U.S. stocks shook off several inauspicious economic reports (to put it mildly), extending the rally to four sessions – a jump that has sent the broad market higher by 18%. A rally in oil prices may have helped sentiment on Wednesday as crude and stocks have been moving in the same direction more than ever – not every session, but many. Why? Because lower prices remind everyone of the depressed nature of demand, so when oil jumps, it helps to ease this concern – it’s a psychological thing.
President-elect Obama also held another press conference, this time explaining that former Federal Reserve Chairman Paul Volcker will be running an economic advisory team for the next president. Lawrence Summers will be the ultimate decision maker with regard to Obama’s economic policy and everyone knows it, but Volcker has a lot of credibility so just having him next to the President-elect probably helped the market as well.
We’ll see how she reacts next week after coordinated terrorist events in India have returned that risk to the fore. If we can keep the momentum moving through this event we may be able to extend a surge through year-end.
Today is Black Friday (traditionally the day retailers begin to turn a profit for the year) and a very cautious consumer will likely add another unfavorable event that the market will have to deal with. On this point, while it is very likely this year’s holiday-shopping season will be the weakest in a long while the 60% decline in gasoline prices may provide a boost. We’ll soon find out whether the extra money left in pockets will be saved or spent.
Many analysts and economists continue to look to today’s activity in order to assess the shopping season, but this day doesn’t apply as it has in the past. Consumers become incrementally smarter each year, knowing if Black Friday shapes up badly, desperate discounting from retail chains will ensue. Point is won’t know how things will turn out for a couple of weeks still.
Market Activity for November 26, 2008
The Economy
We had a lot of data released on Wednesday, so I’ve condensed the comments to get it all in.
First, the Labor Department reported initial jobless claims fell 14,000 to 529,000 in the week ended November 22. While it’s nice to see claims fall we remain at elevated levels and this will remain the case for a few months now. Since we have entered very weak labor-market territory (the labor market held up well for the first eight months of the year, but much damage was done by the credit freeze-up), we’ll remain above the 500k mark for some time.
The unemployment rate peaks roughly a year after a recession has ended, as job creation has a large lag to it, but jobless claims are more of a leading indicator. Still, it will be a few months at least before the gauge begins to ease – and there is really no visibility right now, we’ll need a couple of months worth of data in order to get a decent estimate as to when layoffs will begin to wane.
The four-week moving average of claims increased 11,000 to 518,000 – the highest reading since December 1982. (We’ll note though that when we adjust for the increase in the work-force, claims are much lower than that former period. We’d need to get to 700,000 on an adjusted basis – which shows just how bad that 1981-1982 job market was. Back in 1982 the U.S. work force stood at 112 million, today it is 155 million; jobless claims of 500,000 was obviously much worse back then.)
Continuing claims remain high, but fell nicely – down 54,000 for the week ended November 15 (there’s a week’s lag between this reading and continuing claims if you’re wondering) but again it will take a couple weeks of improvement to get excited about the decline.
Second, the Commerce Department stated durable goods orders went kerplunk in October. No real surprise here as we know October was a terrible month – but the degree of decline was startling, falling 6.2%. The ex-transportation reading was very bad as well, falling 4.4% after a meaningful 2.3% decline in September.
Literally every segment of the report was down big, which is what it takes to get declines of this magnitude. The segment we focus on is the non-defense capital goods ex-aircraft figure (the proxy for business spending), and that number plunged 4.0%. The credit event that began in September caused businesses to pull-back on spending plans in a swift manner.
Machinery, electrical equipment, and primary metals all dropped big time – which also shows the lack of global spending. I’d expect some kind of rebound by December as the heightened level of caution wanes. U.S. firms – in the aggregate – have the resources to increase business spending and even as demand has weakened substantially, we should see a bounce a month out.
The inventory-to-sales ratio within the durables report is rising amid this weakness, but we’re coming from such a historically low level that the figure is not alarming.
Third, Commerce also reported personal incomes rose 0.3% for October, which brings the year-over-year increase to 3.3% - up from 3.2% in September but this rate of climb has slowed from 4.5% on average for the first-half of the year. All things considered, income growth is holding up decently, but the October reading was largely boosted by government transfer payments. Without these payments, along with jobless benefits, the reading would have been unchanged to 0.1% for October.
The good news is that real disposable income (after-tax income adjusted for inflation) jumped 0.9% last month and is now positive over the past 12 months. This figure had been negative for a couple of months due to erstwhile energy prices. Now that energy, along with other commodity prices and overall inflation, has come down, real incomes have benefited.
Within the same report Commerce also stated personal spending fell a large 1.0% in October (down 0.5% adjusting for inflation), marking the fourth-straight month of decline. But spending will not decline forever and the just discussed bounce in real incomes should help.
Gasoline prices alone are down 60% from the peak hit in July-August and this is keeping roughly $300 per month in consumers’ pockets. As consumers hold back on activity, this boost to the pocketbook will build and may help spending pop in December. It is pretty likely, however, that we’ll have to wait six months, maybe more, before consumer activity begins to rise in a sustained way again – it’s impossible to offer a meaningful guess at this point, but there is a lot consumers are facing right now. Uncertainty over how many jobs will be shed over the next 12 months is causing prudent caution at this time.
The savings rate has risen to 2.4% from 1.2% in September and 0.6% in August – households will continue to raise savings so long as asset prices continue to decline, specifically stock prices. (Although the huge jump in home prices 2002-2005 also affected this reading; now that the opposite has occurred more is being placed in savings accounts)
We’ve talked at length over the past few years how those worried about the savings rate are missing the picture. The way the savings rate is calculate assumes the vehicles for savings have not changed in 30 years. Over the past 20 years for sure, most household savings have moved to the stock market, and stock-price appreciation escapes the savings rate calculations. However, with stocks down heavily over the past couple of months in particular, traditional savings (adding money to savings accounts and CDs) has re-emerged. This figure will fall again when stock prices begin to rise in a sustained manner.
Fourth, the Chicago Purchasing Manager’s report stated activity in the country’s largest manufacturing region declinedl further after falling off the proverbial cliff in October (that October reading fell hard to 37.8 from a pretty robust level of 56.7 in September – just another indication things really changed in the late-September/October period).
For November, the Chicago-area manufacturing survey fell to 33.8, which is the lowest level since 1982. We’re seeing a lot of that lately -- comparisons to the 1981-1982 recession.
We may not see much improvement when the December figure is released as both new orders and order backlog fell to very low levels.
Finally, the Commerce Department – they were busy over there -- reported new homes sales fell 5.3% in October to an annual rate of 433,000 units, hitting a 17-year low. The median price of a new home fell to a four-year low of 218,000. This marks a 1.6% decline for the month and 6.9% from the year-ago period. Unfortunately, these declines are a necessary condition to get us through this housing recession.
As you can see via the chart below much improvement has been made on the supply front as new home construction has ramped down big time.
However, relative to the current sales pace, the supply of houses remains at an extreme elevation. But what that houses available for sale figure tells us is once sales rebound, this inventory to sales figure will come down hard. Once it hits 5-6 months’ worth of supply, we’re back in business.
This morning we don’t get much in the way of data as we have a shortened session. Traditionally, most traders are out today (the bond market is closed entirely) so it doesn’t make much sense to release data. We will get manufacturing activity out of the Milwaukee region, but this is not a closely watched gauge. Monday will be another big day of releases as the factory activity for the nation (the ISM reading) and construction spending are due.
Have a great weekend!
Brent Vondera, Senior Analyst
On the economic front, the Commerce Department released its first revision to third-quarter GDP and it was revised down from last month’s initial estimate. The report showed gross domestic product fell 0.5% at a real annual rate during the July-September period, down from the minus 0.3% initially estimated.
