Jan 30th

4Q08 “advance” Real Gross Domestic Product

Author: Kenn Lamson

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As reported by the Commerce Department the advance estimate of fourth quarter real Gross Domestic Product fell 3.8%, on an annualized basis, from the third quarter of 2008. This decrease was substantially smaller than the consensus expectation for a -5.5% reading and followed a -0.5% posting for 3Q08.  Today’s release marked the sharpest contraction in US economic growth since 1982.  The -3.8% reading was improved over the consensus expectation by a rise in business inventories and federal government spending. Posting negative contributions were exports, personal consumption expenditures, equipment and software, and residential fixed investment. Excluding the effect of inflation, the US economy contracted at a 4.1% annual rate; according to Bloomberg, this decline is the largest since 1958.

For the full year of 2008, real US output rose 1.3%, reflecting relative strength in the first half of 2008. Exports and personal consumption expenditures offset weakness in residential fixed investment and other areas.

As noted, today’s release was the “advance” figure that is based in part on incomplete and estimated data.  As with each Commerce Department GDP estimate, today’s release is subject to two additional revisions, which are labeled as “preliminary” and “final”.  Given the rapid change in the economic situation HIA expects the GDP figure released today will be substantially revised, probably lower, in coming months.

Harmonic Investment Advisors believes that, while the “headline” GDP figure is better than expected, its improvement over the consensus estimate by virtue of continued injections of funding into the economy by the US government and the unwanted buildup of unsold products does not suggest unexpected strength.  As noted above we anticipate that today’s figure will be revised downward and that the economy has continued to weaken during January 2009.

Jan 27th

November 2008 S&P / Case-Shiller Home Price Index

Author: Kenn Lamson

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As reported by the Standard & Poor’s the S&P / Case-Shiller Home Price Index fell 18.4% in November 2008 from November 2007. This decrease was slightly larger than the consensus expectation for a -18.2% reading and followed a -18.0% posting in October. The Index, based on the prices of residential real estate in 20 major US metropolitan areas, was driven lower by broad-based price declines; each of the 20 cities included in the Index saw year-over-year declines in home prices. According to the Index, Phoenix saw the largest price drop (-32.9%), followed by Las Vegas (-31.7%), San Francisco (-30.8%) and Miami (-28.7%). Seeing smaller price drops were Dallas (-3.3%), Denver (-4.3%), Cleveland (-5.2%) and Charlotte (-5.3%).

The Index has declined 25% from its peak in mid-2006. Downward price pressure appears to have increased in the latter months of 2008, as the monthly price declines accelerated from June’s

-0.5% drop through November’s -2.2% reading.

Harmonic Investment Advisors believes that, given the deepening recession, home prices continued their downside acceleration in December 2008 and the current month. Falling home prices appear to have attracted some buyers, however, as suggested by the 6.5% increase in sales of existing homes, as reported yesterday by the National Association of Realtors.

Harmonic believes home prices are likely to continue to fall as the overhang of unsold homes appears to far outweigh the number of potential buyers. Further, the pool of potential buyers is negatively impacted by the increased tightening of credit available to fund purchases and by discomfort caused by declining investment market values and rising unemployment. Given that the home is the most valuable asset on most Americans’ personal balance sheet, declines in home prices reinforce the negative sentiment and increase the financial pressure that has contributed to this consumer-led recession.

Jan 26th

December 2008 Index of Leading Economic Indicators

Author: Kenn Lamson

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As reported by the Conference Board the Index of Leading Economic Indicators (LEI) rose 0.3% in December 2008 from November 2008. This increase outpaced the consensus expectation for a -0.2% reading and followed a -0.4% posting in November. The 10-component Index was driven unexpectedly higher largely by a continued increase in the M2 Monetary Supply, which has seen a sharp rise as the Federal Reserve has lowered the Fed Funds rate and other monetary stimulus, such as the TARP, has been injected in recent months. Today’s reading was the first increase in 6 months.

Other Index components, including Building Permits, Average Workweek, Jobless Claims and Pace of Deliveries posted substantially negative readings for the month of December.

The LEI, intended to forecast the direction of the US economy in the upcoming 1 to 2 quarters, suggests that, absent the potential positive benefits from the dramatic increase in the monetary base, the economy will continue to contract in the near-term.

Harmonic Investment Advisors believes that while the LEI has been a historically good tool for forecasting US economic growth, today’s positive reading, driven by the expansion in the M2 Monetary Supply, is misleading. Although growth in the monetary base has historically been a precursor to increased lending and therefore economic activity, the current weakened state of the US financial system has rendered that transmission mechanism ineffective. Harmonic expects the US economy to contract during all of 2009, beginning with a sharp decline in 1Q09 GDP.

Jan 16th

December 2008 Consumer Price Index

Author: Kenn Lamson

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As reported by the U.S. Bureau of Labor Statistics the consumer price index (CPI) rose only 0.1% in December 2008 from December 2007, following a 1.1% year-over-year rise in November. “Core CPI”, which excludes food and energy costs, rose 1.8% in December 2008 from December 2007 following a 2.0% increase in November. December’s “headline” CPI represents the lowest annual inflation rate since 1954, but the “core” rate suggests deflation is not yet evident. The primary contributor to the decline in 2008 prices is the 75% drop in energy prices since oil’s mid-2008 peak.

Harmonic Investment Advisors sees potentially significant issues resulting from the decline in consumer prices. For a number of years the domestic savings rate has been negative as consumer debt grew. As a result, the U.S. was increasingly reliant on foreign countries purchasing our government debt. Consumers tend to delay their purchases when prices are falling since they believe their dollars will have greater purchasing power in the future. This phenomenon of reduced demand was evident in yesterday’s report on December retail sales. As consumers earn but do not spend the savings rate naturally rises; as of 30 November 08, the most recent reporting, it stood at 2.8%, up from 0.0% at April 2008. This is an important development at a time when the U.S. is going to need to increase the amount of debt it issues, as the higher savings rate better facilitates demand for that debt. Also, the decline in prices has primarily been due to declines in energy and food, two of the least discretionary purchases that consumers make, which has also improved consumers’ balance sheets. Reduced consumption supports Harmonic’s stance that the economy will continue to slow over the coming months but that the strengthening consumer balance sheet provides the opportunity for stabilization in the stock markets.

Jan 09th

December 2008 Unemployment Statistics

Author: Kenn Lamson

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As reported by the Labor Department, the US unemployment rate jumped in December to 7.2% from 6.8% in the prior month, rising to its highest level since 1993. Further, according to the Wall Street Journal and Bloomberg News, the US economy lost 2.6 million jobs in 2008, the most since 1945.

Harmonic Investment Advisors believes that unemployment is likely to continue to rise, peaking near 9%. Given that about 70% of US economic activity is driven by the consumer, the negative psychological impact of the fear of losing one’s job and the financial impact of actually doing so will continue the negative spiral of global economic weakness in 2009. Importantly, unemployment has historically continued to rise after the official end of recessions as companies have tended to use staff reductions as a last resort.

Since 1945 periods of rising unemployment have averaged 21 months. According to Northern Trust Global Economic Research, the median increase in the unemployment rate from cycle-low to cycle-high is 3.2%; the low for the current business cycle was 4.4%, reached in March 2007. The unemployment rate reported today puts this cycle’s increase at 2.8%. Harmonic believes that, given the extraordinary circumstances that created the current economic downturn that the unemployment situation will continue to deteriorate longer than average and the rate will rise more than average.

Despite the poor economic outlook, Harmonic believes the US stock markets to be fairly valued. Using what HIA believes to be a conservative estimate of $60 in 2009 corporate earnings, the price/earnings multiple on the Standard and Poor’s 500 stock index stands at 14.9, roughly its long-term average. Further, given stocks’ tendency to lead the economic cycle by several months, it’s likely that the next bull market will begin before this recession is over.