Small Businesses Fail to Enjoy the recovery
A quiet news cycle resulted in modestly positive gains for the equity markets last week. The S&P 500 index rose by 1.0% and the Dow Jones Industrial Average picked up 0.6%.
Two employment reports provided conflicting indications about the state of employment. The January Job Openings & Labor Turnover Survey (JOLTS) showed an increase in the number of job openings from 2.5mln to 2.7mln but small businesses, which account for roughly 2/3 of all net new hiring over the past 15 years, are reluctant to participate in the “hiring spree.” The NFIB Small Business Optimism Index fell to 88.0, remaining below 90 for an unprecedented 17th consecutive month, despite evident recovery in the economy.
Small businesses confirmed that layoffs remain en vogue, and more importantly, in the coming three months a seasonally-adjusted net negative one percent of small business owners anticipate hiring.
Source: NFIB Research Foundation
The following comment from this month’s report was especially telling: “Owners complained that poor sales are their top problem, and there is no need to hire with no new customers. In this sales environment, it is hard for workers to earn their pay. Owners cannot pay workers more than the value they add to the firm. This is why a jobs tax credit will do little to increase employment. No one can pay $40,000 for a worker to get a $5,000 tax credit unless that worker can add at least $35,000 in revenue to cover the cost of hiring. And as long as the tax credit issue is alive in Congress and not passed, employers that were ready to hire (13% plan to hire) will wait until they can qualify for the credit, delaying much needed gains in employment.”
Although small businesses are expressing frustration due to a lack of sales, headline retail sales rose 0.3% in the month of February. Excluding the effect of auto and gasoline, sales jumped 0.9%. Over the past 12 months, retail sales are up 3.9%, but when we exclude the impact of price changes, actual volume of goods sold was up a scant 1.7%.
Shifting to housing, the foreclosure rate dropped 2% in February, as 308k properties fell into foreclosure, according to RealtyTrac. The importance of this drop is somewhat uncertain given the increasing role of the government in stemming foreclosures. The latest Treasury report on the Home Affordable Modification Program (HAMP) showed that 72k homeowners entered the trial modification period in February alone. Since the program began, only 3 in 10 owners that began the modification process at least 3 months ago have been converted to a permanent modification.
In a sign that global financial markets truly returned to a more liquid state, Kohlberg Kravis Roberts, a US-based private equity firm, filed paperwork with the Securities & Exchange Commission for a $2.2bln initial public offering. The group initially sought to go public back in mid-2007, just as the bottom began to disappear from the world economy. Obviously, the listing never materialized and was formally withdrawn in 2009.
Around the time of the Lehman Brothers bankruptcy in September 2008 it was widely speculated that short sellers were a key player in the demise of the firm. Now, after a $38mln investigation that resulted in a mind numbing 2,200 page document, Chicago-based law firm Jenner & Block concluded that not only did short sellers play no role, but corporate executives were complicit in one of the largest hoodwinks in corporate history. We mention this not as a result of some macabre fascination with corporate history, but rather as a reminder that government officials rarely finger the guilty parties on the first attempt.
Much like short sellers were blamed during the time of Lehman, European officials are now banging a similar drum, blaming “evil speculators” for sending Greece into a tailspin. Just as short selling was temporarily banned during the fall of 2008, officials are now gearing up to ban credit default swaps. The ban on short selling was comically ineffective, just as any proposed ban on CDS would prove to be.
In a world of exporters, who will import?
A number of reports released in the past several weeks confirmed that global trade is rebounding sharply from its 2008/09 lows. Relying on exports to drive economic growth is a perfectly plausible strategy, but final demand in many of the developed economies is unlikely to return to its previous highs in the near future.
After peaking in April 2008, world trade suffered a precipitous 20% fall according to the Netherlands Bureau for Economic Policy Analysis (CPB). However, since reaching a trough in May 2009, trade has jumped 15%, led by a 16.5% gain in exports.
Within the US, the January trade balanced narrowed to -$37.2bln on the heels of declining imports, which contracted 1.7% in the month and are now up 11.9% year over year, largely as a result of surging crude oil prices. President Obama indicated that he would like to double exports over the next 5 years, but doing that may be more difficult than expected.
Goldman Sachs estimates the US would need above average global growth of 4.5% and a 30% depreciation in the dollar to accomplish that goal. With the US Dollar showing signs of recent strength, that task will become even more difficult.
Source: Haver Analytics
Outside the US, American consumers were long viewed as the buyer of last resort. This recession is proving that a changing of the guard is in the works.
Emerging economies witnessed their imports rise 7.4% in the last quarter of 2009 (a 32% annualized rate) while imports to developed economies grew at a comprably slower 3.9% during the same quarter.
China especially is reinventing its role in global trade following the recent crisis. Imports to that country are up 45% in the past 12 months, providing a strong boost to global growth. The trade surplus has also fallen by 50% over that period in a sign that domestic demand is becoming a main driver in that economy.
One of the overriding concerns throughout the recovery has been a fear that protectionist measures would hamper any hopes of continued growth. Despite a series of high profile spats between the US and China, protectionst measures have been largely nonexistent.
Source: Wall Street Journal
However, as the WTO pointed out, we are not in the clear yet and “past experience shows that prolonged periods of job losses and unemployment are one of the main catalysts for more restrictive policymaking.”
Export driven growth policies are becoming common practice in the developed world, but these policies are heavily dependent on the continued success of emerging market economies, especially China. For those policies to come to fruition long term, it is imperative that the developing world remains on a sustainable path of economic growth.
The week ahead
The economic calendar fills up considerably this week. Industrial production data on Monday is likely to show a slight uptick as cold weather throughout the country drives utility demand. On Wednesday and Thursday, releases on the Producer Price Index and Consumer Price Index are expected to show weak inflationary pressures. Housing plays a prominent role in CPI and will continue to weigh on overall pricing pressure.
Tuesday afternoon brings the release of the FOMC statement. The Fed Funds is not expected to change from its current range of 0% to 0.25%. Growing dissension about the use of “extended period” will be a focal point for investors.
The American Bankers Association will hold a summit Tuesday through Thursday discussing legislation around recent efforts to enhance consumer protection. On Wednesday, leaders from the Organization of the Petroleum Exporting Countries will meet in Vienna. Data from Bloomberg shows that the number of oil rigs is increasing at the fastest pace in 2.5 years but OPEC member countries are not likely to increase their stated production quotas.
FedEx will be closely watched when it releases earnings on Thursday. The company is viewed as an indicator into the health of the global economy given its real time ability to assess trends in global trade.
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