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.