2010Aug1 Week In Review
The National Bureau of Economic Research is the official arbiter determining whether our economy is growing or not. Officially, we are entering the 33rd month of the recession that began in December 2007. The 1981 recession lasted 18 months. The 1990 and 2001 recessions lasted 8 months each. While legislators and the Fed have provided unprecedented amounts of stimulus, sustainable organic growth remains illusive. As the impact of stimulus dollars wanes, the feared “double dip” may not occur simply due to the persistence of the initial recession. Analogies of the US economy with Japan’s are more common.
A splash of cold water in the face of optimists occurred this week when the BEA adjusted not only Q1 data downward but made similar negative adjustments for 2007, 2008 and 2009. Inventory output by factories is the basis for growth assumptions. However, if consumers do not spend their resources and acquire the inventory, retailers will curtail orders. The BEA’s data reveals anemic retail consumption persists. We have had a significant slowing since the positive and hopeful quarters of Q4 ’09 and Q1 of ’10.
Countering the national trend, Alaska and North Dakota missed the massive real estate speculation of recent years thereby avoiding the pain of today. Further, they are two states with positive job growth. Conservative budgets and debt management leave their citizens with better financial security and expectations than their other highly leveraged sister states.
Possibly not tied to the downward revisions, Toyota announced it will not build its new Prius plant in Mississippi. With 60% market share for hybrids, management disagrees with the forecast of healthy auto sales and believes the government’s wealth redistribution plan of tax credits for electric car purchases unfairly favors new, untested technologies in vehicles manufactured by government motors. Toyota’s contribution to US employment will have to wait another six years. This is one more unintended consequence of centralized planning creating jobs that will not help the BEA find evidence of economic growth.
Electric cars have been a dream for auto enthusiasts for more than a century. From the Hartford Courant: “An interesting story of how three Americans are planning to capture the electric vehicle business of Europe has just come to light in connection with the visit to this country of John F. Monnot, an eminent electrical engineer of Paris and London.”
We are going to get the Chevy Volt. However, GM apparently does not have the money to build the new Flint, MI plant and has run out of its stimulus funds. GM is waiting for “emergency relief” funds from the same Congress that recently denied another bail-out. To proceed, just send another $350 billion tax payer contribution to build a car that is twice as expensive as its established competitors and can make a 40 mile round trip before requiring premium gasoline to run the recharging system. It makes one wonder how long the wait list is to take delivery.
An increasing work week and more hiring of temps is a typical signal for a positive turn in the economy. Both indicators are above expected levels which have coincided with increasing healthcare costs. Rising costs squeeze margins and are an impediment to hiring full-time workers. Extending hours worked does not build employee confidence nor reduce the numbers of unemployed. Angst remains for many who retain their jobs due to evidence of continuing staff reductions.
New home sales in June set a record new low of 30 thousand. The previous low was 34 thousand in 1984. Total sales and total inventory for June were similarly lacking much positive. Detailed graphs are available on-line.
Foreclosures have increased home vacancies and decreased U.S. home ownership to the lowest levels since 1999. Foreclosures are expected to exceed one million this year according to RealtyTrac, Inc. Taxes change behavior as evidenced by last year’s home sale catalyst of an $8,000 tax credit. It was the first increase in sales since 2005. The trend of declining sales results in lower prices with median US home prices falling 29% to an eight year low in February.
"Men willingly believe what they wish."
- Julius Caesar
The up and down cycles of market prices this year indicate some reassurance is needed before a new, sustainable upward trend will be established. The S&P-500 continually bumps up to its 200-day moving average and retreats in the face of weakening labor markets, softening consumer confidence, softening housing activity and retail sales combined with an increasing trade deficit.
Our dollar has been declining while the Euro has been strengthening. European confidence is stronger than in the past two years and German unemployment has declined for 13 straight months. Our administration may complain that Germany and Europe in general have abandoned Keynesian economics for balancing budgets and the reality of a market driven demand economy, but it is working for them.
The Fed released the Beige Book this week which did not fuel many pyres of optimism. Briefly:
New York - Contacts generally indicate that sales of fashion items and apparel were particularly strong, whereas sales of big-ticket appliances were relatively sluggish.
Philadelphia - Most retailers said warm weather boosted sales of summer apparel, but sales of big-ticket appliances, remained weak. "The consumer is still cautious and looking for value."
Cleveland - Purchases of apparel and food products are doing well, while spending on discretionary items has weakened.
Richmond - A contact at a large home and garden chain reported that impulse buying fell, and that home remodeling purchases had scaled back dramatically as consumers "splurged small." Overall, according to our District survey, big-ticket purchases and shopper traffic plummeted.
Atlanta - Although most merchants have reported improved conditions since the beginning of the year, the outlook among retailers was more subdued than in previous months.
Chicago - While spending on food and other necessities rose, spending on home-related and luxury items decreased.
St. Louis - Contacts in education services, air transportation support services, and the casino industry announced plans to decrease operations and lay off workers.
Minneapolis - In South Dakota, a mall manager noted that recent sales were mixed; consumers remained cautious as traffic continued to be driven by promotions.
Kansas City - Retailers expected sales to rise over the next three months and a continued downward trend in prices... Restaurant sales were flat compared to the previous survey, but the average check amount fell.
Dallas - Department store sales were slightly stronger than anticipated, but the pace is expected to moderate in the second half. Consumers continue to deleverage and correspondingly remain price sensitive.
San Francisco - While consumers remained focused on necessities and lower-priced options, reports indicated expanding consumer appetite for discretionary spending. (Apparently, Californians have no clue how dire the finances are in their State. One view of this is that by spending less on necessities, one can save money for a smaller splurge, at least pretending things aren’t all that bad).
In spite of all the headlines, internal market indicators show money beginning to flow back into the markets. Having added some fixed income positions this past month, we are carefully weighing additions in emerging and some European markets. Domestic positions are continually reviewed and close to qualifying for a spot in our portfolios.