Home prices, Richmond-area manufacturing and consumer confidence all posted pretty horrendous results, which we’ll get to below, making it very difficult for the indices to gain ground, especially ahead of today’s Fed rate decision and the comments that accompany that stance.
Market Activity for June 24, 2008
Seven of the 10 major industry groups closed lower yesterday – financials, consumer staples and telecoms were the three that ended on the plus side.In addition to weak data releases, traders also has to deal with seemingly incessant comments of how we’re headed for recession, with some going as far as stating there isn’t any question that economic contraction is just ahead.
Outside of the data that is acutely tied to the housing woes, the majority of economic indicators are not pointing to this situation, as we’ve talked about for many months now. You simply do not have inventory levels (as a percentage of sales) near record lows, business sales that are on an upward trajectory, jobless claims below the 400,000 level and the overall manufacturing reading hovering very close to the line of expansion when recession is right around the corner.
In fact, so long as the Fed gets to it and begins to raise rates a bit – and it wouldn’t; take much in my view – the economy will escape recession even in 2009. If they do not get to it, and instead continue to dither, recession will be upon us late next year as their rate increases will need to be harmfully abrupt in order to squelch what will become a troublesome bout of inflation.
Getting to yesterday’s economic data releases, it began with the Richmond Fed index for June – a survey of factory activity within that Fed district – which posted a reading of negative 12. A number below zero marks contraction.
All broad indicators of activity within the index – shipments, new orders and employment – were in negative territory and lower than the previous month. District contacts reported that readings on order backlogs and capacity utilization narrowed and delivery times, although in positive territory, moved lower as well.
The silver lining, and ignored by the press, was the readings on capital expenditures. This segment increased, registering a four-point gain, coming out of two-straight months in which it registered zero.
This is important because it – along with other indications like the past two months of durable goods data – helps to validate our assumption that business spending will catalyze economic growth in the back-half of the year. Of course, the Fed cannot allow concerns to spin out of control with regard to soaring commodity prices. They must act now. So long as they do, concerns over fuel prices in particular will wane and businesses, which have vast resources as their disposal, will boost spending.
The second piece of data we received pertained to home prices. The S&P/Case-Shiller Home Price Index reported that home sales fell 1.36% in April and 15.3% from the year-ago period.
This index does overstate the declines by my judgment at it only captures 20 U.S. cities. They are the largest cities, but many of which have registered the most dramatic declines. Nine of these cities – Detroit, Las Vegas, Tampa, Minneapolis, L.A, San Fran, San Diego, Phoenix and Miami have all registered at least a 15% price decline in the past year, with seven of these areas falling at least 20%.
But this is not the situation for the country as a whole, as the geographically broader OFHEO (Office of Federal Housing Enterprise Oversight) home price index shows prices down by just 4.9% over the past year. Not that that’s good, but it’s not 15.3%.
Lastly, the Conference Board’s Consumer Confidence reading for June fell to the lowest level in 16 years. I normally do not report on this reading as it has proved to be a worthless indication of actual spending trends – long-time readers may recall this letter spending plenty of time explaining this reality back in 2002-2003. In any event, since the reading has declined to such a low level I feel compelled to touch on it for now.
The precipitous decline of the past eight months is undoubtedly due to housing-market woes and conspicuously irritating gasoline prices for many and financially painful for plenty. In addition though, a constant drumbeat of media pessimism has also contributed and I’d be remiss to leave out that the declines began at the very same time the Fed began to lower rates. The confidence numbers continued to slide as the Fed became irresponsibly aggressive with their rate cuts and oil shot even higher as a result.
I will point out though, again, that this survey is a poor indicator of what consumers actually do, which is apparent even in the past couple of months as spending has rebounded in pretty strong order even as confidence has plunged. The degree to which this reading has declined is disturbing, but those that filled out these surveys (mailed out to homes) should call Bernanke’s office if they’d like to vent some frustration. It was the Fed mistakes of keeping rates too low for too long into 2004 and 2005 that led to home prices to explode to levels that made zero sense, and hence the correction the market is currently dealing with. Now, it is their mistake of becoming way too easy that has pushed the dollar lower and oil prices higher by 70% in the last nine months alone.
The graphs below show both the confidence readings and retail sales (ex-auto sales). Retail sales (x autos), has increased at a 12% annualized pace over the past three months even as this confidence survey has moved to very low levels. Even including auto sales, which have been weak, retail sales have advanced at a 7.6% annual pace since March. Reason is, income growth is the single-largest determent of spending, and disposable income (after-tax income) is up 5% year-over-year. While this increase is not enough to keep up with raging energy prices, it’s still a darn good number.
This morning we get new home sales and durable goods orders for May, but everyone will be waiting for that Fed decision – the comments actually – that is released this afternoon.
I don’t think anyone believes they will raise rates today, although I wish they would send a strong message and begin to boost by 25 basis points. Inflation is becoming a problem and while it hasn’t yet shown up, in a really nasty way at least, within the consumer-level price gauges it will.
Statistical inflation lags by 7-8 months; there is nothing stopping the inflation gauges from hitting 4.5%-5.0% by year end. CPI is close to that point, but the others are still registering roughly 3.5%. Bernanke can save his job by beginning his rate-hiking campaign today, as they need to move fed funds by 3.00% by year end – it needs to be a mild move higher, but the move has to take place or crude prices will not come lower anytime soon.
He will not choose this course, but the second-best thing will be to offer strong language that signals the hiking will begin at the August meeting. If he does not, we’ll be talking about a new Fed Chairman within a year.
Have a great day!
Brent Vondera, Senior Analyst
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