Jun 25th

State-by-state GDP data

Author: Kenn Lamson

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The graph below, which groups states by the percent change from 2007 to 2008 in their after-inflation Gross Domestic Product, clearly shows that the recession has not been evenly felt across US states.  States that enjoyed large run-ups in real estate values such as Arizona, Florida and Nevada, and those with concentrations in durable goods manufacturing, like Ohio and Michigan, saw the largest contraction in their economies in 2007-2008.  At the other end of the spectrum were central states that saw increases in agriculture, mining and similar industries.

By this measure Idaho’s growth was flat (0.0%) from 2007 to 2008. The categories making the largest positive contribution were Professional and Technical Services; Healthcare and Social Assistance; and Government. Categories with the greatest negative contributions were Construction; Agriculture, Forestry, Fishing and Hunting; and Management of Companies.

gdp_by_state1

Jun 25th

“Final” 1Q09 Gross Domestic Product

Author: Kenn Lamson

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The Commerce Department reported that the “preliminary” estimate of first quarter real Gross Domestic Product fell 5.5%, on an annualized basis, from the fourth quarter of 2008. This level marks a 0.6% upward revision from the “advance” estimate released in late April and 0.2% upward revision from May’s “preliminary” estimate. The US economy’s growth rate in 4Q08 was -6.3%. Today’s reading was marked by a continued downturn in exports, business investment and housing construction. Positively, consumer spending rose 1.4% in the first quarter. Excluding the effect of inflation, the US economy contracted at a -2.9% annual rate.
As noted above, consumer spending, which represents about 70% of US economic activity, increased by 1.4% after negative readings in the past two quarters. While this rebound could be dismissed as a snap back from unsustainably negative readings, it’s worthy of note that the increase was mostly driven by spending on long-lived (and often more expensive) durable goods.
Unsurprisingly, investment in housing continued to spiral downward, falling 33.7% on an annualized basis in 1Q09, subtracting 1.4% from GDP. This decline was offset by international trade, which contributed 2.39% to GDP as exports declined less than imports.
A sharp decline in business investment in inventories, which hampers the economy in the short run, is both necessary and beneficial in the longer term, as companies resume a more normal pace of production in coming periods.
Corporate profits rose 3.8% in the first quarter of 2009 after falling 16.5% in 4Q08. Profits from financial companies rebounded, while those of nonfinancial firms fell.
Harmonic Investment Advisors believes that 4Q08 marked the bottom of this economic cycle. However, as noted in earlier commentaries we anticipate that the US economy will remain in recession throughout this year. Consequently our tactical asset allocation, sector weights and security selection remain skewed towards defensive and high quality equities and fixed income investments, although we began earlier this year to tilt our models towards a more neutral position to take advantage of attractive valuations and an economic recovery, albeit one that will likely be slow and fitful.

Real GDP (quarterly data, annualized), white (%) Consumer Spending (quarterly data, annualized), red (%)

Real GDP (quarterly data, annualized), white (%) Consumer Spending (quarterly data, annualized), red (%)

Jun 24th

Fed Leaves Rates, Purchase Programs, Economic Assessment Unchanged

Author: Kenn Lamson

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The Federal Reserve’s Open Market Committee continues to see the economy as improving but expects to leave rates unchanged and to maintain the announced securities purchase programs as it sees inflation to “remain subdued for some time.” The FOMC’s announcement was strikingly similar to April’s statement despite the potential this meeting had to strike a change. The Fed reiterated its expectation that the environment will “warrant exceptionally low levels of the federal funds rate for an extended period.” While the Fed did back off of its deflationary concerns expressed previously, it apparently does not see inflation as a problem.

Jun 18th

Leading Economic Indicators – May 2009

Author: Kenn Lamson

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The Conference Board its Index of Leading Economic Indicators (LEI) rose 1.2% in May, somewhat better than a consensus expectation for a 1.0% reading and following a 1.1% increase in April. Ken Goldstein, Economist at the Conference Board, stated “The leading economic index increased for the second consecutive month. The coincident economic index is still declining but the declines are less intense. The recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing. If these trends continue, expect a slow recovery before the end of the year. However, employment will take longer to turn around.”

Seven components rose, led by supplier deliveries, the interest rate spread (10-year Treasury yield less the Federal Funds rate) and stock prices. These items were somewhat offset by negative readings from the other three components, led by average manufacturing hours worked.

Harmonic Investment Advisors believes that the LEI, which seeks to evaluate the economy’s likely performance 6 months in advance, has historically been a useful tool for forecasting US economic growth. While today’s positive reading reinforces HIA’s expectation of continued economic weakness, Harmonic’s principals are somewhat skeptical that the economy will continue to accelerate at the same pace over the remainder of 2009.

Harmonic integrates the information provided in this release into the macroeconomic models that drive its tactical asset allocation and economic sector weightings and will continue the shift to an incrementally more cyclical stance as the year progresses and when market valuations appear attractive.

Conference Board Index of Leading Economic Indicators May 2004 – May 2009 (vertical line indicates approximate official start of recession)

Conference Board Index of Leading Economic Indicators May 2004 – May 2009 (vertical line indicates approximate official start of recession)

Jun 17th

Consumer Price Index – May 2009

Author: Kenn Lamson

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The U.S. Bureau of Labor Statistics reported this morning that the consumer price index (CPI) fell -1.3% from May 2008. Today’s reading is the largest 12-month decline since April 1950. “Core” CPI, which excludes food and energy costs, climbed by 1.8% over the past year. The data indicates that while overall prices have fallen, when volatile food and energy costs are excluded the rate is comfortably within the range the Federal Reserve apparently prefers. This fact reinforces the idea that the ongoing fiscal and monetary stimulus hasn’t yet ignited inflation. It also suggests that severe deflation appears unlikely.

Month-over-month, the seasonally-adjusted “headline” CPI rose 0.1% in May and the monthly “core” rate of consumer inflation also rose 0.1%.

Housing costs, which comprise 40% of the Index, were down -0.1% for the third consecutive month. Food and beverage costs fell by -0.2%, led downward by fruits and vegetables (-1.0%) and meats, poultry, fish and eggs (-0.9%). Also falling substantially during May were the costs of infant and toddler apparel (-1.6%) and personal computers (-1.6%). Gasoline rose 3.1% during the month.

Harmonic Investment Advisors sees significant benefits resulting from the decline in consumer prices. As suggested by the difference in “headline” and “core” inflation statistics, the overall decline in prices has primarily been due to falling energy and food costs, two of the least discretionary purchases that consumers make. Reduced pressure on consumers’ budgets supports Harmonic’s stance that while the economy will remain sluggish over the coming months, the strengthening consumer balance sheet, in the form of higher savings, provides a key to stabilization in the economy and stock markets.

In its Large-cap Core, Smid-cap Core and All-cap Core US stock strategies, Harmonic continues to look for opportunities to raise the weight of stocks in the consumer discretionary sector in anticipation of improvement in consumer balance sheets and to take advantage of the attractive valuations of selected high quality stocks in that sector.  For similar reasons, HIA remains overweight energy stocks on the belief that the rising price of commodities will spur exploration for natural resources as economic weakness moderates.

Month-over-month (red) and year-over-year (white) “core” CPI (May 2004 – May 2009)

Month-over-month (red) and year-over-year (white) “core” CPI (May 2004 – May 2009)

Jun 05th

Unemployment Situation – May 2009

Author: Kenn Lamson

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The Labor Department reported that the number of unemployed Americans rose by 345,000 in May, raising the unemployment rate to 9.4%. April’s US unemployment rate was 8.9%. May’s losses bring the unemployment level to its highest since August 1983. Today’s release brings to about 6 million the total number of lost jobs since the recession began in December 2007, the majority of which have been shed since mid-2008. Positively, today’s figure also represents the smallest loss in eight months and was substantially better than the consensus of economists expected.

Jobs growth was negative in all major industry groups surveyed except healthcare and hospitality, each of which showed a slight gain. Steep losses continued in manufacturing but the rate of decline moderated in construction, professional and business services and retail.

If workers who were underemployed or who have stopped looking for work are included in the tally the percentage of unemployed plus “marginally attached” workers rose to 16.4%, up from 15.8% in April.

The report is consistent with the idea that the rate of deterioration is slowing and that the economy is gradually stabilizing.

The consensus among economists appears to be shifting towards Harmonic Investment Advisors consistently held position that the unemployment rate is likely to continue to rise to at least 10%. 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 act as a drag on the economy.

The markets’ behavior since early March suggests that market participants may be beginning to acknowledge the “lagging” nature of unemployment statistics. HIA portfolio structures stand “neutral” on stocks of businesses dependent on consumer spending, having moved from an “underweight” position in February. We continue to search for high quality firms that will be survivors of the downturn and that are trading at attractive valuations in anticipation of increasing the cyclical bias of our strategies later this year.

US Unemployment Rate (white, left scale) Nonfarm Payrolls, monthly change (red, right scale) (December 1999 – May 2009)

US Unemployment Rate (white, left scale) Nonfarm Payrolls, monthly change (red, right scale) (December 1999 – May 2009)