The latest personal income report showed consumer spending fell in March, which deflated Wednesday’s premature excitement that consumer activity was on a sustained path higher. This, combined with investors mulling the additional pressure the Chrysler bankruptcy filing would put on the economy, turned out to be too much of a drag for stocks to build upon the prior session’s gains. (This is not to say that bankruptcy isn’t the correct course for Chrysler because it is, but the event will put marginal pressure on growth, particularly within the manufacturing sector.
And speaking of manufacturing, the latest regional factory survey showed very nice improvement, by far the best news we’ve seen out of the sector over the past two quarters. Alas, it was not enough to keep stocks above the flat line. The Senate also rejected mortgage “cramdown” legislation, which is good news for home-financing channels over the longer term. (This legislation was an attempt to violate contract law and a progression down this path would have had tremendously dangerous consequences – big news that it was blocked) These two events probably kept stocks from falling further.
Energy stocks led the five major industry groups that lost ground on the day. The S&P 500 index that tracks these shares dropped 2.08% after Exxon Mobil reported a 55% decline in quarterly operating profit – although Exxon earnings are still plenty to keep funding development and exploration projects; it’s undoubtedly one of the best managed firms out there. Basic material shares led the other five major industry groups that posted gains; the index that tracks these shares jumped 3.01%.
Market Activity for April 30, 2009
Political Malfeasance
Chrysler is headed for bankruptcy court as enough private bond holders chose to reject the Treasury Department’s offer, yes the Treasury Department’s offer, that would have reduced the claim by private investors and given it to a political constituent, the UAW. (This is not unlike the proposed deal at GM that would give the government a majority stake, yet leave the private-sector bondholders – both private investors and the gov’t own $27 billion in GM debt each -- just 10% of the restructured firm; the UAW would receive 40%) President Obama castigated the private investors (mutual funds, hedge funds, pension funds, retail investors) for refusing “to make sacrifices while everyone else was.”
The reality is, just maybe they simply chose to take the chance that their claim would be worth more to them (and their investors) in liquidation than via the Treasury’s skewed plan. After all, many large investors had purchased credit-default swaps as protection in the event of bankruptcy – shall they have given that insurance up to partake in this ridiculous offer?. Oh, and since a UAW health-care trust fund would end up owning 55% of the restructured company one can bet the chances their investment would be worth more in liquidation is dramatically higher.
Mr. Obama has it all wrong as he attempts to take from one group to give to another and vilifies the private investors for acting in their own self interest. In his disdain for the private sector, he forgets that the government doesn’t make all the decisions, not yet at least. There is still a freedom to choose and investment managers chose that the deal the Treasury was offering to Chrysler’s creditors was a bad one. It’s no more complicated than that. Besides, all who pay taxes will be “sacrificing” in short order to pay the bills the federal government is ringing up.
Jobless Claims
The Labor Department reported that initial jobless claims fell 14,000 to 631,000 in the week ended April 25 (better-than-expected) from an upwardly revised 645,000 in the week prior. The four-week average of initial claims fell 10,750 to 637,250.
Continuing claims jumped 133,000 to 6.271 million (much worse-than-expected) – this marks the 13th straight week in which the reading has made a record high.
The insured unemployment rate, which is tied to the continuing claims report and closely tracks the direction of the overall jobless rate, rose again, hitting 4.7% -- the highest level since December 1982 when the overall unemployment rate hit 10.8%.
Bottom line is it does appear initial claims have peaked – although it’s tough to say as that Good Friday holiday played havoc with the number. If initial claims ease again next week we’ll have conviction in stating the worst has been seen. In addition though, the Chrysler bankruptcy will very likely mess with the reading (as plants are closed) and it’s just really tough right now to confidently say we’re trending lower from here.
Ultimately, we’ll need to see the four-week average trend into the 500K handle. While this is still a very elevated position from a historical perspective, it will offer a clear sign the worst is over for the labor market.
Continuing claims are hitting new records, which illustrates the fragility of labor market conditions. That said, this reading is not the leading indicator that initial claims is, it’s more of a lagging figure as is the overall unemployment rate. Continuing, just as the unemployment rate, will continue to remain elevated even as the economic rebound truly takes hold; however, we need to see continuing claims at least cease to make new highs.
Personal Income and Spending
The Commerce Department announced that personal incomes fell 0.3% in March (the fifth decline in the past six months) and is up just 0.3% now from a year-over-year perspective. Every private sector income component declined again, which does not bode well for a sustained upswing in consumer activity.
Total compensation fell for the fifth-straight month, down 0.3% in March and down 0.5% from the year-ago period. Wage and salaries fell 0.5% last month and are down 1.2% year-over-year. Rental income, dividend income, interest income and proprietor’s income were also lower and three of these four are down from the year-ago period – rental income is still up big thanks to massive monthly increases late last year.
Government transfer payments remain the only component of personal income that is on the rise, boosted by a large 7.1% jump in unemployment insurance last month. For the year, government transfer payments are up 12.3%.
On the spending side, expenditures fell 0.2% in March after an upwardly revised 0.4% increase for February. Assuming the data is not significantly revised when this month’s data is released next month, the personal consumption estimate within the GDP report on Wednesday looks to be pretty accurate, up 2.2% for the quarter.
The personal savings rate rose again, hitting 4.2% of disposable (after-tax) income, after a blip down in the previous reading.
A sustained rebound in consumer activity is unlikely as consumers will feel the continued need to augment their cash-savings due to the hit their two main savings vehicles (homes and stocks) have taken – maybe somewhere around the 6% level is where we see consumer activity trend higher; my former number was 5% but I’m thinking that is a poor assumption.
In addition, as stated above, we’ll need to see initial jobless claims signal the worst of the labor market conditions have been reached by trending down to the 500K handle. When this occurs the possibility of sustained help via the consumer with regard to GDP growth will become much more likely. Even then, the trend higher in personal consumption will remain somewhat tepid due to low income growth.
The inflation gauge that is tied to this report, the PCE Deflator, came in slightly lower than expected, up 0.6% year-over-year (0.7% was expected).
The core rate, which excludes food and energy, rose 0.2% for the month (higher than the 0.1% increase expected) and 1.8% on a year-over-year basis (right in line with expectations). While this rate remains very tame, it is up 2.4% over the last three months at an annual rate – kind of a high level for this stage in the business cycle.
Chicago PMI
The Chicago Purchasing Managers Index (the most watched regional factory survey) jumped to 40.1 in April from the nearly 30-year low of 31.4 hit in March. This is the highest level we’ve seen since the economic world changed in September -- 50 is the dividing line between expansion and contraction.
This increase is great news and is the best indication the manufacturing sector has seen the bottom. While the improvement illustrates a slower pace of contraction rather than a rebound to expansion, hitting 40 was a big step to take.
Nearly all of the sub-indices showed nice improvement.
Production added 5.4 points.
New orders shot up 11.2 points.
Order backlog jumped 15.6 from an extreme depth.
Employment improved a bit.
Unfortunately, the inventory gauge declined. This doesn’t give the impression that firms are too terribly optimistic about sales growth over the next few months, but let’s not dwell on it as the rest of the report gives us one of the most positive signs we’ve seen yet in this recession.
The issue right now is the extent to which continued auto-sector woes weigh on this index – Chicago PMI is the regional factory index most affected by auto activity. This is why it will be increasing important to watch the other regional surveys as clues the economy is rebounding. It will also be essential for the ISM (nationwide manufacturing survey) to trend into the 40s (currently stuck in the mid 30s) and remain there – we get that number this morning. The regional factory surveys we’ve seen over the past couple of weeks have sent the signal ISM will hit the 40s. Will it remain there and trend to expansion mode? That’s the question, and auto bankruptcy (while a necessary condition for U.S. auto makers to get things right) increases the difficulty of answering this question.
Have a great weekend!
Brent Vondera, Senior Analyst
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