Weekly Economic Insight, 3 May – 7 May 2010 « Harmonic Investment Advisors

May 7th

Weekly Economic Insight, 3 May – 7 May 2010

Author: Kenn Lamson

The week ending 7 May 2010 saw indicators that were, on balance, positive for the US economy. Consumer spending grew handily (albeit at the expense of the savings rate) and consumer-level inflation remained tame. Manufacturing continued to be the US’s dominant economic driver, even signaling improving employment within the sector. The bottom line for the ISM Manufacturing Index was that production hasn’t kept pace with demand and manufacturers are ramping up employment. The much larger service sector, however, grew at a much slower pace. With a few caveats, the monthly unemployment figures also appeared stronger than expected, with the Household Survey confirming the headline Establishment Survey’s report of job gains; especially important to see were gains in the work week, hourly earnings and temporary jobs. Tempering the positive news was that the percentage of “long-term unemployed” hit almost 46% and that the most comprehensive measure of under- and unemployment rose to 17.1%. Consumer credit rose marginally, following the pattern of past months in which credit card-type credit declined but non-revolving, such as auto loans, rose.

A couple of other data points rose to the surface this week that bear mentioning.

Weak loan demand and poor credit availability have hamstrung large segments of the US economy, particularly impeding the ability of small businesses and households to rebound from the recession. The recently released Federal Reserve’s survey of senior loan officers showed little change in credit conditions during 1Q10:
- Most banks kept their lending standards unchanged but a small and shrinking net fraction tightened standards.
- Like 4Q09, banks reporting having eased standards in 1Q10 were large banks, and they apparently lent predominantly to large- and middle-market firms; small banks on balance tightened standards and lending to small businesses remained very weak.
- Similarly, large banks reported better availability of mortgage and non-revolving credit to households but tighter standards for credit cards; small banks tightened standards across the board.
- Loan demand in 1Q10 was reported to have generally weakened.
The EU/IMF bailout of Greece generated urgent headlines, with national leaders, economists and citizens in a seeming shoving match while “Athens burns.” While it’s been clear for months that Greece was in serious financial trouble, Standard & Poor’s downgrade of Greek debt on Tuesday 27 April seemed to catch the financial markets off guard and put a match to the fuse the resulted in a stomach-churning week in the markets. We believe investors should pay close attention to the bailout – or not – of Greece because of:
- its likely depressive effect on the European countries providing the bailout funds, many of which are major US trading partners
- the potential contagion effect of similarly weak countries requiring or demanding a bailout
- the fact that US taxpayer funds are contributed to the IMF.

Whether the abuser is an individual, family, a company, a municipality or nation, fiscal irresponsibility — especially the overuse of debt – usually ends poorly. Greece is the most recent and largest example, but we fear it will not be the last.

RELEASE (leading, coincident or lagging indicator)	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
Consumer Spending (leading)	March (MoM)	+0.6%	+0.6%	+0.3%	Personal spending in March rose at twice the pace of personal income while inflation, as measured by the PCE deflator, remained a non-issue.
ISM Manufacturing Index (leading)	April	60.4	61.0	59.6	In April the manufacturing sector expanded for the eighth consecutive month to its highest level since July 2004, although the Index failed to meet consensus expectations.
ISM Services Index (leading)	April	55.4	56.4	55.4	The ISM services index remained in growth territory. The important new orders component gave up some of March’s jump.
Unemployment Rate (lagging)	April	9.9%	9.6%	9.7%	Unemployment rate rose as the number of Americans in the workforce rose more than the number of new hires. The Household Survey showed a employment +550K gain.
Nonfarm Payrolls (lagging)	April	+290K	+200K	+162K	Less the Birth/Death adjustment and the new Census workers, payrolls rose about +40K. The average work week rose by +0.1 hours and average hourly earnings rose by +$0.01.
Consumer Credit (lagging)	March	+$2.0B	-$3.0B	-$11.5 B	Incentive-driven car sales apparently accounted for March’s increase in outstanding consumer credit.