The Dow was pressured by shares of 3M, Boeing and Proctor & Gamble as the day’s economic data showed manufacturing and consumer activity remain in the doldrums. Among the 10 major industry groups, industrial shares led the losers, falling 2.51%.
The NASDAQ Composite was bolstered by a strong showing among telecom, information technology and biotechnology shares, up 2.02%, 1.48% and 0.95%, respectively.
The S&P 500 ended the day just fractionally lower.
Market Activity for February 2, 2009
Economic Data
The Commerce Department reported that personal income fell for the third-straight month in December. While the declines in this data, the broadest measure of income, have been mild considering the degree of labor-market weakness, the fact that we have a series of declines means the year-over-year readings have deteriorated substantially.
Personal income fell 0.2% in December and is up only 1.4% year-over-year, which is down from +3.8% as recently as August. Real disposable (after-tax) income rose 0.3% for the month. The savings rates increased to 3.6% in December from 2.8% in November. This traditional measure of savings has jumped over the past few months as the two main savings vehicles (stocks and homes) continue to fall.
The compensation and wage and salary components of the report had been holding up remarkably well, but not so for the past two months – both fell 0.3% in December.
Proprietor’s income fell 0.6%, marking the second month of decline – the figure fell 1.6% in November. The year-over-year figure is down 2.0%.
Interest and dividend income were also lower, down 2.1% and 0.5%, respectively. On a year-over-year basis interest income is down 7.2% as interest rates have been very low for some time. Dividend income was up only 0.1% from December 2007, down from the robust year-over-year rate of 5.5% in August. The dividend cuts within the financial sector have caused this erosion.
On the spending side, personal spending fell a large 1.0% in December, marking the sixth month of decline – and substantial declines they have been. The level of real spending in December was down 2.8% from the fourth-quarter average at an annual rate, according to RDQ Economics. This compares to the 3.5% decline in personal consumption we saw in Friday’s GDP, so we wouldn’t expect this component of the report to be revised.
The consumer is simply not going to increase activity until they are comfortable with the level of cash savings. If we don’t get policy out of Washington that can ease some concerns and spark a sustained stock market rally, then we may need a savings rate close to 5% before consumer activity rebounds. Obviously, the deterioration within the labor market has caused issues, but it’s our feel the degree of decline in stock prices – along with continued home price contraction – has dealt the largest blow. It’s a confidence thing.
This personal spending data has an inflation gauge linked to it (known as the personal consumption expenditures, or PCE, deflator). This gauge, along with the chained CPI report, is immensely more accurate than the regular CPI figure and garners the most focus from economists.
The month-over-month reading showed prices fell 0.5% in December. On a year-over-year basis, the PCE Deflator is up 0.6%, that’s down from 1.4% in November. The core rate, which is the Fed’s favored inflation gauge, has price activity up 1.7% year-over-year, which is a deceleration from 1.9% for the previous month.
Energy prices have turned the inflation gauges lower and this pushed real disposable income up a sharp 6.7% at an annual rate last quarter. This will help the consumer bounce back several months down the road.
Combine this improvement in real incomes with strong corporate cash positions and massive monetary easing that will explode through the economy once lending normalizes and we could see a powerful rebound in economic growth a couple of quarters down the road. The concern is that government is so involved at this point, the unintended consequences of their actions makes this rebound a short-term event. We shall see. It’s vitally important we shift some of the stimulus plan to an incentives-based framework; if done it will help to offset the consequences that always follow government “fixes.”
In a separate report, the Institute for Supply Management announced factory activity improved in January, although it remains at a weak level.
The ISM manufacturing index rose to 35.6 last month from 32.4 for December, which marked the lowest reading since 1980. ISM is a diffusion index, which means it attempts to measure the percentage of firms experiencing an improvement in factory conditions. Therefore, only 35.6% of firms experienced improving conditions last month; 64.4% saw conditions deteriorate.
The more forward-looking sub-indices of the report did show some life for February as production, new orders, orders backlog and inventories all moved in the right direction. However, the improvement is from terribly weak levels. One would think we can get some bounce over the next couple of months, simply based on the levels we’re coming off of, but there just isn’t a compelling reason to expect a sustained rebound just yet.
If we’re going to see the economy begin its recovery by the summer, we’re going to have to see ISM move into the mid-40s by March. This is one of the best indicators of when the economy has begun to turn.
In the final release of the day, Commerce also reported construction spending fell 1.4% in December. The November decline was revised downward to show a 1.2% drop (double last month’s estimate). This marks the third-straight month of decline, but unlike the previous months every component was down.
Private residential construction continues to the lead the move lower, falling 3.2% (down 22.9% year over year); private nonresidential fell 0.4% (up 8.9% YOY) -- it remains remarkably resilient, I’ve got a feeling we’re about to see this one begin to post substantial declines. Public residential construction spending dropped 2.5% (up 9.1% YOY) and public nonresidential fell 0.8% (up 6.9% YOY).
The December construction spending decline was larger-than-expected, and in addition to the downward revision for November, this data will have a negative effect on the revision to Q4 GDP.
The driver for construction spending will come from the public side of things over the next year, at least, as it is obvious government will play a larger economic role.
Have a great day!
Brent Vondera, Senior Analyst
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