The market appeared to give the Obama budget – some of which we touched on yesterday – a thumbs down but I’m not sure it’s fair to blame yesterday’s activity on the fact that the relationship between the federal government and the private sector is in the process of being altered. This has been a major reason the market is down 25% since Election Day– per yesterday’s session, we’ve known the agenda for a while so it’s not like what was announced was much of a surprise. We’re going to see government spending as a percentage of GDP move from the 18%-20% range of the past quarter century to something closer to 30%, and this will have an effect on longer-term growth rates simply because the private sector allocates resources in a much more efficient manner than government, period.
Financials and telecoms were the only winners yesterday – telecoms have been on a nice little run of late. In terms of financials, it’s a rarity these days to see the overall market decline on a day the banks gain ground, but the broad market was weighed down by the drubbing health-care stocks took – the budget was not kind to this sector as a push to universal health care, a proposal to lower Medicare Advantage payments to managed-care firms and requiring drug-makers raise rebates (you want to crush drug discovery, this is the way to do it) pushed the group lower.
Market Activity for February 26, 2009
Well, let’s get to the economic data.
Initial Jobless Claims
The Labor Department reported initial jobless claims for the week ended February 21 rose 36,000 to 667,000 -- the expectation was for a decline. Claims just keep rising and we’re approaching the all-time high hit in 1982. However, while one shouldn’t downplay this event, when adjusting for payroll position growth claims would have to hit one million to match that 1982 level. There are 135 million payroll positions today compared to 88 million in 1982.
The four-week average of claims – a less volatile figure -- jumped 19,000 to 639,000.
Continuing claims rose 114,000 to 5.112 million in the week ended February 14. The insured unemployment rate – which tracks the overall jobless rate – rose 0.1 to 3.8%.
I think it’s pretty clear payrolls will show another huge 600,000 loss for February when the data is released next Friday. The unemployment rate may hit 8.0%, currently it is 7.6%. I’ve got to believe the degree of monthly job losses will ease a couple of months out as firms may have gone too far in job cutting, scared by the combination of the credit freeze last quarter followed by policy that has not exactly offered a boost to confidence.
Durable Goods Orders
The Commerce Department announced durable goods orders dropped 5.2%, following an almost equally large 4.6% decline in December. A decline in transportation orders of 13.5% led the decline as defense aircraft and auto bookings dropped.
Excluding transportation, durables orders fell 2.5%, following a big 5.5% decline for December that was revised down to show double the damage of the initial estimate. There were no silver linings in the data. Primary metals orders fell 4.6%, industrial machinery was down 2.0%, computer orders fell 5.0%, electrical equipment was down 6.1%, autos were down 6.4%.
The component of the report we watch most closely (as longer-term readers are aware) is nondefense capital goods ex-aircraft, this the proxy for business equipment spending. This figure dropped 5.4% last month and 5.8% in December – down 34.3% at an annual rate the last three months. This as well as anything explains the level of caution with which businesses are operating. This gets the business equipment side of GDP off to a horrible start for the first quarter.
New Home Sales
Wow! The Commerce Department reported new home sales declined 10.2% in January to 309,000 units at an annual rate from an upwardly revised reading of 344,000 for December – first reported at 331,000.
The supply of new homes fell 3.1% in January – the 21st straight month of decline – to 342,000 to the lowest level since April 2003. The population was 19 million lower back in 2003; I think this shows how the supply glut has been completely erased, new home prices are down 26% from the peak.
It will take some economic confidence, however, for this to flow through in sales. The supply of homes relative to sales rose to 13.3 months’ worth.
By region, sales in the Northeast rose 12.5%, but the Midwest and South fell roughly 6% and the West saw new home sales plunge 28%, for the month! This depressed activity in the West is quite different from existing home sales data as we’ve seen activity rebound to a decent degree for existing.
New home sales are down 65.8% at an annual rate over the past three months and have yet to show any sign of bottom, but we’ve got to be close.
Have a great weekend!
Brent Vondera, Senior Analyst
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