|
No one promised that the recovery would be smooth. And it certainly is not. This past week highlighted divergent patterns in two key sectors—manufacturing and housing. While factories are humming louder, housing has fallen back.
 There was no shortage of a variety of sources of impact on equities this past week. Equities were boosted on Monday after the U.S. House voted to pass health care reform legislation. The lifting of uncertainty was a key factor. Drug manufacturers (including Bristol-Myers Squibb and Pfizer) and many health care providers were key beneficiaries. Upgrades on a number of companies (including Citigroup and Boeing) also pushed stocks up at the start of the week. The biggest boost of the week, however, came on Tuesday as existing home sales did not fall as much as feared.
Equities fell back on Wednesday. Economic news was mixed as durables met expectations, but in contrast to the day before, new home sales were worse than forecast, weighing on equities. Worries about European debt also moved to center stage as one agency cut Portugal’s credit rating and a prominent economist said Greece will default on its debt.
Thursday looked like a stellar day at the start as initial jobless claims fell more than projected, some upbeat profit forecasts were issued by Best Buy and Qualcomm, and Fed Chief Bernanke reaffirmed that low rates would last for some time. But European debt threw water on the party as stocks plunged the last half hour of trading after European Central Bank President Jean-Claude Trichet called on the EU to take responsibility for its members’ debt problems, calling into question whether an IMF solution was likely.
Equities were mixed on the final day of trading after reports of a naval conflict between North and South Korea led stocks to pull back. Information that the sinking of a South Korean vessel was not related to conflict and apparently to some other cause came late in the day and was not enough to push equities back up.
Despite worries over European debt and uneven economic news, equities kept the bull market going with net gains four weeks in a row for most indexes.
Equities were up this past week. The Dow was up 1.0 percent; the S&P 500, up 0.6 percent; the Nasdaq, up 0.9 percent; and the Russell 2000, up 0.8 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 4.0 percent; the S&P 500, up 4.6 percent; the Nasdaq, up 5.6 percent; and the Russell 2000, up 8.6 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 This past week, Treasury yields were up sharply. Except for Wednesday, rates were little changed—that was the day that made the difference for the week. Leading into Wednesday’s spike in rates was a soft auction on Tuesday for 2-year T-notes. The five-year auction on Wednesday went poorly as a record-tying $42 billion auction of five-year notes sold at the widest difference in yield over the average forecast by primary dealers since mid-2009. For the day, the yield on the five-year note soared 17 basis points to 2.59 percent while the 30-year yield rose 13 basis points to 4.73 percent. Rates were up for several reasons, including concern about the Fed's exit strategy, European debt, and whether health care reform will add to the federal deficit instead of reducing it as claimed by proponents.
For this past week Treasury rates were up as follows: the 2-year note, up 6 basis points; the 5-year note, up 13 basis points; the 7-year note, up 16 basis points; the 10-year bond, up 16 basis points; and the 30-year bond, up 17 basis points. The 3-month T-bill edged down 2 basis points.
 Crude oil prices fell slightly net this past week. Spot prices for West Texas Intermediate did firm at the start of the week, coming off a drop at close of the prior Friday after a boost in key rates by the Reserve Bank of India led to worries about global oil demand. Gains in U.S. equities and a dip in the dollar helped the rebound in oil on Monday. A smaller than expected drop in existing home sales supported a modest additional gain in oil prices on Tuesday.
Prices fell back on Wednesday on a jump in oil inventories and over European debt worries. Lack of resolution of debt problems in Greece, Portugal and other debt strapped EMU countries also helped bump prices down.
Net for the week, spot prices for West Texas Intermediate slipped 32 cents per barrel to settle at $79.97.
We closed the books on fourth quarter GDP (at least until annual revisions) and growth was not as strong as believed. More current numbers indicate that manufacturing is doing just fine, the consumer is marginally less pessimistic, but housing has reversed course.
 It is probably a good thing that we did not get the final revision to fourth quarter GDP growth until now as the latest numbers were not as strong as believed and final sales were actually anemic. But the economy has moved well beyond the fourth quarter and recovery has become more entrenched. Real GDP growth for the fourth quarter was revised downward to an annualized 5.6 percent from the prior estimate of 5.9 percent. Both final sales and inventory investment were revised down. Final sales grew a meager 1.7 percent, following a 1.9 percent rise in the third quarter.
 The 0.3 percentage point cut in the GDP growth rate primarily reflected downward revisions to nonresidential fixed investment, to private inventory investment, and to personal consumption expenditures.
The boost in real GDP growth in the fourth quarter from 2.2 percent in the third primarily reflected acceleration in private inventory investment, an upturn in nonresidential fixed investment, faster growth in exports, and a deceleration in imports that were partly offset by slowing in PCE and in federal government spending.
Inflation is still barely noticeable as the GDP price index was revised up to a 0.5 percent gain, compared to the prior estimate of an annualized 0.4 percent.
The bottom line is that the economy has moved well beyond the final quarter of last year. More recent monthly data show a gradual improvement in consumer spending, business investment in equipment, and an uptrend in exports. Forward momentum is now probably a little better than seen in the latest GDP detail.
 Manufacturing is holding on to its role as the engine of the recovery as overall new orders for durable goods in February gained 0.5 percent, following a revised 3.9 percent surge in January. February fell short of analysts’ projections for a 1.0 percent increase but January’s number was much higher than the prior estimate of 2.6 percent. New orders have been up three months in a row. Excluding the transportation, new durables orders rebounded 0.9 percent, following a 0.6 percent decline in January.
For the latest month, new orders were led by machinery which jumped 4.7 percent. Other components were mixed.
The uptrend in equipment investment also continues as new orders for nondefense capital goods orders jumped 5.2 percent in February after a 4.4 percent boost the prior month. Most of the gain was aircraft related as this series excluding aircraft made a partial rebound, rising 1.1 percent after dropping 3.9 percent in January. Shipments for this category—a key ingredient in equipment investment in GDP—rose 0.8 percent in February, following a 1.9 percent dip the month before. Both shipments and orders have been volatile but remain on a healthy uptrend.
Another sign of forward momentum continuing was a 0.4 percent advance in unfilled orders for durable goods—following a 0.2 percent rise in January.
Overall, the manufacturing sector is leading the recovery with moderately strong growth.
 The housing recovery did not take hold as much as expected. Yes, the first-time homebuyer credit worked this past fall but the economy has not improved enough for housing sales to pick up the pace without further help. The big picture is seen in the chart for existing home sales. Purchases surged in the autumn but sales were somewhat if not heavily at the expense of subsequent months.
February existing home sales fell 0.6 percent to a sluggish pace of a 5.02 million units annualized. Months’ supply jumped to 8.6 months vs. 7.8 in January and 7.2 in December, and is the steepest winter build-up in the last 20 years. The supply overhang has weighed on prices in which the median came in at $165,100, up 0.1 percent from February on a month-ago basis and down 1.8 percent on a year-ago basis.
The only really good news from the February numbers is that sales were likely hurt by severe snow storms around the U.S. and we may see a rebound in March on a reversal of that factor alone. Also, most industry leaders and analysts still expect to see a surge in sales in March and April surrounding the second-round expiration of tax credits in April.
While existing home sales in February were down from the recent peak, they also were still moderately above the cycle low. That did not hold true for new home sales for the month as they fell and set a record low for the series. New home sales fell 2.2 percent in the month to a 308,000 annual rate. This is the weakest sales pace since the start of the series in January 1963. Supply swelled to 9.2 months.
Interestingly, prices firmed in the month, up 6.1 percent for February to a median $220,500. The price jump likely reflected a shift in composition of sales toward the high end. On a year-ago basis, the median price is up 5.2 percent. But with the heavy supply, prices are not likely to continue to firm unless a sales surge begins to unfold ahead of stimulus deadlines in the spring. And we may actually get a bump in sales. Mortgage applications for home purchases have firmed in three of the last four weeks in what is hopefully an indication that January and February will prove to be lows for the housing sector.
 Perhaps reflecting slowing layoffs and stock market gains over the last four weeks, consumer sentiment inched slightly higher in the second half of March. The Reuters/University of Michigan index came in at a final March reading of 73.6, a bit improved from the mid-month reading of 72.5. But the gain was very slight, reflecting primarily a rise for the current conditions index to 82.5 from mid-month’s 80.8. Less robust was the boost in the expectations index which rose only seven-tenths from mid-month to 67.9.
The final overall March reading is unchanged from February and is 8 tenths below January. Looking ahead, sentiment is not likely to show any dramatic improvement as now higher gasoline prices are at least partially offsetting the reduced rate of layoffs.
The recovery is on an uneven road and some individual sectors are even more so. While manufacturing continues on a relatively smooth uptrend, the gains in housing from earlier tax credits did not take hold and have reversed to a large degree. Hopefully, the deadline for the second round of tax credits for homebuyers will give housing a boost with eventually stronger labor markets chipping in later this year.
The spotlight is on the consumer with updates on personal income on Monday and the March employment situation posted Friday morning. In between, we get a status report on manufacturing on Thursday with the ISM index.
Personal income rose only 0.1 percent in January, after a 0.3 percent boost the month before. The softening was due to a return to trend in farm income after a jump in that component in December. The true measure of strength in income for consumers is the wages and salaries component which jumped 0.4 percent in the latest month after edging up 0.1 percent in December. The spending numbers also required some extra digging. A 0.5 percent rise for personal consumption was stronger than expected but, given a 1.8 percent surge in non-durable goods, looks to have been boosted by gasoline. The inflation numbers were mixed in January as the headline number was up 0.2 percent but the core reading was flat. Looking ahead, the wages and salaries component for personal income will likely dip as aggregate weekly earnings fell 0.5 percent in March, according to the employment situation. Current dollar PCEs are a little iffy as core retail sales jumped 0.8 percent but unit new motor vehicle sales dropped 3.7 percent. Look for soft PCE price index numbers since they track CPI. March’s headline CPI was flat while the core was up 0.1 percent.
Personal income Consensus Forecast for March 10: +0.1 percent
Range: -0.1 to +0.2 percent
Personal consumption expenditures Consensus Forecast for March 10: +0.3 percent
Range: +0.2 to +0.4 percent
Core PCE price index Consensus Forecast for March 10: +0.1 percent
Range: 0.0 to +0.1 percent
The Conference Board's consumer confidence index fell back sharply in February, dropping nearly 10 points to 46.0. This was the lowest level since the 40.8 reading for April 2009 but is still above the recession low of 25.3 seen in February 2009. If the confidence index tracks the March consumer sentiment index, look for little change as the final sentiment reading for March matched that for final February.
Consumer confidence Consensus Forecast for March 10: 50.0
Range: 48.0 to 56.0
The Chicago PMI for February rose 1.5 points to 62.6—solidly into positive territory. The gain was led by a sharp slowing in deliveries which boosted that sub-index to 62.6 from January's 55.3. While one might worry that this may have been weather related instead of due to a spike in business activity, other indications suggest otherwise. Production and new orders were up while inventories were down. The very strong reading for new orders coming in at 62.2 for a fifth straight plus-60 reading suggests a healthy headline number for March.
Chicago PMI Consensus Forecast for March 10: 61.0
Range: 58.3 to 63.0
Factory orders rose a very solid 1.7 percent in January led by strength in transportation equipment, specifically aircraft. Orders for non-durable goods rose 0.9 percent. Durable goods orders were revised four tenths lower to a still very strong 2.6 percent. More recently, the advance report showed durables orders February gaining 0.5 percent, following a revised 3.9 percent surge in January. With energy prices up for the month, nondurables orders also should rise in February, leading to a boost for overall orders.
Factory orders Consensus Forecast for February 10: +0.4 percent
Range: 0.0 to +1.4 percent
Sales of domestic-made light motor vehicles in February dipped 2.2 percent to a 7.7 million unit annualized pace, largely on severe snow storms cutting into showroom traffic. Imports, however, fared worse, dropping 7.9 percent to 2.7 million units. The import share was hurt by Toyota’s recall-related stoppage of sales on certain models. Combined domestics and imports were down 3.7 percent to 10.4 million units from 10.8 million in January. Deal making by competitors going after Toyota market share could boost overall sales in March.
Motor vehicle domestic sales Consensus Forecast for March 10: 9.0 million-unit rate
Range: 8.1 to 9.2 million-unit rate
Initial jobless claims for the March 20 week fell to a lower-than-expected 442,000, which outside of a single week in the volatile month of February, was the lowest total of the recovery. The four-week average, at 453,750, is at a cycle low.
Jobless Claims Consensus Forecast for 3/27/10: 440,000
Range: 425,000 to 445,000
The composite index from the ISM manufacturing eased back in February to 56.5 from 58.4 the month before. But the number was still at a healthy level above break even, indicating moderate growth in manufacturing activity. The composite index has been above 50 for seven months in a row. Looking ahead, the March composite is likely to remain well into positive territory as the new orders index slipped but remained at a high reading of 59.5.
ISM manufacturing composite index Consensus Forecast for March 10: 56.3
Range: 54.0 to 58.0
Construction spending in January dropped 0.6 percent after sinking 1.2 percent in December. On the year, total construction has declined by 9.3 percent. Weakness in the month was led by a fall in private nonresidential spending with public outlays also slipping. The bright spot was private residential construction spending which posted a notable gain. Looking ahead, overall outlays are likely to fall back further as housing starts dropped a sharp 5.9 percent. This likely was weather related due to severe snow storms. This effect will likely been seen in other components of construction spending.
Construction spending Consensus Forecast for February 10: -1.1 percent
Range: -2.0 to -0.4 percent
SIFMA Recommended Early Close 2:00 p.m. ET
Good Friday
Stock Market Closed, Banks Open, Bond Markets Open
Nonfarm payroll employment in February declined 36,000, following a 26,000 decrease in January. Weakness in February was led by a 64,000 drop in construction jobs. Manufacturing and mining both actually edged up. Service-providing jobs were up 42,000 in February with the highlight being a 48,000 jump in temp help. Despite these positive signs, the big negative is coming from the public sector as government jobs fell 18,000 despite the hiring of 15,000 temporary Census workers. Wage inflation in February eased to an anemic 0.1 percent rise from 0.2 percent the month before. From the household survey, the unemployment rate held steady at 9.7 percent in February. Looking ahead, an easing in the drop in construction plus a stronger gain in Census workers could put payroll jobs back in the positive column for March.
Nonfarm payrolls Consensus Forecast for March 10: +200,000
Range: +75,000 to +300,000
Unemployment rate Consensus Forecast for March 10: 9.7 percent
Range: 9.5 to 9.9 percent
Average workweek Consensus Forecast for March 10: 33.9 hours
Range: 33.2 to 34.0 hours
Average hourly earnings Consensus Forecast for March 10: +0.2 percent
Range: +0.1 to +0.3 percent
SIFMA Recommended Early Close 12:00 p.m. ET
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, October 2009.
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}