November 29, 2009 – “The Recovery Grinds Forward”
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The Recovery Grinds Forward
Third quarter real GDP was revised to show a less positive annualized growth rate of 2.8%, slower than the initial estimate of 3.5%, but in line with market consensus expectations. The primary areas of weakness were commercial construction and a wider foreign trade deficit. The final estimate of 3Q:’09 will be released by the Bureau of Economic Analysis (BEA) on December 22nd.
Consumer spending was up 2.9% annualized in 3Q:’09, slower than 3.4% estimated by the BEA last month, but markedly better than the 7.0% annualized fall in 2Q:’09. Inventories were liquidated at an annualized rate of $133.4 billion in the 3rd quarter. Further liquidation lies ahead in the current quarter, but a reduced pace of liquidation and the beginnings of inventory building will add to GDP growth in the quarters ahead. We believe real GDP will expand 4.2% annualized in the current quarter. BEA will release its initial estimate of the fourth quarter in late January.
The October data showed a 0.2% gain in personal income (PI), the 4th straight monthly increase in this metric. Current dollar personal consumption expenditures (PCE) rose 0.7% in October. PCE was not driven by Cash for Clunkers as was the case in August, and not by transfer payments as was the case in June. Current $ PCE for durables rose 2.1%, led by a gain in motor vehicle sales. PCE for non-durables were up 0.4%, helped by an increase in gasoline sales. PCE for services rose 0.5%. In real terms, PCE advanced 0.4% in October. Real PCE is up 0.8% y/y.
PI in October, however, was down 1% y/y. It is difficult to see the consumer adding significant momentum to the economy until labor market conditions materially improve. The personal savings rate receded to 4.43% in October from 4.6% in September.
The final November reading of the Reuters/U. of Michigan Index of Consumer Sentiment rose to 67.4, above expectations of 67.0, and up from 66.0 in the preliminary report. The two subcomponent indices gave mixed messages. The assessment of current conditions was revised lower from the preliminary report, but the index of expectations six months out was revised materially higher. The expectations index, however, is down from October, which was below the September ’09 high.
The Conference Board’s November Consumer Confidence Index (CCI rose to 49.5 from an upwardly revised 48.7 in October. The market consensus expected a decline in the November CCI. While the CCI surprised the consensus on the upside, the absolute level of confidence is still reflective of considerable consumer caution. The CCI reached its cyclical bottom in February ’09 at a record low of 25.3.
Two distinct labor market developments are important to note.
1. Initial unemployment insurance claims fell to 466,000 in the week ended November 21st. This is the lowest level of initial claims since the week ended September 13, 2008, the week which preceded the collapse of Lehman. While an aggressive seasonal factor helped induce the dimensions of the drop in claims, there is no question claims have been trending lower. The four week moving average fell to 496,500, the lowest since November 8, 2008. Initial claims will have to move to about 400,000 before they imply stable payroll employment.
2. In early 2010, hiring by the Census Bureau will take place for the decennial population count. We will see an artificial boost in job growth in the first half of 2010. While this will be transitory, sooner than otherwise would be the case we will witness an increase in nonfarm payroll employment. 3Q’10 will absorb the falloff from Census hiring, and 4Q:’10 will provide truly clean employment numbers. In 1990, the Census Bureau hired 330,000 workers, spread between January and May. In 2000, 515,000 workers were temporarily employed to do the census. When President Obama’s fiscal stimulus package was approved in February, the plan was to hire 1.3 million workers for the 2010 Census.
Monday’s stock market strength was fueled by October existing home sales, which increased 10.1% from September to 6.1 million annualized, well above consensus expectations. Existing home sales are now up 23.5% y/y. The inventory of unsold homes was pared to a 7.0 month supply. Prices are coming back as well. In January 2009, existing home sales had average prices down 17.5% y/y from already depressed levels. Average prices for October sales were off 7.1% y/y.
The Case-Shiller Home Price Index rose 3.1% in 3Q:’09 q/q, following a revised increase of 3.1% in 2Q:’09. This is the first time we’ve seen back to back quarterly price increases since the first half of 2006. While 3Q:’09 prices were down 8.9% y/y, it’s the lowest y/y decline since 4Q:’07.
October new home sales were stronger than market expectations, rising 6.2% m/m to 430,000 units annualized, the best level since September ’09. October new home sales were up 5.1% y/y, the first positive y/y reading since November 2005. The inventory of unsold homes fell to 6.7 months supply in October, the lowest months supply since December 2006.
Durable goods orders declined 0.6% in October, following an upwardly revised gain of 2%. Primary metals and electrical equipment orders both increased in October. Durable goods orders are now 11.9% down y/y, an improvement from the September y/y decline of 18.8%
Government deficits imperil the durability of the recovery, which is gaining some real traction. The combination of bulging federal borrowing and shrinking bank lending to the business sector is deadly, if not addressed. Federal Reserve support of the mortgage- backed securities market via heavy buying of MBS will be winding down at some point, inducing a re-pricing of risk.
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Economic Indicators in the Week Ahead:
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Monday, November 30 9:45a.m. November Chicago PMI
We expect the Chicago Purchasing Managers Index (PMI will retreat slightly to 54.0 in November, higher than consensus expectations of 53.0. October showed an 8.1 point surge to 54.2. Like the NY Fed. Empire Index and the Richmond Fed series, a modest pullback to a still positive metric is likely.
Tuesday, Dec.1 10:00a.m. October Construction Spending
Construction spending (CS) should be up 0.1% in October led by single-family homebuilding, and by an annualized rise in federal outlays of between 15% and 20% for public construction. The consensus projects a decline of 0.6% in October. We feel multi-family construction declined as did non-residential (commercial) construction.
Tuesday, Dec. 1 10:00a.m. Nov. ISM Manufacturing Index
We see the Institute for Supply Management (ISM) manufacturing series slipping to 54.7 in November from 55.7 in October in line with consensus. The direction of risk is a steeper decline in November.
Wed. Dec. 2 8:15a.m. November ADP Private Sect. Payrolls
We believe ADP private sector payrolls dropped 125,000 in November vs. a consensus decline of 145,000. In October, ADP payrolls fell 203,000
Thursday, Dec. 3 8:30a.m. Jobless Claims Wk. end. 11/28
We see initial claims rising slightly to 470,000 from the week ending November 21st, when initial claims dropped substantially to 466,00o with the help of a strong seasonal adjustment factor. The consensus sees a rise in claims to 480,000.
Thurs. Dec. 3 8:30a.m. (Final) 3Q:’09 Productivity & U.L.C.
We believe with the downward revision in real GDP in 3Q:’09 to 2.8% annualized growth from 3.5% estimated previously, nonfarm productivity will be revised to show a still extraordinary growth of 8.4% annualized vs. the 9.5% gain estimated previously by the Bureau of Labor Statistics (BLS). The consensus sees an 8.5% annualized gain in productivity. In
our estimation, unit labor costs (ULC) fell at a 4.2% annualized pace in 3Q:’09 vs. the 5.2% decline previously estimated by BLS.
Thurs. Dec. 3 10:00a.m. Nov. ISM Non-Manufacturing Ind.
We expect the ISM Non-Manufacturing Index rose to 52.0 in November vs. 50.6 in October. This would be the third straight month above 50.0, and is stronger than the consensus call of 51.2.
Friday, December 4 8:30a.m. Nov. Employment Results
We see nonfarm payroll employment dropping 90,000 in November vs. the October fall of 190,000. The consensus sees a decline of 116,000 in November payrolls. We believe the unemployment rate will remain at 10.2% of the civilian labor force.
Friday, December 4 10:00a.m. October Factory Orders
We believe October factory orders will rise 0.1%, following a 0.9% September gain. The consensus sees an increase of 0.5% in October factory orders.
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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