Economic News Remains Fast & Furious
Economic & Market Update: May 4, 2009
“Economic News Remains Fast & Furious”
The Fortigent Investment Research Team
Last Week’s Highlights:
Consumer Confidence: 39.2 – equity rally helped consumer expectations
Home Price I -18.6% – price decline leveled off since January
1st Quarter G -6.1% – glimmers of hope beneath an abysmal number
Personal Spend -0.2% – higher unemployment leads to lower spending
Chicago PMI: 40.1 – improving from the bottom
Stocks: 878 – another muted week as investors digest a lot of news
Bonds: 3.2% – record issuance next week scares investors away
Oil: 53 – crude oil hits 6-week high ahead of peak driving season
Dollar/Euro: $1.33 – increasing risk appetite sends investors overseas
Economics This Week:
Date Item Est. Comment
5/4 Construction Spending: -1.4% Likely to stay weak
5/7 Consumer Credit: -3.3B Consumers reduce debt appetite
5/8 Nonfarm Payrolls: \ -620K No reason for a slowdown
5/8 Unemployment Rate: 8.9% Job losses continue
5/8 Wholesale Inventories: -1.0% Cutback in inventories seen
Global Equities Remain Resilient
Equity markets moved in a positive direction once again following modestly negative performance in the prior week. The S&P 500 index finished up 1.3% and the DJIA finished the week up 1.7%. Trading was volatile on account of several key stories.
The most dominant story of the week was the rapid acceleration of Influenza A (aka: swine flu) around the globe. It remains to be seen what economic impact, if any, the flu will have on an already fragile global economy but this story will stay front and center for the time being.
The bankruptcy of Chrysler, the third largest US automaker, was the other major headline of the week. There are an amazing number of moving parts to this story, so we will leave analysis to the likes of the Wall Street Journal and Bloomberg, but this is another reminder that these are extraordinary times, indeed.
1st Quarter GDP Not As “Gross” As It Appears
Although the headline decline of 6.1% for 1st quarter GDP was nasty, underlying trends lead many to believe that the worst is behind us and that the economy will improve from here. Make no mistake, the last two quarters represent the steepest decline since the 7.4% annualized decline endured in 1957-58, but ultimately, the steeper than expected decline was attributable to the weakness in inventories and business investment, as expected. The contraction in inventories alone took a whopping 2.8% off of overall GDP.
Source: Northern Trust Global Economic Research
Once again we run into leading and lagging economic indicators. As an economy nears a bottom and begins to work its way out of recession, sectors such as residential investment and personal consumption expenditures (PCE) generally improve, but business investment and inventories remain weak. That is precisely what occurred during the first quarter.
When Recovery Typically Starts
Breaking down each of the underlying components of GDP, we see that there was a dramatic turnaround in PCE from a net contribution of -3.0% in the 4th quarter to a +1.5% contribution in the 1st quarter. On the negative, inventories were the biggest detractor for the quarter, which should be viewed positively moving forward. At some point in the near future, companies will need to replace depleted inventory stocks, adding positive support to the manufacturing sector.
Source: Calculated Risk Blog
Manufacturing – Domestic and Abroad
An interesting dichotomy became apparent during the previous week as we found out that production in China once again reached expansionary levels and that the US is working its way back towards an expansionary level.
The ISM Manufacturing Index is a survey of hundreds of companies across the US and is generally used as a broad indicator of manufacturing trends in this country. Readings above 50 signal expansion in manufacturing. Levels between approximately 43 and 50 are representative of a contraction in manufacturing, but expansion in the broader economy. Anything below 43 is a sign of recession.
April’s reading of 40.1 shows that the economy is still mired in a recession but paints a rosier picture than we saw during the previous four months. After hitting 32.9 in December, the index has increased for four consecutive months. Although not yet at expansionary levels, a continued trend in this direction is supportive of future economic production.
A similar manufacturing survey in China increased to 53.5% in April. Again, higher than 50% is an expansionary sign. The survey was driven by increases in new orders and exports. Increases in new orders are a show of confidence that the economic picture is improving.
Neither of these surveys is a perfect indicator, but improvements from extremely weak levels at the end of 2008 are another positive development for the future trajectory of the US and world economy.
The Week Ahead
This week will be interesting on geopolitical and economic fronts. On Monday, the European Commissions will release its economic forecast for the 27 European Union countries. Included in the data are expectations on GDP, unemployment and inflation.
Ben Bernanke, Chairman of the Federal Reserve, reports to the Joint Economic Committee on Tuesday. Mr. Bernanke will provide an analysis of the economy and projections for future economic growth.
Results of the bank stress tests are set for release on Thursday. There is a large amount of trepidation surrounding these results and two of the largest banks – Citigroup and Bank of America – are the focus of most of that angst.
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