This may seem obvious -- you say: “Of course the prospects for global growth are pathetic” – but the concern regarding the extent to which the credit chaos has had on the global economic picture actually ebbs and flows on a weekly, sometimes daily, basis.
Indeed, we do get small indications that the pessimism has gone a bit too far. There is a separation between perception and reality that needs to be addressed – energy demand has actually improved over the past couple of months after falling the most since 1982 for the first 10 months of the year. This is the affect of the price mechanism, but it seems to me we’d see demand continue to decline if the world were as “tapped out” as most seem to assume.
(We’ll note, the January crude-oil futures contract expires today so there was added selling pressure yesterday as those who own contracts simply for financial reasons have to sell to avoid taking possession. Although, at these levels, grab a few galvanized swimming pools and let them back the truck up. Do you think the EPA would have an issue with backyard storage?)
Market Activity for December 18, 2008
In addition, while it’s tough to get terribly optimistic about things right now, the statements that accompany tech-sector earnings in particular show what we’re dealing with is more an issue of confidence than actual economic fundamentals being in the dirt. I can sense the reaction now; you’re thinking I’m off my rocker. But a number of economic data sets show business spending collapsed as if a switch had been flipped (generally we see this kind of grind to a halt as the economy contracts), which proves to me that a lack of confidence/caution is half the battle right now – reverse this mindset slightly and you get a decent bounce in activity from these levels.
Take Oracle’s earnings release yesterday. The company stated they have never seen orders canceled to the extent they did in November -- ever. Apparently, companies had the resources to engage in such spending plans just a couple of months back, but now all of a sudden they are pulling orders. This tells me the dramatic economic retrenchment of the past three months is due more to heightened levels of caution than anything else. This is the obstacle that must be addressed.
Don’t get me wrong, the current quarter’s GDP report is going to make a run at the horrible declines in economic activity seen in 1980 and 1982 (which posted -7.8% and -6.4% readings at their nadirs) but confidence is something that can be returned to the marketplace very quickly if the correct strings are pulled – problem is we’re not pulling the correct strings. You know what I’m referring to.
Ease this current level of caution and a tepid rebound in business spending will combine with a stock market rally and a mild bounce from the consumer. Remember, nearly $4 trillion sits in money market accounts and real incomes have been boosted via the 65% plunge in gasoline prices, offsetting some of the damage due to a weak labor market. The fuel is there, now ignite it.
On stocks, we’re 18% above the November 20 low; if we can manage a rally of an additional 20%, you’ll see caution ease.
Jobless Claims
The Labor Department reported initial jobless claims fell 21,000 to 554,000 in the week ended December 13. While it’s nice to see some easing, the figure remains elevated and the jump in the prior week likely portends the December payroll report will show a decline at least as bad as the 500,000-plus drop in November – possibly worse. Next week’s claims data will correspond with the December job market reporting period and we’ll be better able to assess things then.
Despite the decline last week, the four-week average of claims rose 2,750 to 543,750.
It’s important to watch the ISM (both the manufacturing and service-sector surveys) reports, which have seen their employment gauges slide. The manufacturing survey’s employment index has matched the 1990-91 recession low and we’ll be watching to see if it weakens further and moves to the 1981-82 low. If it holds above that mark, we may see the payroll declines at least stabilize.
We’ll also remind everyone, as touched on a couple of times now, the jobless claims figure would have to approach one million to match what occurred at the high point of 1982 when adjusting for payroll growth. Back in 1982 total non-farm payrolls stood at 88 million; today it is 136 million, so 550,000 in claims is not nearly as harsh as it was back then.
That said, claims have risen significantly over the past three weeks (all due to the December 6 weekly claims report that showed a 60,000 increase) and this is a dismal backdrop for the shopping season. As mentioned above, we expect that the 65% decline in gasoline prices, which has boosted real incomes, will offset some of this labor-market weakness and the December spending numbers will post a better-than-expected reading. But this claims data does cause some doubt.
Continuing claims are approaching the peaks hit in 1974 and 1982, but did fall 47,000 to 4.384 million in the week ended December 6 – there’s a one week lag between initial claims and continuing. .
Philly Fed
The Philadelphia Federal Reserve Bank’s general business conditions index showed activity remains depressed, but not to the degree expected. The index rose to -32.9 in December from -39.3 in November – the number was expected to fall to -40.5. Not exactly an inspiring print but the level remains above even the relatively mild 1990-1991 recession.
The new orders index rose to -25.2 from -31.4; but unfilled orders deteriorated.
The employment index declined to -28.7 from -25.2 last month.
Witching Hour (and no, I’m not referring to Def Leppard lyrics)
We’re without any economic releases this morning, but things will remain exciting (if that’s the correct term) as today marks quadruple witching. This is the quarterly event with which we get the expiration of stock-index futures, stock-index options and single-stock futures and options. As a result, it should be a volatile session, especially in the final hour – unfortunately, nothing new these days.
Have a great weekend!
Brent Vondera, Senior Analyst
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