

“As employment picks up, new households are likely to rise above the past decade’s average of 1.3 million a year, according to Newport.”

If the forecast proves to be accurate, a modest rise in demand may return, helping to absorb the excess inventories on the market and help put a solid foundation under the housing market.

Retail sales climb but keep an eye on gasoline

Gasoline prices have soared and the extra cash we are leaving at the pump may be starting to have a modest impact at the nation’s retailers, according to the latest data released today by the Commerce Department.

Advance retail sales increased a respectable 0.5% in April. Ex-autos, sales improved by 0.6%. But excluding autos and a 2.7% jump in receipts at gasoline stations, so-called core sales rose a more muted 0.2%.



Oil prices remain well below the 2008 peak, but gasoline prices have soared in recent months, pushing the price up over $1 per gallon from a year ago, as prices approach a record high (see Crude oil inventories approach near-term record).

Job growth as helped to support personal income, which in turn, has lent some support to spending.

But as the chart above reflects, the rate of growth in sales ex-autos, gasoline has gradually decelerated from November’s high of 5.9% y/y to 4.7% last month.



That doesn’t mean consumers are returning to their recessionary ways, but the evidence suggests that higher gasoline prices do appear to be modestly impacting the nation’s retailers.

Oil and wholesale gasoline prices have tumbled over the past couple of weeks in volatile trading. A meaningful drop at the pump would be welcome news.

Core CPI remains on gradual upward trek

The CPI was released this morning and to almost know ones’ surprise, surging gasoline prices continued to fuel increases in the headline rate of inflation.

Led by a 3.1% rise in energy prices, the Consumer Price Index advanced 0.4%.  Core inflation, which excludes food and energy and provides us with a better look at underlying inflation trends, increased a more muted 0.2%.

Core inflation has now risen 0.2% in three of the last four months.  Previously, the core CPI had not registered 0.2% since late 2009.

Core prices are up 1.3% year-over-year. Though the Fed is spending more time talking about commodity prices, core inflation remains below its implied target of about 1.7 – 2.0%.

Given the sluggishness of the recovery, very small gains in wages – the largest expense to most businesses, and longer-term inflation expectations that remain anchored, it is unlikely that core inflation will surge in the short term.

Higher energy and raw material prices have started to bleed into the broader price level, but not in a way that will force the Fed to quickly change course.

Further, policymakers still believe the spike in commodities is “transitory,” and the recent downdraft in prices, if it proves to be more than temporary, would give the Fed additional leeway to support aggregate demand.

The best news on inflation is behind us, as the core rate has jumped from a negligible 0.6% in October to 1.3% last month, and soaring commodity prices since the Fed first hinted at another round of QE has put central bankers on edge.

But the factors that are holding down price increases are likely to win out, at least in the short term.

Crude oil inventories approach near-term record

High prices are crimping demand for gasoline

U.S. crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.8 million barrels to 370.3 million barrels and are above the limit of the average range, according to data supplied by the Energy Information Administration.

Oil supplies now stand at the highest level in two years and are just shy of the near-term peak of 375.3 million barrels reached in early May 2009. Only during a brief period in 1990 did supplies surpass current level and approach 390 million barrels.

Meanwhile, gasoline inventories increased by 1.3 million barrels last week to 205.8 million barrels and are in the lower limit of the average range.



The national average retail regular gasoline price increased for the seventh week in a row to $3.965 per gallon on May 9, 2011, $0.002 per gallon more than last week and $1.060 above a year ago.

But over the last four weeks, gasoline demand has averaged nearly 9.0 million barrels per day, down by 2.4% from the same period last year according to EIA data.

The tremendous jump in gasoline prices from a year ago likely provides us the explanation for the demand destruction we are seeing, even as the economy has grown over the past year.

Though the U.S. is practically swimming in crude based on the latest EIA data, gasoline supplies are hovering near the bottom end of the range.

Refinery capacity at just under 82%, versus almost 89% a year ago, is playing a large role in the drop in gasoline production and relatively tight supplies and is probably responsible for the outsized jump in prices at the pump.

Currently, gasoline prices are just pennies below the July 2008 peak. At about $100 per barrel, oil is well shy of its record of $145.

Trade deficit widens as rising exports offset by jump in imports

The U.S. Commerce Department reported this morning that the trade deficit widened from $45.4 billion in February to $48.2 billion in March, as higher imports offset record exports.

The government said that March exports rose by $7.7 billion to $172.7 billion. Imports increased $10.4 billion to $220.8 billion.


The jump in exports to the highest level ever suggests that growth in the global economy remains on track, with stronger sales of autos, industrial supplies and capital goods lifting overseas’ sales. That seems likely to support manufacturing, at least through the near term.

Much of the deterioration in the trade situation, however, can be traced to oil. Government data revealed that average daily oil imports increased from 8.7 million barrels to 9.5 billion barrels, while the price per barrel jumped over $6 to $93.76.

Inflation expectations still anchored

Headline inflation has turned higher since the start of the year amid a jump in food prices and sharply higher gasoline prices.

But it’s not just food and energy.  Commodity prices in general have surged on strong demand from China and emerging markets, while the Fed’s $600 billion in purchases of longer-term Treasuries, popularly known as QE2, also appears to be part of the problem (see QE, commodities and stocks).



An ultra-loose monetary policy, coupled with sharply higher raw material prices, has given way to talk among analysts and the public that much higher inflation is all but a certainty.

Anecdotal evidence from the Fed and a smattering of corporate earnings reports during Q1 do suggest that pricing power is beginning to emerge, and regional surveys of manufacturing by various regional Fed banks are detecting some movement in prices that manufacturers receive.

The University of Michigan’s survey of consumer sentiment, which includes inflation expectations, has detected upward movement in the public’s view of what will happen to inflation over the next year.

Further, core inflation has crept off the bottom.

But the longer-term inflation outlook – see chart, as measured by the ten-year break-even rate of inflation (the difference between the yield on the ten-year bond and ten-year TIPS, shows that inflation expectations remain reasonably anchored.

The reason it is called the break-even rate of inflation? The spread reveals what Treasury buyers are willing to give up in order to obtain a hedge against inflation.

Though not perfect, it does provide a rough look at the longer-term inflation outlook.

Expectations have moved higher since Bernanke first announced at the end of August that the Fed was considering a new round of bond buys. Notably, prior to Bernanke's announcement, inflation expectations has been cratering amid deflation chatter and growing worries about a double-dip recession.

But the spread is now near a five-year high.

Still, at just under 2.50%, investors have not lost confidence that the Fed can sop up the extra liquidity it has put into the financial system and prevent inflation from taking hold when growth eventually picks up. Plus, nascent worries about growth and mixed data have knocked off almost 20 basis points off the recent high.

And the relatively low level of inflation expectations is what gives the Fed the leeway to continue to hold rates at rock bottom levels and keep its primary focus on economic activity and job creation.

Recent gains in employment are encouraging

But the recession created a deep hole in the job market

The Department of Labor reported that employment grew by 244,000 in April, which marks the third consecutive month that the economy has generated in excess of 200,000 net new jobs.

Adding to the upbeat tone, February and March were revised upward by 46,000.

Despite the favorable news on the employment front in recent months, the economy has failed to make a significant dent in the unemployment rate, and the total number of employed remains well below its peak.



Notably, the steep recessions of 1974-75 and 1981-82 were followed by robust recoveries, and the job market quickly recovered.

The much shallower and uneven recovery this time around has bred a significant amount of uncertainty and has delayed and slowed the rebound in the job market.



Although the recession has been over for nearly two years, the economy, which continued to lose jobs after the recession ended, just recently returned to the level of employment reached when the economy hit bottom in June 2009.

Though the improvement in job creation has been far from stellar, we can take some solace in the fact that job growth is ahead of what occurred following the mild 2001 recession.

Nonetheless, the economy appears to have hit a soft patch, which could further delay progress in the coming months. Stay tuned.

ECB holds the line on rates, hints at move in July

The European Central Bank (ECB) kept its benchmark rate at 1.25% following a quarter point bump in April, the first such tightening in over two years.

ECB President Jean-Claude Trichet said he continues “to see upward pressure on overall inflation, mainly owing to energy and commodity prices,” and will continue to “closely monitor” upside risks to price stability.

However, Trichet refrained from using the key signal “strong vigilance,” which would have strongly implied a rate hike at the June meeting.

Unlike the Federal Reserve, which has a dual mandate that focuses on price stability and unemployment, the ECB has a single mandate that focuses only on inflation.

That does not mean that the ECB operates in a vacuum, automatically hiking rates when inflation moves above its target of “close to, but below 2%,” but it does set off alarm bells among central bankers, as they ramp up the hawkish rhetoric.

The lack of a concrete signal for a June rate increase is helping to lift the dollar against the euro.

Additionally, the caution the ECB is displaying is effectively telegraphing to the financial markets that the bank is concerned about economic conditions and fears that a more aggressive path, which would likely strengthen the euro, could further complicate the situation in southern Europe.

QE, commodities and stocks

The Federal Reserve announced its first foray into QE, or quantitative easing, when it communicated to the public at the end of November 2008 – see statement – it would buy up to $100 billion in GSE obligations and up to $500 billion in mortgage-backed securities.

Falling commodities and stocks, surging unemployment and emerging fears that deflation might eventually engulf the economy led the Fed to vastly expand QE, now  referred to as the first round of quantitative easing, as it now included $1.5 trillion in agency debt and mortgage-backed securities purchases and $300 billion in Treasuries.

Initially set up to go through December 2009, the Fed decided to extend and draw out the purchases of agency and MBS until the end of Q1 of 2010 in order to smooth transition in the markets – see statement.


(click chart to enlarge)

Defined as the purchases of government debt over and above what is needed to keep short-term rates at zero, the Fed’s extraordinary action has prevented a much deeper recession from taking hold.

But the  massive purchases have had little impact stimulating a more aggressive recovery, as much of the newly created money returned to the Fed in the form of excess reserves – Economic impact of QE2 looks limited.

Nonetheless, as the chart above reveals, the implementation of both QE1 and QE2 does appear to have had a profound impact on commodities and stocks.

Commodity prices (orange), as tracked by the Thomson Reuters/Jefferies CRB Index, didn’t bottom until Q1 2009 as risk averse investors shunned all but the safest assets, while a sharp slide in global manufacturing triggered a surplus of raw materials.

The end of QE1 marked the temporary end to the rise in raw material prices. In fact, the decline during the first quarter of 2010 can probably be traced to declining purchases of government securities and the expectation new buys were about to come to an end, as Fed moneys dried up.

The blow up in Greece during the spring of 2010 and the modest impact on the credit markets encouraged investors to briefly trade their commodities and stocks for the safety of the dollar.

However, the mere mention at the end of August 2010 by Fed Chief Ben Bernanke that policymakers were considering a second round of QE2 sent astute speculators back into the commodity markets.

And the eventual implementation of $600 billion in longer-term Treasury buys has helped to fuel the dramatic rise in raw material prices.

Stocks (green), as measured by the S&P 500 Index, have tracked a similar path, with the bull market being interrupted by the end of QE1 and the negative effect of the credit crisis in Greece on economic activity and financial markets.

The avoidance of a double-dip recession last year and the favorable impact from a growing economy on corporate profits has reignited bullish sentiment; however, the flood of new Fed money has also provided a stiff tailwind for stocks, in my view.


(click chart to enlarge)

A closer look at the CRB Index and the first and second rounds of QE are available in the chart above.

ISM Services Index takes unexpectedly sharp downward turn

The Institute for Supply Management reported this morning that the ISM-Non Manufacturing Index fell a steep 4.5 points to 52.8, the lowest reading since last August and well below analysts’ forecasts. A reading above 50 suggests the broad-based service sector is expanding.



The business activity subcomponent fell a sharp 6.0 points to 53.7 and new orders, a proxy for future activity, plunged 11.4 points to 52.7.

Though pricing pressure continue to cause problems, prices paid did manage to slip by2 points to 70.1.

The slowdown in GDP in the first quarter appears to be carrying over into Q2, according to today’s report provided by the ISM.

Commodity prices have been soaring, and the slow and uneven recovery has not done much to bolster consumer confidence.

Further, the recent jump in jobless claims above 400,000 – assuming the outside possibility this is not just statistical noise caused by the inability to capture seasonality – is worrisome. Three consecutive weeks of elevated numbers, coupled with today’s disappointing ISM report, strongly suggest an uncertain start to Q2.

Though the recovery is not on the verge of stalling, it does look as if we are entering a temporary slowdown in economic activity that will complicate the Fed’s job and potentially slow progress on the job front.



Despite the weakness in the broad service sector, the ISM’s data show that manufacturing continues to support the economy.

Manufacturing remains strong, price pressures squeeze firms

The ISM Manufacturing Index slipped but held above 60 for the fourth-consecutive month, signaling that the manufacturing sector continues to fuel the economic recovery. Price pressures, however, remain a significant problem.

The closely-followed national gauge of goods producers dipped from 61.2 in March to 60.4 in April, topping the Bloomberg forecast of 59.5.  A reading above 50 suggests the sector is expanding.

The rate of growth in new orders and production also decelerated but held above 60 for the fifth-consecutive month.  And employment remained strong, as the Institute for Supply Management noted, “the first four months of 2011 are the highest readings in the last 38 years.”

Manufacturers, however, are now reporting their inventories are at comfortable levels, which could signal a deceleration in the coming months. Nothing worrisome, as a modest slowdown to a more sustainable rate of growth would be a healthy sign.

But surging prices at the early stages of production continue to bedevil manufacturers, as prices paid rose from 85.0 to 85.5.

Anecdotal evidence from the Fed’s Beige Book and comments by several major corporations in their Q1 earnings report reveal that higher input costs are forcing price hikes as pricing power begins to resurface, and core inflation has risen following extremely low levels in the second half of 2010.

The Federal Reserve had fretted in the middle of last year that inflation was hovering at uncomfortably low levels, raising the possibility the economy could slip into a deflationary spiral.

Soaring oil and commodity prices and QE2 have eliminated the outside possibility that falling prices might engulf the economy, and Fed Chief Ben Bernanke hinted at his press conference last week that the odds of another round of bond buys is very low.

Despite the worrisome rise in raw material prices, today’s upbeat report on manufacturing will ease worries that the economy might be slowing too quickly.

Friday’s employment  report

Attention will now turn to Friday’s labor report where economists surveyed by Bloomberg expect nonfarm payrolls to rise of 185,000 in April following a 216,000 increase in March.

Weekly jobless claims have unexpectedly jumped above 400,000 over the past three weeks and a weak payroll number would raise fears about the durability of the recovery, despite today’s upbeat manufacturing number.

But one month does not make a trend, and it seems likely that the slowdown in growth last quarter, as evidenced by the sluggish GDP number, is probably temporary.