Dear Clients and Friends,
I want to touch on a few developments that shed light on the positive direction the
market seems to be heading. Most of the following is either not reported or under reported by the everyday news media.
- Americans are saving money again. Personal
income rose 1.4% in May, the fastest since May 2008, largely driven by provisions
in the American Recovery and Reinvestment Act of 2009, which reduced
personal current taxes and increased government social benefit payments. April's
reading was 0.7%. Disposable personal income jumped 1.6% in May (0.2% if
you exclude the effects of the government stimulus). Personal consumption
expenditures rose 0.3% in May, as expected; April's spending was flat. On
a trend basis, real spending is down a record 1.8% from a year ago. The
saving rate soared 1.3 points, the most in a year, to 6.9%, above its
historical mean of 6.6% and at its highest level since December 1993. It
seems people decided to save more of their extra income from the stimulus
to help pay down debt.
- Households able to pay debts:
The
household debt service (DSR) and financial obligations (FOR) ratios fell
in Q1 to their lowest levels in more than four years. This indicates an
increased ability to make required payments out of disposable personal
income. The FOR fell 35 bp to 18.50%, while the DSR slipped 31 bp to
13.48%. While the drops are helpful, the ratios are still historically
high and inconsistent with a secular trough, such as what was seen in the
early 1980s. However, it is moving in the right direction! We would like
to see the FOR at least get back to the 16%-17% range to lay the
foundation for a sustainable economic recovery.
- Sentiment is up, but mixed: The
Reuters/University of Michigan
Consumer Sentiment Index firmed in June, rising 2.1 points from May and
1.8 points from mid-month to 70.8, the highest level since February 2008. However,
another widely watched barometer - the Consumer Confidence Index, is down
to 49.3, after hitting a May level of 54.8. Because
consumer spending accounts for more than two-thirds of economic activity
in the U.S.,
economists and investors watch it closely. The chief of the research
center said the decline in consumers' current view implies "that
economic conditions, while not as weak as earlier this year, are
nonetheless weak." While consumer sentiment has risen well above its
new historic low of 25.3 in February, confidence is still well below
what's considered healthy. These contrary developments are part of what we
should consider as the expected ebb and flow of the tide, as the economy
recovers.
- The labor market has stopped deteriorating: While it may
not be improving, the labor market may have stopped deteriorating. Initial
jobless claims rose 15,000 during the week of 6/17/09. On a four-week
moving average basis, claims rose slightly, but remained close to its
lowest level since mid-February. Remember that unemployment numbers are a
lagging indicator, which is likely to change when the economy does, as
employers want to be confident that things are better before expanding
payrolls. It may take at least 6-12 months after the economy has picked up
for hiring to come back. While these numbers are headline grabbing they
are a lagging indicator. People are
generally laid off after the economy has weekend and hired only after a
rebound has occurred. It will take employment six months to a year to
after a recession to really pick up. Of course, in the "If it bleeds it
leads" news culture, that information is generally left out. Today
(7/2/09) is a prime example of this phenomenon. It was reported this
morning that payrolls shrank by 467,000 people last month, more than the
expected number of 350,000.
However, buried in the news was the fact that jobless claims fell
last week by 16,000 while expectations were for a decline of 8,000.
- Housing is doing better: Existing home
sales rose for the second consecutive month, up 2.4% to a 4.77 million
unit annual rate in May. Sales have risen 4.8% in the past two months, the
first back-to-back gain since September 2005 and the largest two-month
improvement since April 2004. Historically, as a recession eases, existing
home sales pick up first followed by a rise in new home sales and then in
new home construction. We are beginning to see prices stabilize on an
absolute level, as homes in the $400,000-$500,000 range gained market
share at the expense of lower-priced homes for the first time since last
year. On a trend basis, home sales are off 10% to 12%, a welcome
moderation in the rate of decline. Housing starts jumped by 17.2%, to an
annual rate of 532,000 units. The sub-set that we watch closely, single-family
housing, rose by 7.5%. That was the biggest one-month gain since January
of 2006 and it was the third straight monthly rise in single-family
starts. These numbers, while less reported, are more important than the
employment figures. That is because housing has led the rebound from every
recession in this country since 1960. Historically, existing home sales
pick up first followed by new home sales and then new home starts.
- Manufacturing is up:Manufacturing activity in the
Kansas City Fed District rebounded in June, as the production index jumped
12 points to +9, its first positive reading since last August. The Philly
Fed General Business Activity Index soared 20.4 points, the most in nine
months, to -2.2 in June, its highest reading since September, and beating
expectations. From a year ago, the index is up 15.5 points, the most since
July 2004. Manufacturers are increasingly optimistic about activity six
months from now. The Future Activity Index rose 12.6 points, its third
straight increase, to 60.1, its highest level since September 2003, as all
components advanced into positive territory with the exception of
inventories.
- The Leading Economic Index is up: The Leading
Economic Index (LEI) rose for a second month in May, surging 1.2%, the most
since March 2004, generating an expansion signal for the economy. The
indicator has had almost a perfect track record in the past six
recessions, identifying the end of downturn within two months.
Expectations were for an increase of 1%. Seven of the 10 indicators
improved, led by vendor performance and the interest rate spread. Over the
past six months, half of the components have increased, the most since
July 2007. Although the LEI is off 1.8% from a year ago, it is the slowest
decline since December 2007. As well, the index has risen 2.4% over the
past six months on an annualized basis, the first positive reading since
July 2007 and the most since April 2006.
The
market has come a long way since the dark days of last fall. Experienced
investors know that even in a market that seems to be improving; there may
still be a lot of pain to go through. Three steps forward are sometimes
followed by one step backward. But all in all, the market and the economy look
like they are on the mend, as things are looking up in many areas. As we finish
this article, more encouraging news is breaking. The ISM Manufacturing index
for June showed a rise of 2 points to 44.8 and production grew for the first
time in 10 months. This indicator jumped 6.5 points to 52.5, the biggest
monthly increase since August 2003. The ISM described the trend as "encouraging" and
added that "a slow recovery for manufacturing is forming."
|
|
