December 14, 2009 – “An Improved Tone”
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An Improved Tone
Despite the dreadful ineptitude of many of those who purport to practice fiscal policy, or is it the fiscal follies, in Washington D.C., a legitimate economic recovery is underway. The U.S. posted a $176.36 billion deficit in October, our widest-ever October deficit. This follows fiscal 2009 with its $1.4 trillion deficit, thrice the FY 2008 deficit. The November deficit was “only” $120.3 billion. TARP repayments and corporate tax receipts will pare the deficit to an estimated $1.1 trillion in FY’10.
The “Red Sea”, the sea of red ink in Washington, D.C. continues to swell. The budget deficit is roundly 10.0% of GDP, the widest deficit as a share of GDP since 1945. The federal government expended nearly $18 billion in October just in net interest on the federal debt. This does not even count interest on nonmarketable government securities held by federal trust funds, e.g., Social Security.
The third quarter flow of funds report was released by the Federal Reserve last week. It showed U.S. household sector net worth advanced 5.3% in 3Q:’09, a gain of $2.7 trillion. This follows a 4.7% increase in 2Q:’09. At the end of 3Q, household sector net worth had risen to $53.4 trillion, the highest level in a year. Household sector net worth, however, is still 19.1% below its 2007 peak. In the third quarter, household sector real estate assets grew 2.1%, a gain of $295 billion. Household sector equity assets in corporations rose $1.1 trillion. And, as the consumer credit outstanding (CCO) data show, the consumer continues to deleverage for nine consecutive months through October’s $3.5 billion incremental cut in CCO.
Against this backdrop, November retail sales jumped 1.3% from October, well above consensus expectations. Nominal retail sales rose at a 6.5% annualized rate over the June through October period. Ex-autos, retail sales have risen at a 5.5% annual rate over the same period. November retail sales were driven by gas stations, auto dealers, grocery stores, department stores/warehouse clubs, and building materials. November’s 1.5% increase in sales of building materials, its best gain in 19 months, supports some recovery in homebuilding.
Friday’s report of the preliminary December Reuters/University of Michigan Consumer Sentiment Index was also a real plus, advancing to 73.4 from 67.4 in November. This is the strongest reading since the 73.5 level in September ‘09. Let’s remember, however, 73.4 is not a strong absolute sentiment reading.
Indeed, the IBD/TIPP Economic Optimism Index fell for the third consecutive month in December. The “personal finances” component rose, but the “federal policies” piece dropped to its lowest level since January ’09. The authors of the IBD/TIPP Index wrote: “Americans have started to question major elements of this year’s stimulus and bailout packages.”
It is unwise to get too euphoric about the U.S, consumer, as labor market conditions are still weak and the need to further deleverage is very real. The November Challenger data show “most industries are seeing job cuts subside.” But, the recent ISBC-Goldman Sachs weekly index of chain store sales has been weakening. Comparisons vs. year-earlier levels are still up 2.6%, but these are nominal or current dollar data and vs. a very weak sales environment a year ago.
The October data on wholesale inventories, up 0.3%, as well as on business inventories, up 0.2%, are clearly intended accumulation of inventories, given rising orders, and reflective of improved optimism in the CEO survey of larger companies. The National Federation of Independent Businesses (NFIB) Survey, conversely, is reflecting pessimism in the small business sector re employment intentions and tightened credit conditions. It would behoove policymakers to pay attention. This is where more than half of employment growth emanates. Incremental regulation scares small business, as it sees disincentives to work, to invest, and to produce emerging in fiscal policy.
The housing sector data look encouraging. The Mortgage Bankers Association (MBS) broad mortgage application index increased 8.5% in the week ending December 4th, atop a 2.1% gain the prior week. The advance reflects a 4% jump in the purchase application index and an increase of 11.1% in the refinancing index.
The “bubble” we have to worry about is the growth in the federal government, which, ceteris paribus, over time hinders private sector employment growth, profitability, productivity, and the entrepreneurial spirit that has made this country great. In addition, we are concerned about a protectionist President. The House attack on the Treasury and the Fed is only half wrong. Where would the U.S. economy be without the courage and wisdom of Fed Chairman Ben Bernanke?
In the week ahead, the equity market will witness the December N.Y. Fed Empire Manufacturing Index, December’s NAHB Housing Market Index, November industrial production, November housing starts and building permits, and the November Leading Economic Indicators release. Each of these specific yardsticks, in our estimation, will be better than market consensus expectations. See our forecasts for the forthcoming indicators which follow herein.
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Economic Indicators in the Week Ahead:
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Tuesday, December 15 8:30a.m. November Producer Prices
The producer price index (PPI) for finished goods likely rose 1.0% in November, up 1.75% y/y. The market consensus expects an increase of 0.8% in the PPI. Wholesale food, energy, and vehicle prices drive the rise, the first y/y advance since November ‘08. The core PPI (excluding food and energy) likely rose 0.3%, the biggest m/m gain in a year.
Tuesday, Dec. 15 8:30a.m. Dec. NY Fed Empire Manu. Index
We see the NY Fed Empire Manufacturing General Business Conditions Index rising to 26.0 in December from 23.5 in November, but still below October’s 34.6 reading. December would be the 5th straight monthly expansion in the index. The market consensus sees the index at 25.0.
Tues., Dec. 15 9:15a.m. Nov. Industrial Production & Capacity Utilization
November industrial production (IP) likely rose 0.6%, higher than the consensus call of 0.5%. Manufacturing hours worked increased and manufacturing production should rise 0.8 to 0.9%, but a flat utility output should contain the overall rise to 0.6%. We expect total capacity utilization to reach 71.2%, up from 70.7 in October. The consensus sees 71.1%.
Tuesday, Dec. 15 1:00p.m. Dec. Wells Fargo/NAHB Housing Market Index
The extension and the expansion of the homebuyer tax credit in December likely boosted the Wells Fargo/National Association of Homebuilders Housing Market Index to 19 in December from 17 in both October and November. The market consensus sees a December reading of 18.
Wednesday, Dec. 16 8:30a.m. November Housing Starts
Improved weather may help November housing starts jump to 595,000, a gain of 12.5% from 529,000 annualized in October. Multi-family starts are likely to rebound from a 50 year low in October. The consensus expects 575K starts. Building permits will likely jump to 610,000 from 551K in October. The consensus sees 570K.
Wednesday, Dec. 16 8:30a.m. November Consumer Prices
We expect the overall CPI to rise 0.5% led by a 3.5% jump in energy prices and a food price increase of 0.4%. The consensus sees the overall CPI up 0.4%. We view November as up 2.0% y/y, the first y/y rise since February. The core CPI likely advanced 0.1% from October, up 1.7% y/y.
Wednesday, Dec. 16 8:30a.m. 3Q Current Account Deficit
We believe the current account deficit grew to $110 billion in the third
quarter, led by a worsening in the merchandise trade deficit, and a rise in
petroleum imports. The current account deficit would be more than 3% of
nominal GDP. The consensus sees a 3Q:’09 current account deficit of $106
billion.
Thursday, December 17 8:30a.m. Weekly Jobless Claims
Initial claims in the week ending Dec. 12th likely fell to 465K from 474K the prior week. Our estimate for initial claims is in line with the market consensus. Continuing claims likely jumped 90,000, and workers getting extended benefits will rise from 4.6 million.
Thursday, Dec. 17 10:00a.m. November LEI Index
We expect the Leading Economic Indicators (LEI) series likely rose 1% in November, well above the 0.7% gain the market consensus envisions. This would be the 8th straight monthly increase in the LEI.
Thurs., Dec. 17 10:00a.m. Dec. Philadelphia Fed. Index
We estimate the Philadelphia Fed General Business Activity Index slipped to 13.0 in December from 16.7 in November. This is below the consensus call of 15.8. We are concerned about the weak momentum of the Philadelphia Fed manufacturing index.
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Jack W. Lavery
CEO & Chief Economist of Lavery Consulting Group, Senior Executive Fellow in Financial Economics at the University of Maine