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Economic data were mixed last week and generally on the soft side. Bets are slowly leaning toward the belief that the U.S. is entering a mild recession. But how did last week’s data stack up on whether the first quarter will end up on the negative side of the ledger or the plus side?
Last week stocks staged a comeback despite generally negative economic news. Gains during the first three days of the week more than offset declines during the last two days. Stocks rose the first day of the week despite news from AIG that its debt losses were greater than previously announced. Equity gains were moderate and widespread on the belief that stocks are at or near their bottom and will pick up in price later in the year as the economy rebounds. Stocks on Tuesday got a sizeable lift from billionaire investor Warren Buffet’s offer to help bond insurers. Stocks posted their biggest gains of the week on Wednesday on stronger-than-expected retail sales (which eased recession fears) and due to healthy earnings reports, including from Coca-Cola, which also is suggestive of a healthier than believed consumer sector. Small caps and techs were particularly strong on Wednesday. Stocks dipped on Wednesday after Federal Reserve Chairman Ben Bernanke indicated that the Fed’s economic forecast has been downgraded. Stocks on Friday were pulled down by a weak Empire State manufacturing report and by a drop in consumer sentiment. But overall for the week, equities were supported by the belief that stocks are near a cycle low and that further rate cuts by the Fed will be boosting the economy later this year.
Last week, major indexes were up: the Dow, up 1.4 percent; the S&P 500, up 1.4 percent; the Nasdaq, up 0.7 percent; and the Russell 2000, up 0.4 percent.
Since year end, major equity indexes remain in negative territory. Major indexes are down as follows: the Dow, down 6.9 percent; the S&P 500, down 8.1 percent; the Nasdaq, down 12.5 percent; and the Russell 2000, down 8.4 percent.
Treasury yields were mixed as the short end edged down while long-term rates rose. Rates were little changed on Monday. On Tuesday, investor Warren Buffett’s offer to help guarantee some $800 billion of municipal bonds guaranteed by three insurers boosted confidence in the muni market as well as the stock market and led to outflow from Treasuries, nudging rates up. Stronger than expected retail sales numbers boosted rates on Wednesday while inflation fears boosted long rates on Thursday after comments by Fed Chairman Ben Bernanke indicated that further easing by the Fed is likely. However, rates did ease moderately on the last day of the week on a drop in the Empire State index and fall in consumer sentiment. Net for this past week, the short end was little changed while inflation fears are becoming a big factor on the far end, bumping up long rates.
Treasury yields were mixed last week as follows: 3-month T-bill, down 3 basis points, the 2-year note; down 2 basis points; the 5-year note, up 8 basis points; the 10-year bond, up 13 basis points; and the 30-year bond, up 16 basis points.
Inflation fears have come to the forefront as long bond yields have been trending upward since mid-January.
Oil prices rose significantly last week. The biggest price movements were on Monday and Thursday during last week. The spot price for West Texas Intermediate rose $1.68 per barrel on Monday to $93.45 per barrel as traders reacted to threats from Venezuelan President Hugo Chávez to stop selling oil to the U.S. and over news of a partial outage at a Louisiana refinery. Spot prices jumped $2.19 per barrel on Thursday primarily over concern that Asian demand for oil would be higher than expected. Data from Japan indicated strong economic growth for that country. Also, a six-year record high jump in Japan’s stock market fueled the belief that economic growth will pick up. Also, China’s central bank reported a surge in that country’s money supply which also supported the belief that Asian demand for oil will remain robust. While the U.S. economy may be slowing, it now appears that stronger-than-expected growth in Asia will be taking up much of that slack.
The spot price for West Texas Intermediate jumped $3.73 per barrel net for the week to settle at $95.50 per barrel, $4.12 below the record high of $99.62 set January 2nd.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
This past week, economic data generally came in on the soft side. The consumer sector is slowing and weaker consumer confidence indicates this sector may ease further. The bright spot during the weak was record high exports but even that has not been enough to keep manufacturing from flattening or even declining according to some measures.
The January retail sales report came in moderately positive at the headline level and boosted market confidence. However, the detail suggests that consumers are retrenching somewhat. Retail sales rebounded in January but strength was primarily in motor vehicles and gasoline. Retail sales rose 0.3 percent in January, following a 0.4 percent drop in December. Excluding motor vehicles, retail sales also made a comeback and by 0.3 percent, after a 0.3 percent fall in December. However, excluding both motor vehicles and gasoline, retail sales were flat in January after declining 0.3 percent in December.
A key point from looking at detail is that consumers are primarily spending on essentials. By components, January's gain was led by gasoline station sales and motor vehicle sales, up 2.0 percent and 0.6 percent, respectively. Some strength also was seen in food & beverages, up 0.6 percent; clothing, up 1.4 percent; health care, up 0.8 percent; and nonstore retailers, up 0.5 percent. The housing recession clearly is damping some key retail sales components. Weakness was still very pervasive and found in furniture, down 0.5 percent; electronics, down 1.0 percent; building materials, down 1.7 percent; sporting goods, down 1.3 percent; and food services, down 0.5 percent.
Overall retail sales on a year-on-year basis in January improved to up 3.9 percent from up 3.7 percent in December. Excluding motor vehicles, the year-on-year advance slipped to up 4.9 percent from up 5.0 percent in December. Excluding both motor vehicle and gasoline sales, the year-on-year rate fell to up 2.6 percent from up 3.2 percent in December.
The latest retail sales report does show the consumer sector slowing in the first quarter. Even some components that showed strength – such as gasoline and grocery stores – were likely due to price increases as much as due to demand growth. The consumer sector is mildly positive and is working to keep the first quarter in positive territory.
Industrial production remained slightly positive in January but cold weather is the likely reason the number is in plus territory. Overall industrial production edged up 0.1 percent in January, matching December’s rise. The manufacturing component, however, was flat in January, following a 0.2 percent gain in December. For January, utilities output jumped 2.2 percent while mining output slumped 1.8 percent. The spike in utilities was seen in both electricity and natural gas and likely reflected higher usage from atypically cold weather in parts of the U.S.
Overall capacity utilization was unchanged at 81.5 percent in January and the capacity utilization rate for manufacturing edged down to 79.7 percent in January from 79.8 percent in December. Capacity utilization in manufacturing continues a slow downtrend and suggests some easing in resource utilization. This helps the Fed see its forecast for moderating inflation staying on track.
By market groups in January, production was led by defense & space equipment, business equipment and by consumer goods, which were up 0.9 percent, 0.4 percent and 0.3 percent, respectively. The housing recession continues to tug down on manufacturing as the construction supplies subcomponent of nonindustrial supplies fell 1.1 percent. Within consumer goods, appliances, furniture & carpeting dropped 2.1 percent in the latest month while automotive products declined 1.2 percent. Home electronics was up 1.4 percent. Business equipment was led by information processing and transit equipment, up 1.6 percent and 0.7 percent, respectively.
Year-on-year, overall industrial production was up 2.3 percent in January, compared to up 1.8 percent in December. Despite the year-on-year rise, the growth pace is still sluggish and likely to ease in coming months.
More current data on manufacturing suggest that this sector could actually turn negative in the first quarter. The empire state index fell to minus 11.7 in February, well down from plus 9.0 in January and signaling month-to-month contraction in the New York manufacturing area. Additionally, weakness was centered in new orders, at minus 11.9 and pointing to contracting production in the months ahead. Demand may be slowing but price pressures are not easing, with prices paid up more than 7 points to 47.4 and prices received little changed at 17.9. The Empire State report is hardly a comprehensive measure for U.S. manufacturing, but it suggests that this sector could be weakening more than anticipated just a few months ago.
The most positive news on the economy is coming from the international sector. However, even though the trade gap shrank in December, there are signs of a slowing U.S. economy within the data. The nation's trade deficit narrowed sizably in December, to $58.8 billion from November's $63.1 billion. Imports fell 1.1 percent and this likely reflects a softening in domestic demand especially for imported cars. Exports continued to strengthen, rising 1.5 percent. Capital goods exports were particularly strong.
The non-oil gap showed its best reading in more than four years at under $35 billion. But the nation continues to import oil aggressively with the oil gap widening $1.5 billion to $31.5 billion as higher prices more than offset lower volume. For all of 2007, the nation's petroleum deficit came in at a record $293.5 billion, up nearly $25 billion from 2006.
The bottom line from the very good December report is that fourth quarter GDP estimates will be nudged up and will likely end up with a mildly positive number for the period – keeping the economy out of recession at year end. Given the continued weakness in the dollar, export growth will continue into 2008 and will support both manufacturing and overall economic growth, helping to keep the first quarter possibly out of recession.
Inventory is the textbook bellwether for the business cycle. And the latest inventory numbers suggest that there may be a mild inventory correction developing. Overall business inventories jumped 0.6 percent in December, following a 0.4 percent boost the month before. Retail inventories excluding autos jumped a swollen 0.7 percent in December with gains posted for nearly every component, in bad news for the retail sector given what turned out to be weak sales in December.
The saving grace currently is that inventory-to-sales ratios are still somewhat low but they may be nudging back up and could worsen significantly if sales weaken further.
While the Fed and the markets say they are more worried about credit market instability and that inflation will be coming down, the latest import price numbers suggest that an easing in inflation is not yet in the pipeline. The import price index shot up 1.7 percent in January, pushing the year-on-year rate to 13.7 percent -- the largest increase in 25 years of data. When excluding oil, however, the news is less alarming with the month-to-month gain at 0.6 percent for a 3.6 percent year-on-year rate. Nonetheless, the 3.6 percent rate is the highest since the mid-90s and is clear evidence that the nation is importing inflation.
Not surprisingly, oil prices led the latest import price surge. Petroleum import prices jumped 5.5 percent in the month for a nasty 67 percent year-on-year rise. Import prices for food continue to show increasing pressure, up 3.1 percent in the month and partly reflecting demand for biofuels, another factor related to energy. Import prices for consumer goods showed an on-trend 0.3 percent monthly rise.
One of the biggest shockers in the latest report was what countries were exporting notably higher prices. By country, import prices from Latin America, the EU, and China showed the most pressure with import prices from Canada and Japan mild in the month. Countries which have been helping suppress price pressures in the U.S. are now actually adding to inflation. Notably, prices of goods imported from China rose a record high 0.8 percent in January for a year-on-year pace of 3.3 percent. While slower economic growth may help to ease inflation pressures in the U.S., a weaker dollar and strong foreign growth are working in the opposite direction.
Looking forward to the remainder of the first quarter, the latest consumer sentiment numbers are worrisome and may be a key piece of economic news that points toward a possibly negative first quarter. The Reuters/University of Michigan consumer sentiment index fell sharply in the mid-February reading to 69.6 from 78.4 in January. The latest reading is the worst since the 1991 recession. Declines were posted for current conditions and especially for expectations which fell nearly 10 points to 59.4. The expectations index, a key reading that often leads the overall index, is also at its lowest point since the 1991 recession. Investors should be closely watching other indicators of consumer health in coming weeks – notably initial claims and payroll jobs – to see if the consumer sector is holding up.
The economy continued to slow in the first quarter, according to last week’s numbers. But thus far, the data point to a small positive for the first quarter rather than a contraction. But it is still too early to make the final call. Meanwhile, the Fed continues to be poised for further rate cuts but is certainly looking over its collective shoulder for any pending resurgence in inflation pressures.
This coming week there are two market moving indicators, both on Wednesday. The CPI report gives us an update on where inflation has begun to moderate as the Fed hopes and the housing starts report likely points to further decline in the housing sector. Also on Wednesday, the Fed releases its latest FOMC minutes as well as an updated forecast for the economy. With manufacturing data having weakened significantly in recent months, the Philly Fed Business Outlook Survey will likely get notable market attention on Thursday.
Presidents’ Day. All Markets Closed.
The consumer price index in December rose 0.3 percent, moderately strong but coming off the 0.8 percent spike in November. For December, the core CPI inflation rate increased 0.2 percent, after firming to 0.3 percent in November. Based on year-on-year gains in December, inflation has a good ways to come down to meet the Fed’s goal for inflation in a 1-1/2 percent to1-3/4 percent range. Year-on-year, the overall CPI stood at up 4.1 percent in December while the core rate was up 2.4 percent. More recently, a January spike in import prices suggests that we may not get the softening in CPI inflation that the Fed is hoping for.
CPI Consensus Forecast for January 08: +0.3 percent
Range: +0.2 to +0.3 percent
CPI ex food & energy Consensus Forecast for January 08: +0.2 percent
Range: +0.2 to +0.3 percent
Housing starts in December fell sharply, dropping 14.2 percent, following a revised 7.9 percent decline in November. Within starts, weakness in the latest month was led by multifamily units. Single-family starts in December declined 2.9 percent after a 6.9 percent fall in November while multifamily starts posted a sharp 40.3 percent drop after a 10.1 percent decline in November. The latest pending home sales numbers and unsold supply indicate that builders have little reason to boost starts yet and are more likely to still be pulling back from December’s 1.06 million unit annualized pace.
Housing starts Consensus Forecast for January 08: 1.01 million-unit rate
Range: 0.95 million to 1.06 million-unit rate
The Minutes of the January 29-30 FOMC meeting are scheduled for release at 2:15 p.m. ET. Markets will be picking apart what issues the Fed sees as leading to further interest rate cuts. Focus will likely be on financial markets and consumer debt as well as the housing recession.
Initial jobless claims fell 9,000 in the week ending February 9 week to 348,000, a level in line with the four-week average of 347,250 and one unfortunately pointing to slow payroll growth. Initial claims have eased off of the recent high of 378,000 for the week ending January 26 but those numbers were skewed sharply by seasonal adjustments surrounding January's holidays. Claims data have leveled out but they are still notably above the 300,000 to 325,000 levels that were common before economic growth began slowing late last year.
Jobless Claims Consensus Forecast for 2/16/08: 348,000
Range: 335,000 to 360,000
The general business conditions component of the Philadelphia Fed's business outlook survey index plunged to minus 20.9 in January from December's already soft minus 1.6. New orders also pointed to future weakness in manufacturing, falling to minus 15.2 from plus 12.0 in December. After last week’s sharp drop into negative territory for the February Empire State index and a flat manufacturing component in January’s industrial production numbers, expectations are slipping for manufacturing.
Philadelphia Fed survey Consensus Forecast for February 08: -12.0
Range: -15.0 to 0.0
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