Apr 09th

Should You Pay Off Your Mortgage or Invest?

Author: Chris

Should You Pay Off Your Mortgage or Invest?

Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the opportunity cost

Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.

Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash,start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other points to consider

While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.

What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.
How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.
Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.
How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments.
Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.
How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).
Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The middle ground

If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both. It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

Apr 02th

“Separating Wheat from Chaff”

Author: Kenn Lamson

Comments: 0

As even a casual observer would recognize, there are hundreds of pieces of economic data available from various departments within the Federal government and private research firms. There’s also lots of anecdotal information, too. Unfortunately, as a relatively young (17 month anniversary is tomorrow, 3 April!) investment and research firm we don’t have time or the patience to try to analyze and write about what we find interesting, much less every thing that’s available. It’s clear, though, that some data are more important than others, because:

they have a higher information content,
their methodology is more robust,
they’re more timely,
they tend to “move the market”,
or they’re familiar to the public at large.

With the able assistance of intern Vu Ngo, a senior majoring in finance at Boise State University, we’ve “separated the economic wheat from the chaff” by creating a list of about 15 indicators on which our research will focus.

We segmented our list by the component of the economy about which it informs us. The list looks like this:

CONSUMER

Retail Sales
Univ of Michigan Consumer Sentiment
New & Existing Home Sales
Consumer Credit
Real Personal Consumption Expenditures (aka consumer spending)
Unemployment Situation
Consumer Price Index
S&P / Case-Shiller Home Price Index

BUSINESS

ISM Manufacturing Index
ISM Service Index
Durable Goods Orders
Industrial Production & Capacity Utilization
Productivity and Costs

FOREIGN TRADE

International Trade

OVERALL MACROECONOMIC ACTIVITY

GDP
Chicago Fed National Activity Index
Economic Cycle Research Institute Weekly Leading Index

Of course we’ll keep our finger on the pulse of other data, and this list may change if items lose their efficacy. We think, however, it strikes a good balance between data overload and having too narrow a focus.

Apr 02th

Weekly Economic Insight, 29 March – 2 April 2010

Author: Kenn Lamson

Comments: 0

The week ending 2 April saw indicators that provided incremental information on the consumer, housing, the manufacturing sector and unemployment. The ISM Manufacturing Index data came in especially strong, confirming our thesis that economic growth will continue to be lead by the industrial sector rather than households. While Friday’s Unemployment Situation report showed the most jobs created in 3 years, the underlying data was less satisfying.

This week’s data suggests economic growth firm enough to let the Fed continue its “exit strategy”. The 4Q09 inventory- and stimulus-driven growth spurt appears to be waning though, suggesting a significantly lower 1Q10 GDP print.

RELEASE (leading, coincident or lagging indicator)	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
Consumer Spending (leading)	February (MoM)	+0.3%	+0.3%	+0.5%	On an inflation-adjusted basis, MoM spending rose +0.3%.
S&P / Case-Shiller Home Price Index (lagging)	January 2010	145.32	N/A	145.90	On a seasonally adjusted basis home prices rose +0.3% month-over-month but fell -0.7% year-over-year. On an unadjusted basis, prices fell -0.4% MoM.
ISM Manufacturing Index (leading)	March	59.6	56.3	56.5	In March the manufacturing sector expanded for the eighth consecutive month and accelerated from February.
Unemployment Rate (lagging)	March	9.7%	9.7%	9.7%	Unemployment rate remained unchanged. According to the Household Survey the number of unemployed Americans was little changed at 15.0 million in March; this number has risen by 8.5 million since the official beginning of the recession in December 2007.
Nonfarm Payrolls (lagging)	March	+162K	+184K	-36K	The Establishment Survey showed a seasonally-adjusted gain of +41K jobs in goods-producing businesses and a gain of +82K in service-providing businesses.

CONSUMER SPENDING

On balance, consumer spending continued on its gradual uptrend. February’s increase was once gain lead by spending on nondurable goods (boosted by gasoline expenditures), which gained +0.7% month-over-month. Spending on durable goods was down -0.4% on weak auto sales; expenditures on services were up 0.3%. As a function of flat incomes (personal income rose less than +0.1% in February) and slightly higher spending, the monthly personal savings rate continued to decline, falling from a revised 3.4% in January to 3.1% in February.

We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, we hope to see spending growth driven by increases in wages and employment alongside an increasing savings rate and reduced outstanding consumer credit.

Personal Income (white) and Personal Consumption Expenditures (red),

$MM; Personal Savings (yellow), % of Disposable Personal Income

GRAPH: Bloomberg

S&P / CASE-SHILLER HOME PRICE INDEX

While the overall level of home prices appears to be slowly improving, this report suggests that the housing rebound that appeared last fall is fading. Only two of the 20 cities saw month-over-month price increases, and 4 cities reported new lows in prices. However, 9 cities saw year-over-year price improvement. Prices stand at their autumn 2003 levels and are down -29.6% from their summer 2006 peak.

As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.

ISM MANUFACTURING INDEX

While it represents a relatively small percentage of the economy, this report points to a continued strengthening and expansion of the manufacturing sector. The Index made up for January’s lackluster showing, and then some, with a 3.1 points month-over-month jump further into “growth” territory. Importantly, new orders accelerated for the ninth month and the order backlog remained in the expansionary range. The employment component of the Index contracted slightly but remained in positive territory, suggesting that manufacturers have reached their maximum productive capacity given existing resources and have begun to hire. The reading on inventories finally echoed the data reported in 4Q09 GDP, turning sharply higher by 8.0 points into solidly expansionary territory.

EMPLOYMENT SITUATION

The most closely-watched economic release of the week (and the month) was Friday’s Employment Situation. It’s somewhat confusing because it contains data from two surveys, the Household and the Establishment, that are conducted differently and therefore provide different estimates. Also, each Survey shows both Seasonally Adjusted and Not Seasonally Adjusted data, so getting a read on what’s actually happening is challenging. The “headline” numbers are the Unemployment Rate from the Household Survey and the Nonfarm Payrolls figure from the Establishment Survey, both of which are seasonally adjusted. For a broader discussion of the Employment Situation data, see our Economic Insight research entitled “Fun With Numbers” released 5 September 09.

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons rose by +134K during March, the second monthly increase. The average duration of unemployment lengthened again, to 31.2 weeks from 29.7 weeks –and a shocking 44.1% (6.5 million) of unemployed Americans remaining unemployed 27 weeks or longer. Those working part-time for economic reasons rose to 9.1 million from 8.8 million in February; about 2.3 million Americans were not in the labor force but wanted and were available for work but had not searched for work within the past 4 weeks. Because of the increase in the number of temporary and part-time workers, the broadest measure of labor underutilization, which also includes “marginally attached” and “discouraged” workers, rose to 16.9% in March from 16.8% in February.

According to the Household Survey the seasonally unadjusted unemployment rate for manufacturing jobs was 12.6%; for construction, 24.9%; agriculture, 18.0%; healthcare and education, 5.2%; and government, 3.9%.

UNEMPLOYMENT RATE

GRAPH: Bloomberg

Establishment Survey

The seasonally adjusted Establishment Survey data showed a gain of +41K jobs in goods-producing businesses and a gain of +82K jobs in service-providing businesses; this report appears to square with the ISM manufacturing survey data cited above.

The Survey showed gains in an increasing number of major private industry groups. As suggested by the Household Survey, temporary help services once again added a relatively large number of workers (+40K). Education and healthcare companies added +45K while trade, transportation and utilities grew by +31K. The construction sector saw its first job gain in many months, gaining +15K, while the important manufacturing sector gained +17K. Shedding jobs in March were the Information (-12K) and Financial (-21K) sectors. Government employment totals rose +39K, with local government shedding -5K while the Federal government added +48K Census workers.

Average hourly earnings were $22.47 in March, down $0.01 from February but up $0.39 from a year ago. Month-over-month Increases have been modest but relatively consistent, reinforcing the idea that wage pressures are nonexistent.

The average private work-week regained its February retreat, lengthening by +0.1 hours to 34.0 hours. The longest work-weeks were recorded in Mining & Logging (43.0 hours), Utilities (40.8 hours) and Durable Goods manufacturing (40.3 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (25.7 hours), Retail (31.2 hours) and Education & Healthcare (32.8 hours).

The “birth / death” model created 81K jobs in March.

MONTH-OVER-MONTH CHANGE IN NONFARM PAYROLLS

GRAPH: Bloomberg

Analysis

The Establishment Survey has a “large company” bias; the “birth/death model” is used to estimate the number of jobs created by small companies. Given the importance of small businesses in our economy, we believe (and the historical record would suggest) that these firms are the “canary in the coalmine” of domestic economic activity, since they have less cash on the balance sheet, less access to credit, and less exposure to overseas markets than large companies. Consequently, we prefer to emphasize the Household Survey in our analyses.

We note the increased importance of investigating the underlying trends in this and subsequent months’ reports in order to look through potentially obscuring factors:

The temporary hiring of hundreds of thousands of Census workers.
The fact that as the economy begins to improve workers that have previously excluded themselves from the labor force resume applying for unemployment benefits, so the labor force participation and unemployment rates rise.

We see Friday’s release as offering mixed signals:

The “headline” numbers were basically neutral: The unemployment rate remained unchanged and nonfarm payrolls were up +162K, but most of the gain was from the hiring of almost 50K temporary Census workers and 81K jobs created by the “birth/death” model.
The Household Survey’s reported seasonally-adjusted month-over-month increase by +264K in the number employed Americans but an increase of +134K in the number of unemployed.
About 238K workers joined the labor force, pushing the participation rate up one-tenth to 64.9%, a plus.
Average hourly earnings fell, but the work-week lengthened.
The broadest measure of under- and unemployment rose again, predominantly due to a sharp increase in the number of Americans working part-time for economic reasons.
The percentage of “long-term unemployed” workers continued to rise and is painfully high. We have to question whether the jobs these workers performed are permanently lost as some industries are undergoing permanent structural change.

A rather sobering realization is the fact that if this recovery were “normal”, the economy should be generating substantially more jobs than were are currently seeing. According to economist and strategist David Rosenberg, 2.5 years after the Fed begins to ease, the economy is usually generating about 150K jobs per month; job gains after a quarter of 5.6% GDP growth (like we saw in 4Q09) are usually about 215K per month. The gulf between “what should be” and “what is” highlights the difficulty the economy’s government handlers will have getting it up off the mat.

Mar 26th

Pepsi Gets a Makeover

Author: Chris

Comments: 0

Courtesy of The Economist

Pepsi gets a makeover

Taking the challenge

The giant drinks-and-snacks firm attempts to wean itself off sugar, salt and fat

Mar 25th 2010 | NEW YORK | From The Economist print edition

COCA-COLA once famously defined its market as “throat share”, meaning its stake in the entire liquid intake of all humanity. Not to be outdone, Indra Nooyi, the boss of Coke’s arch-rival, PepsiCo, wants her firm to be “seen as one of the defining companies of the first half of the 21st century”, a “model of how to conduct business in the modern world.” More specifically, she argues that Pepsi, which makes crisps (potato chips) and other fatty, salty snacks as well as sugary drinks, should be part of the solution, not the cause, of “one of the world’s biggest public-health challenges, a challenge fundamentally linked to our industry: obesity.”

To that end, on March 22nd she unveiled a series of targets to improve the healthiness of Pepsi’s wares. By 2015 the firm aims to reduce the salt in some of its biggest brands by 25%; by 2020, it hopes to reduce the amount of added sugar in its drinks by 25% and the amount of saturated fat in certain snacks by 15%. Pepsi also recently announced that it would be removing all its sugary drinks from schools around the world by 2012.

Although Ms Nooyi talks about the need to “cherish” employees, and once wrote to the parents of her senior managers thanking them for bringing up such wonderful offspring, she rejects the notion that these goals are soft-headed or decorative. She argues that they are necessary to prevent food companies from going the way of tobacco firms, which are perennially held responsible by governments for the health problems associated with their products, and penalised accordingly. As it is, several countries in Europe and various localities in America have banned trans fats, a particularly unhealthy ingredient in much junk food. A bill introduced earlier this month in New York’s state assembly proposes banning salt in restaurants. Michelle Obama, America’s first lady, has launched a campaign against obesity among children.

In the 1990s virtually all of Pepsi’s products were bad for you—or “fun for you”, as the firm likes to put it. Under Ms Nooyi, who became boss in 2006, it has stepped up its diversification into products it calls “better for you” and “good for you”, including fruit juices, nuts and porridge (oatmeal, to Americans). Ms Nooyi does not see this as a case of trading profits for virtue. Instead, she insists both are possible—an idea expressed in the firm’s syrupy motto: “Performance with purpose.”

There is no shortage of sceptics, both about the sincerity of Pepsi’s social mission and, more recently, its performance, which was decidedly flat in 2009. Indeed, this week, at the firm’s first meeting with investment analysts since 2006, in New York’s Yankee Stadium, Ms Nooyi admitted to a series of disappointments, before promising that lessons had been learned and that “we won’t make the same mistakes.” As well as being hurt by the economic downturn, Pepsi suffered from a flawed financial hedging strategy that left it paying too much for commodities. And it has suffered from some recent marketing disasters, including a campaign for Tropicana fruit juice that is widely regarded as one of the worst brand makeovers since Coca-Cola launched New Coke.

Yet investors seem to be taking seriously Ms Nooyi’s claim that Pepsi’s future is bright. It helps that the firm has raised its dividend and announced a big share buyback. Investors also seem to be reappraising Pepsi’s decision last year to acquire the two independent firms that bottle its drinks. The deal had received a tepid reception, not least because Coca-Cola had insisted that keeping syrup-making and bottling separate made sense. Now, however, Coca-Cola has decided to follow Pepsi’s lead by acquiring its main bottler—a move Ms Nooyi describes as “vindication”.

The hope is that integrating the bottling company into Pepsi will bring greater control over an increasingly diverse drinks portfolio, and promote cross-marketing between the food and drink divisions (not something that Coca-Cola’s acquisition will help with much, as it does not own a large snack operation). Pepsi, which jointly markets several different brands, dubs the clout this gives it with retailers and customers “Power of One”. The bottling acquisition should boost this tactic by ending the need to negotiate a division of the spoils on every big deal. When Wal-Mart calls asking for a joint promotion of, say, Pepsi and Doritos, as it did for the Super Bowl in February, Pepsi can “respond in 24 hours, instead of six weeks.”

Ms Nooyi wants to take this idea further, with a strategy she snappily dubs “Power of Power of One”. By that she means partnerships with other firms to cut the cost of procurement, or research and development. Pepsi has already signed a supplies and ad-purchasing deal with Anheuser-Busch, a big brewer.

In the long run, much will depend on the success of Pepsi’s strategy to convince the public and regulators that it is on the side of reducing obesity, not creating it. This strategy will have several prongs, including reducing the amount of obviously unhealthy ingredients in its existing products, adding new healthier products to its portfolio, promoting healthier lifestyles and trying to point the finger of blame away from how many calories people consume to how few calories they burn. “Why aren’t we going after computer and cable-TV companies for creating a sedentary lifestyle?” asks Ms Nooyi.

Pepsi’s growing portfolio of “good for you” products now accounts for around $10 billion in revenues (nearly a fifth of the total). Ms Nooyi expects that figure to grow to $30 billion within ten years. The firm has been hiring an army of experts on health to work in its research and development business, to give credibility to its claim that it is applying science to creating products that are better for its customers. Mahmood Khan, a British-born doctor recruited to run Pepsi’s R&D at the start of 2008, says he has been “pleasantly surprised by how rapidly this new health agenda has been embraced.”

Pepsi already claims to be making significant progress in making its “fun-for-you products better for you” by voluntarily removing trans fats long before it was required to do so, and reducing the amount of sugar, fat and salt. There is now less salt in a packet of crisps, claims Dr Khan, than in a slice of white bread.

Quaker, which makes porridge, cereal, cereal bars and rice crackers, is Pepsi’s leading healthy brand. Pepsi hopes to use its expertise in product design and packaging to make these goods more enticing, especially to children at breakfast time. It is already testing oatmeal drinks and biscuits, as well as new flavours of porridge. Quaker Oats packaging will also get a more contemporary look, although the black-hatted Quaker mascot will survive. “Our goal”, says Ms Nooyi, in typically forthright style, “is to rewrite the rules of breakfast.”

There is no doubting the seriousness of Ms Nooyi’s drive to increase Pepsi’s sales of healthy products. But it will not be easy to push them without undermining sales of its other, less wholesome wares or appearing to nanny its customers. Moreover, politicians and public-health campaigners may not regard selling more healthy products, while continuing to profit handsomely from unhealthy ones, as the best way to tackle obesity.

Mar 05th

Weekly Economic Insight: 1 March – 5 March 2010

Author: Kenn Lamson

Comments: 0

The week ending 5 March 2010 saw the manufacturing sector post somewhat slower growth than expected but services moving further into expansionary territory. The American consumer may have recently loosened the purse-strings, with both spending and credit rising more than expected.

RELEASE

(leading, coincident, or lagging indicator)

PERIOD

ACTUAL

EXPECTED

LAST

HIA COMMENT

Consumer Spending (leading)

January (MoM)

+0.5%

+0.4%

+0.2%

On an inflation-adjusted basis, MoM spending rose 0.3%.

ISM Manufacturing Index (leading)

February

56.5

57.5

58.4

In February the manufacturing sector expanded for the seventh consecutive month, albeit at a slower pace than January.

Construction Spending (leading)

January (MoM)

-0.6%

-0.8%

-1.2%

Construction spending continued its downward trend. A drop in non-residential spending was the primary culprit.

ISM Services Index (leading)

February

53.0

51.0

50.5

The ISM’s non-manufacturing index rose again and moved further into expansionary territory in February. The important new orders component grew for the sixth consecutive month.

Factory Orders (leading)

January (MoM)

+1.7%

+2.0%

1.0%

Orders for durable goods, already released, rose +2.6%; nondurable goods were up +0.9%.

Productivity

4Q09 (QoQ)

+6.9%

+6.3%

+6.2%

Output jumped +7.6% while hours worked only rose +0.6%.

Unit Labor Costs

4Q09 (QoQ)

-5.9%

-4.5%

-4.4%

Since productivity rose faster than compensation, ULC dropped.

Unemployment Rate (lagging)

February

9.7%

9.8%

9.7%

Unemployment rate remained unchanged. According to the Household Survey the number of unemployed Americans rose by 34K to 14.9 million in February; this number has risen by 8.4 million since the official beginning of the recession in December 2007.

Nonfarm Payrolls (lagging)

February

-36K

-50K

-20K

The Establishment Survey showed a seasonally-adjusted drop of -60K jobs in goods-producing businesses, versus a gain of +42K in service-providing businesses.

Consumer Credit (lagging)

January

+$5 billion

-$4.0 billion

-$1.8 billion

Consumer credit rose for the first time in a year.

CONSUMER SPENDING

On balance, consumer spending continued on its gradual uptrend, and for a change was at a faster rate than expected. January’s increase was lead by spending on nondurable goods (boosted by gasoline expenditures), which gained 1.8% month-over-month. Spending on durable goods was up only 0.1% and services up 0.2%. The monthly personal savings rate fell from a revised 4.2% in December to 3.3% in January. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.

GRAPH: Bloomberg

ISM MANUFACTURING INDEX

While it represents a relatively small percentage of the economy, this report points to a continued expansion of the manufacturing sector. While the survey fell back from January’s surprisingly good reading, the Index level indicates solid growth. Growth appeared in 11 of 16 industries surveyed. Importantly, new orders accelerated for the eighth month and the order backlog grew for the second month. The employment component of the Index rose by nearly three points further into positive territory, suggesting that manufacturers have reached their maximum productive capacity given existing resources and have begun to hire. Inventories remain extremely lean.

GRAPH: ISM

CONSTRUCTION SPENDING

A -1.4% month-over-month decline in non-residential spending was the primary driver of the January decline. Residential construction spending rose +1.1% in January while government spending fell -0.7%. Year-over-year, total construction spending declined -9.3%.

Weakness in construction spending is a double-edged sword: Positively, a slower rate of construction makes it easier for the large volume of vacant, foreclosed or otherwise distressed homes and other buildings to be absorbed; negatively, however, continued contraction of this sector of the economy removes a potential driver of employment and incomes. Clearly it’s unlikely that construction will be a broad-based engine of economic growth in the near future.

GRAPH: Bloomberg

White = actual; Red = revised

ISM SERVICES INDEX

Beating the consensus of analysts’ expectations, the Index rose further above the 50.0 mark, indicating continued expansion of the critical service sector. Growth was seen in the “information”, “arts, entertainment & recreation” and “transportation” industries. Growth of the new orders component for the sixth consecutive month is also encouraging. However, the Index’s employment component showed a slower rate of contraction but remains at a dismal level. Also concerning is that only 9 of 18 industries expanded, with 8 continuing to contract.

GRAPH: ISM

FACTORY ORDERS

Growth in new orders was solid for both nondurable goods and durable ones in January. Orders were strongest in nondefense aircraft & parts and defense communication equipment (last month’s weakest groups). New order growth was weakest in power transmission equipment and photographic equipment. Basically an updated version of last week’s Durable Goods Orders release, the durable goods side of this series tends to be fairly volatile since it includes high value transportation items such as aircraft and ships.

GRAPH: Bloomberg

PRODUCTIVITY AND COSTS

Unsurprisingly, since unemployment has risen while manufacturing has apparently begun to rebound, labor productivity – the amount of goods and services produced per worker – rose sharply in the fourth quarter of 2009. As companies sliced payrolls and benefits, Unit Labor Costs – the ratio of hourly compensation to productivity – of course declined.

While this data is by now old news, it reinforces that, since labor-related costs are the vast majority of expenses for most companies, consumer-level inflation is unlikely to become a problem in the near-term.

GRAPH: Bloomberg

Quarter-over-Quarter change in Labor Productivity (white) and Unit Labor Costs (red)

EMPLOYMENT SITUATION

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons rose by +34K during February, interrupting the decline from prior months. Full-time workers have declined by -4.0 million over the past year while part-time workers have increased by about +1 million. About 8.8 million Americans are employed part-time because of slack business conditions or because they could only find part-time work, up from 8.3 million in January. Multiple job-holders remained relatively stable at 5.1% of the total employed. The average duration of unemployment shortened slightly in February to 29.7 weeks from 30.2 weeks – about 7 months – but an alarming 40.9% (6.1 million) of unemployed Americans remaining unemployed 27 weeks or longer. Because of the increase in the number of temporary and part-time workers, the broadest measure of labor underutilization, which also includes “marginally attached” and “discouraged” workers, rose to 16.8% in February from 16.5% in January.

According to the Household Survey the unemployment rate for manufacturing jobs was 12.1%; for construction, 27.1%; agriculture, 18.8%; healthcare and education, 5.6%; and government, 4.0%.

GRAPH: Bloomberg

UNEMPLOYMENT RATE

Establishment Survey

The seasonally adjusted Establishment Survey data showed a drop of -60K jobs in goods-producing businesses versus a gain of +42K jobs in service-providing businesses; notably, this report appears at odds with the ISM manufacturing and nonmanufacturing survey data cited above.

While the overall number showed a small (-18K) decline, the Survey showed gains in many major private industry groups. As suggested by the Household Survey, temporary help services once again added a relatively large number of workers (+48K) and healthcare & social assistance companies added +20K. Meanwhile, the construction sector continued to bleed jobs, losing another -64K and transportation & warehousing lost another -12K. Government employment totals fell by -18K, with local government shedding -31K while the Federal government added +16K.

Average hourly earnings were $22.46 in January, up $0.01 from January and $0.41 from a year ago. Month-over-month Increases have been modest but consistent, reinforcing the idea that wage pressures are nonexistent.

The average private work-week shortened by -0.1 hours to 33.8 hours. The longest work-weeks were recorded in Mining & Logging (42.6 hours), Utilities (40.6 hours) and Durable Goods manufacturing (39.8 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (25.7 hours), Retail (31.2 hours) and Education & Healthcare (32.6 hours).

GRAPH: Bloomberg

MONTH-OVER-MONTH CHANGE IN NONFARM PAYROLLS

Analysis

According to the BLS the massive snowstorms that hit the US (especially the east coast) probably didn’t skew the February unemployment stats. However, according to the BLS, “In order for severe weather conditions to reduce the estimate for payroll unemployment, employees have to be off work for an entire pay period and not be paid for the time missed. While some persons may have been off payrolls during eh survey reference period, some industries, such as those dealing with cleanup and repair activities, may have added workers.”

We see Friday’s release as offering mixed signals:

The “headline” numbers were basically neutral: The unemployment rate remained unchanged and nonfarm payrolls were -36K.
The Household Survey’s reported seasonally-adjusted month-over-month increase of +308K in the number of unemployed Americans and an increase by +34K in the number employed.
The broadest measure of under- and unemployment rose again, predominantly due to a sharp increase in the number of Americans working part-time for economic reasons.
The percentage of “long-term unemployed” workers fell slightly but remains painfully high.
The labor force participation rate moved up one-tenth to 64.8%, a plus.
Average hourly earnings rose, but the work-week shortened.

A rather sobering realization is the fact that if this recovery were “normal”, the economy should be generating substantially more jobs than were are currently seeing. According to economist and strategist David Rosenberg, 2.5 years after the Fed begins to ease, the economy is usually generating about 150K jobs per month; job gains after a quarter of 5.9% GDP growth (like we saw in 4Q09) are usually about 215K per month. The gulf between “what should be” and “what is” highlights the difficulty the economy’s government handlers will have getting it up off the mat.

CONSUMER CREDIT

Consumer credit outstanding rose in January for the first time in a year. Non-revolving credit, such as auto loans, actually rose 5.0% (a continuation of January’s 3.7% increase). Revolving credit like credit cards fell at a much slower rate, dropping -2.3% on top of last month’s -12.9% plummet. The decline reflects both consumer pay-downs and tightened credit standards.

GRAPH: Bloomberg

Feb 12th

Credit Card Changes This Month

Author: Chris

Comments: 0

Consumer Alert: Check Your Credit Card Statements This Month

Dale Dixon

Published: Yesterday

As your credit card statement arrives in the mail this month and March, start looking for a few changes. On Feb. 22, new consumer protections kick in, thanks to the Credit Card Accountability Responsibility and Disclosure Act of 2009.

About 75 percent of cardholders admit to not reading the terms and conditions of their credit cards, according to a CreditCards.com survey.

Remember: The large print giveth and the fine print taketh away. Here are a few items you might find interesting:

MORE NOTICE FOR INTEREST RATE CHANGES: Card issuers must give card holders 45 days advance notice in the event of an interest rate change. Additionally, promotional rates must apply for at least six months, and, unless disclosed up front, card holders cannot have their rate increased in the first year.

CARDHOLDER OPT-OUT: If there are significant changes made to the terms of the account, card holders can choose to reject those changes and will have five years to pay off the balance under the original terms.

Older Age Restrictions Added: Card issuers are no longer allowed to issue a credit card to people under 21 unless they can prove they have the means to repay debt or if an adult older than 21 co-signs on the account. Credit card companies also face new restrictions on how they can promote cards to college students.

NEW RULES FOR MONTHLY STATEMENTS: In response to complaints that bill due dates were being moved up – and leading to increased late fees – monthly statements must now be mailed or delivered 21 days before the due dates. Additionally, card issuers no longer can set a payment deadline before 5 p.m. and cannot charge card holders if they pay online, over the phone or by mail – unless the payment is made over the phone either on the due date or the previous day.

OVERPAYMENTS GO TOWARD HIGHEST INTEREST BALANCES: If the card holder has varied interest rates for different services or accounts, any overpayments must be applied to the account that is incurring the highest interest rate.

OVER THE LIMIT OPT-IN: Card holders must opt-in to be able to exceed their credit limit – and subsequently be charged an over-limit fee by the issuer. If card holders choose not to opt-in, then they will not be able to exceed their credit limit and incur any fees.

INCREASED DISCLOSURE ON MINIMUM PAYMENTS: Card issuers must disclose how long it will take card holders to pay off their bill if they only pay the minimum monthly payment as well as how much the card holder would need to pay every month to pay off the balance in 36 months.

SAY GOODBYE TO DOUBLE-BILLING CYCLES: When calculating finance charges, card issuers can no longer employ two-cycle or double billing – a method that causes cardholders to pay interest on previously paid balances.

Dale Dixon is president and CEO of the Better Business Bureau, a not-for-profit organization serving Southwest Idaho and eastern Oregon. Reach him at 342-4649 or ddixon@boise.bbb.org.

Feb 05th

Weekly Economic Insight: 1 Feb – 5 Feb 2010

Author: Kenn Lamson

Comments: 0

Two significant economic releases bookended the week: The stock market rallied solidly on Monday’s much better-than-expected ISM Manufacturing survey, while Friday’s unemployment figures saw a drop in the reported unemployment rate. Of special note within the Employment Situation report was the overstatement of job creation by the BLS’s Birth / Death Model between April 2008 and December 2009 to the tune of 1.184 million jobs. Despite its relatively small weight in the US economy, manufacturing appears to be leading the economy out of recession. The consumer, however, continues to retrench.

RELEASE

(leading, coincident, or lagging indicator)

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

ISM Manufacturing Index (leading)

January

58.4

55.0

55.9

Manufacturing sector expanded for the sixth consecutive month in January, and accelerated from December.

Construction Spending (leading)

December (MoM)

-1.2%

-0.5%

-0.6%

Construction spending continued its earlier downward trend. Downside acceleration in private residential spending was the primary culprit.

Consumer Spending (leading)

December (MoM)

0.2%

0.3%

0.5%

On an inflation-adjusted basis, MoM spending rose 0.1%.

ISM Non-manufacturing Composite (leading)

January

50.5

51.0

49.8

The ISM’s non-manufacturing index rose slightly and moved into expansionary territory in December. The important new orders component grew for the fifth consecutive month.

Factory Orders (leading)

December (MoM)

1.0%

0.5%

1.1%

Orders for both durable and nondurable goods rose 1.0%.

Unemploy-ment Rate (lagging)

January

9.7%

10.1%

10.0%

Unemployment rate unexpectedly declined. According to the Household Survey the number of unemployed Americans declined by -430K to 14.8 million in January; this number has risen by 8.4 million since the official beginning of the recession in December 2007.

Nonfarm Payrolls (lagging)

January

-20K

-85K

The seasonally adjusted data show a drop of -60K jobs in goods-producing businesses, versus a gain of 48K in service-providing businesses.

Consumer Credit (lagging)

December

-$1.8billion

-$10.0 billion

-$17.5 billion

Consumer credit continued to decline in December, but by much less than was anticipated.

ISM MANUFACTURING INDEX

While it represents a relatively small percentage of the economy, this report clearly confirms an improving manufacturing sector. This was the highest reading of the Index since August 2004. Growth appeared in 13 of 16 industries surveyed. Importantly, new orders accelerated for the seventh month and the order backlog grew for the first month. The employment component of the Index rose by three points into solidly positive territory, suggesting that manufacturers have reached their maximum productive capacity given existing resources and have begun to hire. Inventories remain extremely lean.

Level of ISM Manufacturing Index, 2004-date

CONSTRUCTION SPENDING

A -2.8% month-over-month decline in residential spending was the primary driver of December’s shortfall. Nonresidential construction spending rose 0.2% in December while government spending fell 1.2%. For all of 2009, construction spending declined 12.4% from 2008.

Month-over-month change in Construction Spending, 2005-date

CONSUMER SPENDING

On balance, consumer spending continued on its gradual uptrend, albeit (once again) at a slower rate than expected. December’s increase was lead by spending on services, which gained 0.5% month-over-month. Spending on durable goods was flat while spending on nondurables fell -0.6%. The personal savings rate increased from a revised 4.5% in November to 4.8% in December. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.

Month-over-month change in Consumer Spending, 2005-date

ISM NON-MANUFACTURING INDEX

Although it failed to meet the consensus of analysts’ expectations, the Index shifted back above the 50.0 mark, indicating expansion of the critical service sector. Growth was seen in the “other services”, “information”, “utilities” and “wholesale trade” industries. Growth of the new orders component for the fifth consecutive month is also encouraging. However, the Index’s employment component showed a slower rate of contraction but remains at a dismal level.

Level of the ISM Non-manufacturing Index, 2005-date

FACTORY ORDERS

Growth in new orders was solid for both nondurable goods and durable ones in December. New order growth was strongest in construction machinery, power transmission equipment and metalworking machinery. Orders were weakest in nondefense aircraft & parts and defense communication equipment. Basically an updated version of last week’s Durable Goods Orders release, the durable goods side of this series tends to be fairly volatile since it includes high value transportation items such as aircraft and ships.

Month-over-month change in Factory Orders, 2005-date

EMPLOYMENT SITUATION

Household Survey

Adjusted for seasonal variations, the Household Survey data showed that the number of unemployed persons fell by -430K during January, continuing the decline from prior months. Full-time workers have declined by -4.0 million over the past year while part-time workers have increased by 100K. About 8.3 million Americans are employed part-time because of slack business conditions or because they could only find part-time work, down from 9.2 million in December. Multiple job-holders rose slightly to 5.2% of the total employed. The average duration of unemployment extended another week to 30.2 weeks – about 7 months – with an alarming 41.2% of unemployed Americans remaining unemployed 27 weeks or longer. Because of the decline in the number of temporary and part-time workers, the broadest measure of unemployment, which includes “marginally attached” and “discouraged” workers, declined to 16.5% from 17.3% in December.

According to the Household Survey the unemployment rate for manufacturing jobs was 13.0%; for construction, 24.7%; agriculture, 21.3%; healthcare and education, 5.5%; and government, 4.3%.

TOP GRAPH: “Headline” (U-3) unemployment rate – white; broadest reported measure (U-6) – orange

BOTTOM GRAPH: U-6 rate less U-3 rate

Establishment Survey

The seasonally adjusted Establishment Survey data showed a drop of -60K jobs in goods-producing businesses versus a gain of 48K jobs in service-providing businesses; notably, this report appears at odds with the ISM manufacturing and nonmanufacturing survey data cited above.

The Survey showed gains in many major private industry groups. Retail trade was reported to have added 42K jobs during January while temporary help services added 52K and motor vehicle & parts companies added 22.7K. Meanwhile, the construction sector lost -75K and transportation & warehousing lost -19K. Government employment totals fell by -8K.

Average hourly earnings were $22.45 in January, up $0.04 from December and $0.44 from a year ago. While increases from November varied by industry, year-over-year gains were broad-based, with declines in only a handful of industries.

The average work-week lengthened by 0.1 hours to 33.9 hours. The longest work-weeks were recorded in Mining & Logging (42.7 hours), Utilities (40.6 hours) and Durable Goods manufacturing (40.0 hours). The shortest hours were, unsurprisingly, in Leisure & Hospitality (25.6 hours), Retail (31.1 hours) and Education & Healthcare (32.7 hours).

Monthly change in nonfarm payrolls, 2005-date

Analysis

There were enormous seasonal adjustments to Friday’s report. For instance, while the seasonally adjusted change in Establishment Survey payrolls was only -20K, the non-seasonally adjusted figure plummeted -2.819 million.

Also, revisions to the historical data were included with Friday’s report that make historical comparison difficult. Of special note was the overstatement of job creation by the BLS’s Birth / Death Model between April 2008 and December 2009 to the tune of 1.184 million jobs. Quoting our Economic Insight “Fun With Numbers”, Harmonic feels compelled to question the usefulness of a model that creates from thin air a substantial number of jobs in a given month, in an environment in which companies that are too small or new to be officially surveyed may have difficulty finding financing.

Notwithstanding the huge seasonal adjustments and revisions that make drawing a conclusion difficult, Friday’s release is marginally positive:

The Household Survey’s reported seasonally-adjusted month-over-month decline of -430K in the number of unemployed Americans and an increase by 541K in the number employed.
The broadest measure of under- and unemployment declined sharply, predominantly due to a 10% decline in the number of Americans working part-time for economic reasons.
The length of the average work-week continued to creep higher, although it remains near its record low.
Average hourly earnings rose.

Additionally, the number of Americans considered “not in the labor force” fell by about 200K; the labor force participation rate rose from 64.6% to 64.7%. However, the extremely long average period of unemployment is also of great concern. It should further give one pause to note that the same number of Americans are now employed – 129.5 million – as in 1999, while the working-age population has increased by 29 million.

graph courtesy of CalculatedRiskBlog.com

CONSUMER CREDIT

Consumer credit outstanding dropped again in December, but nowhere near to the degree that was expected. Non-revolving credit, such as auto loans, actually rose 5.2% (a reversal of last month’s -6.1% decrease); in fact, auto sales were the strongest in December since August of last year. Revolving credit like credit cards continued its precipitous decline, dropping -11.7% on top of last month’s -18.6% plummet. The decline reflects both consumer pay-downs and tightened credit standards.

Consumer Credit outstanding, 2004-date

Dec 24th

Weekly Economic Insight: 21 Dec – 24 Dec

Author: Kenn Lamson

Comments: 0

RELEASE	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
*(leading, coincident, or lagging indicator)*	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
GDP (lagging)	3Q09 final	2.2%	2.7%	3.5%	The lowered estimate of third quarter economic activity was primarily driven by downward revisions to consumer and business spending.
Existing Home Sales (leading)	November	6.54M	6.25M	6.10M	Sales spiked as first-time buyers and those purchasing “distressed” homes drove demand.
Consumer Spending (leading)	November (MoM)	0.5%	0.6%	0.7%	On an inflation-adjusted basis, MoM spending rose 0.2%.
Univ of Michigan Consumer Sentiment (leading)	November	72.5	73.5	73.4	American consumers’ opinion about the economy remained quite sour in November, although this was the highest reading in 3 months.
New Home Sales (leading)	November	355K	440K	430K	New home sales tumbled 11% MoM at the same time the prior two months were also revised lower.
*Durable Goods Orders (leading)*	November	0.2%	0.5%	-0.6%	Orders excluding transportation rose 2.0% month-over-month.

“FINAL” GDP

This release is a look into the relatively distant past; the 1.3% variance between the initially released figure and today’s final one demonstrates the sometimes substantial revisions that change the image as the picture becomes more clear. This was our third and last look at 3Q GDP, which was revised downward more than expected. If the obvious stimulative effect of “cash-for-clunkers”, the first-time homebuyer’s tax incentive, and other measures were removed, the growth rate would clearly be significantly lower. The downward revisions to consumer and business spending are troubling, since (1) business investment is a precursor of stability in the manufacturing sector, widely touted as likely to be a key driver of the US economy out of recession, and (2) as we have consistently observed, since the US consumer represents about 70% of economic activity, demand from that sector is critical. As a reminder, these are the same categories that were also revised lower in last month’s second, “preliminary” GDP release. Given the historical nature of this data, however, conclusions to be drawn are tentative at best.

EXISTING HOME SALES

Government stimulus is clearly underpinning the housing market, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November. According to the National Association of Realtors, over half of November’s buyers were “first-time”. Scavenging was also a driver of sales volume, with 33% of November sales either “short sales” or foreclosed homes. All-cash purchases were 19% of the total. It’s reasonable to assume that without sharply higher interest rates or other negative factor intervening, we’ll see another surge of first-time buyers in March and April.

The housing market’s also being supported in a less obvious way, through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end in early 2010; it’s an easy bet that rates will rise as we approach that date and thereafter.

Positively, the reported estimate of existing homes for sale continued to fall; the measure now stands at 6.5 months. However, it must be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market. According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

CONSUMER SPENDING

Consumer spending continued on its gradual uptrend, albeit at a slower rate than expected. November’s increase was lead by nondurable items, which jumped 1.4% month-over-month. The personal savings rate remained at 4.7%, the same as in October. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.

CONSUMER SENTIMENT

Within the U of M Consumer Sentiment Index, the measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, leapt to 79.1 in November from 68.8 in October and 73.7 in September. The index of expectations six months from now, which more closely projects the direction of consumer spending, rose slightly to a still-dismal 68.9 from 66.5.

NEW HOME SALES

The margin of error for New Home Sales month-over-month decrease was 11.0%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Midwest region saw an uptick. As with existing home sales, the spike in new home sales can in part be attributed to the recently-extended and expanded first-time homebuyer tax credit. Without the seasonal adjustment new home sales are down year-to-date -23.9%.

The inventory-to-sales ratio now stands at 7.9 months, up from October but down from a peak of 12.4 months. As with the existing home sales data, it must be kept in mind that the reported figures ignore the overhang of foreclosed and delinquent properties that have yet to be officially put on the market. The sudden downward move in the new homes sales figures is a reminder of the perils of predicting a rebound in the housing market by extrapolating trends based on sketchy data.

DURABLE GOODS ORDERS

Orders for new long-lived goods maintained their reputation for volatility, spiking higher in November after a plunge in October and an earlier surge in September. Growth in new orders appeared broad-based, including communications equipment (+4.0%), computers & electronics (+3.7%), machinery (+3.5%) and electrical equipment (+3.2%). Weakness was centered in the transportation equipment, especially nondefense aircraft (-32.6%) and defense aircraft (-3.2%). Over the past 12 months durable goods orders have dropped -21.6%.

Durable goods inventories continued to fall in November, frustrating those that have for months have predicted increases in production to restock. The relatively broad based gains in new orders and the slow but (relatively) steady growth in the industrial sector may portend the end of this trend, however. The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.

Nov 25th

Weekly Economic Insight, 23 November – 27 November

Author: Kenn Lamson

Comments: 0

RELEASE	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT

*(leading, coincident, or lagging indicator)*
Existing Home Sales (leading)	October	6.10M	5.70M	5.57M	Removing seasonal adjustments that call into question the accuracy of the “headline” figure, existing home sales rose 6.6% from September and 20.8% from a year ago.
GDP (lagging)	3Q09 preliminary	2.8%	2.8%	3.5%	The lowered estimate of third quarter economic activity was primarily driven by an upward revision to imports and downward revisions to consumer and business spending.
S&P Case-Shiller 20-city Home Price Index (lagging)	September	146.5	NA	146.0	The rate of price declines fell for the fifth consecutive month, to -9.4% compared to the same month last year. Nineteen of the 20 MSAs showed year-over-year improvement in prices and 9 showed month-over-month raises. Prices stand at their autumn 2003 levels.
*Durable Goods Orders (leading)*	October	-0.6%	0.5%	2.0%	Orders excluding transportation fell -1.3% and excluding defense-related items rose 0.4%. Monthly bright spots included orders for primary metals (+3.6%), electrical equipment (+2.7%) and nondefense aircraft and parts (+50.8%). Weakness was seen in defense aircraft (-6.5%), computers (-7.2%) and machinery (-8.0%). Over the past 12 months durable goods orders have dropped -23.0%.
Consumer Spending (leading)	October (MoM)	0.7%	0.5%	-0.6%	On an inflation-adjusted basis, MoM spending rose 0.4%.
Univ of Michigan Consumer Sentiment (leading)	November	67.4	67.0	70.6	American consumers’ opinion about the economy remained very sour in November. October’s figure was revised upward from 66.0.
New Home Sales (leading)	October	430K	410K	405K	New home sales have risen 31% from their cycle low in January 2009. The inventory-to-sales ratio now stands at 6.7 months, down from a peak of 12.4 months.

Positively, the estimate of housing stock outstanding continued to fall; the measure now stands at 7 months. Government stimulus is clearly underpinning the housing market, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November. The housing market’s also being supported in a less obvious way, through the Federal Reserve purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns.

This week’s release is our second look at 3Q GDP, which was revised downward as expected. If the obvious stimulative effect of “cash-for-clunkers”, the first-time homebuyer’s tax incentive, and other measures were removed, the growth rate would clearly be significantly lower. The downward revisions to consumer and business spending are troubling, since (1) business investment is a precursor of stability in the manufacturing sector, widely touted as likely to be a key driver of the US economy out of recession, and (2) as we have consistently observed, since the US consumer represents about 70% of economic activity, demand from that sector is critical.

Orders for new long-lived goods rebounded lower from a surge in September. While a useful anticipatory measure of manufacturing sector activity, the data on durable goods orders is a very volatile series.

As expected consumer spending data was boosted by the “cash-for-clunkers” program. Personal savings declined slightly, to 4.4% from 4.6% in September.

Within the U of M Consumer Sentiment Index, the measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, fell to 68.8 from 73.7, which was the highest in a year. The index of expectations six months from now, which more closely projects the direction of consumer spending, decreased to 66.5 from 68.6.

The margin of error for New Home Sales 6.2% month-over-month increase was 17.6%, so as usual the initial estimate should be taken with a grain of salt. Also, the gains were not distributed evenly across the US, as the South saw most of the uptick. As with existing home sales, the spike in new home sales can in part be attributed to the recently-extended and expanded first-time homebuyer tax credit. The declining volume of new homes for sale reflects both that purchase activity has increased and that, as indicated in the recently discussed construction statistics, homebuilders have slowed the pace at which they’ve added to the housing stock.

Oct 30th

Weekly Economic Insight: 26 Oct – 30 Oct

Author: Kenn Lamson

Comments: 0

Many of this week’s releases failed to reach the consensus estimates, weighing on an already heavy-feeling market.

Arguably the “less negative” print on the Case-Shiller Home Price Index is due to bargain hunting in deeply oversold housing markets. The breadth of the move higher is encouraging, though, as is its four month trend.

Dampening the marginally positive news of the Case-Shiller data was the lower-than-expected new home sales figure. The decline in this report was undoubtedly due to the expiration of the $8000 first-time homebuyer credit. Since new home sales data are recorded when contracts are signed (as opposed to existing home sales, which are recorded at closings) and buyers had to close by November 30 to receive the credit, signing a contract in September is cutting it close.

Although a direct linkage is difficult to demonstrate, we’d argue that the continued exceptionally weak confidence numbers are largely due to the difficult job market. For comparison, consumer confidence readings have historically averaged 72.0 in recessions.

Durable goods orders rose for the fourth time in six months, although this week’s release fell short of expectations. Interestingly, durable goods inventories declined for the ninth consecutive month; 3Q09 was supposed to be one in which companies restocked.

The advance GDP figure, bolstered by consumer spending (particularly through the Cash-for-Clunkers program), surprised on the upside. Residential investment spiked at an annualized rate of 23% during the quarter; clearly the $8000 first-time homebuyer tax credit boosted this figure so it remains to be seen whether this strength will continue. Inventory building contributed 0.9% to GDP (given the decline in durable goods inventories noted above, this must’ve been driven by nondurables), and business investment fell at an annualized -2.5% rate. As we’ve stated before, there was little question that 3Q09 GDP would be substantially positive; the real question surrounds the sustainability of that trend, especially when the “stimulus” runs out or is removed.

Like the GDP data, consumer spending was largely driven by the effect of the “Consumer Assistance to Recycle and Save” Act (aka, “cash-for-clunkers”). From August to September, the annualized rate of spending on durable goods, nondurable goods and services fell -7.0%, rose 0.7% and 0.2% respectively. The growth in services spending continues a narrowly positive trend over the past six months. Consumers saved 3.3% of their disposable personal income in September, down from 4.8% in August.

RELEASE	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
*(leading, coincident, or lagging indicator)*	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
S&P Case-Shiller 20-city Home Price Index (lagging)	August	146.00	NA	144.23	The rate of price declines fell for the seventh consecutive month, to -11.3% compared to the same month last year. Nineteen of the 20 MSAs showed year-over-year improvement in prices and 16 showed month-over-month raises. Prices stand at their August 2003 levels, and have declined -29.3% from their peak.
Consumer Confidence (leading)	October	47.70	54.00	53.40	Confidence fell to its lowest level since July, as both the “present situation index” and “expectations index” declined.
*Durable Goods Orders (leading)*	September	1.0%	1.5%	-2.6%	Orders excluding transportation rose 0.9% and excluding defense-related items rose 0.5%. Monthly bright spots included orders for machinery (+7.9%) and defense aircraft and parts (+12.5%). Weakness was seen in nondefense aircraft (-2.1%) and communications equipment (-7.0%). Over the past 12 months durable goods orders have dropped -24.1%.
New Home Sales (leading)	September	402K	440K	429K	New home sales have risen 22% from their cycle low in January 2009. The inventory-to-sales ratio now stands at 7.5 months, down from a peak of 12.4 months.
GDP (lagging)	3Q09 advance	3.5%	3.0%	-0.7%	This stronger-than-consensus release marks the end of the longest and deepest recession of the post WW2 era.
Consumer Spending (leading)	September (MoM)	-0.5%	-0.5%	1.4%	Consumer spending declined -0.3% year-over-year. On an inflation-adjusted basis, MoM spending fell -0.6%.