Best Buy reported that same-store sales plunged 6.7% last quarter, a 2.3% decline was expected and one would think they’d had been able to meet that number with major competitor Circuit City out of the game. Traffic in all stores was weak (the same-store sales figures measures just those stores open for more than a year). This didn’t seem to have an effect on investor sentiment initially, but when it combined with a poor industrial production reading, the market sold off.
A lot of people seem to be expecting consumer activity to bounce in the near-term simply because the numbers have been so weak. But this economy has to face big headwinds, one being debt liquidation within the consumer arena and this will weigh on the largest segment of the economy for an extended period.
Market Activity for June 16, 2009
Housing Starts
The Commerce Department reported that builders broke ground on significantly more houses than expected in May, offering signs that the industry has roused from its four-year slumber.
Housing starts jumped 17% in May to an annual rate of 532,000 after making a new low of 454,000 in April. Starts were led by a 61.7% leap in multi-family units after back-to-back declines in April and March of 49.4% and 26.3%, respectively. Single-family starts rose 7.5% in May.
These are nice improvements -- certainly the multi-family number is a surge but it’s from a deep record low and this segment is highly volatile – yet we still have a large supply burden to work off and this increase in housing starts is not going to help that glut. In terms of GDP, if this move continues into June, which the rise in building permits suggests will be the case (also released yesterday), residential construction may just contribute to economic activity for the first time in 10 quarters.
I think economists should refrain from getting too excited, which appeared to be the case by the reporting, that this jump in starts signals something has changed. I have no desire to offer a negative view here, but the levels are very depressed and any pickup is going to add to supply. Fact is sales will not bounce with the jobless rate at these heights unless fixed mortgage rates move well below 5.00% again, which seems unlikely.
I’ve been comparing the past few readings to the December figure, rather than simply using the previous month. The December reading is the one to gauge ensuing data against simply because the January and February readings really skewed things. (January housing starts were depressed because of really bad weather and February saw a big bounce as weather was better than normal). We have yet to get back to the level in December. When that reading is surpassed, which a mild increase for June should accomplish, it will then be safe to say we’ve seen the worst from this market. But without a sustained bounce in sales, I don’t see how residential construction can help GDP outside of possibly offering a little boost this quarter as we come out of the lowest activity on record.
Building permits rose 4% last month from the record low hit in April.
Industrial Production (IP)
Commerce also reported that industrial production fell for the 16th time in the past 17 months for May. This marks the deepest and most prolonged slump since the draw down in production coming out of WWII. And the decline cannot be blamed solely on a weak auto sector as declines in consumer goods and business-equipment production illustrate the manufacturing slump is broad based.
Industrial production (output at factories, mines and utilities) fell 1.1% in May, slightly worse than the 1.0% decline that was expected. A 7.9% plunge in motor vehicles and parts led the decline, but this segment makes up less than 5% of the index. Ex-vehicles, production fell 0.9%, which follows a 0.7% decline in April and is off by 12.2% from the year-ago level.
In terms of industry groups, manufacturing output fell 1.0%, utility output fell 1.4% (not weather-related as the national temp was slightly above average) and mining production slumped 2.1%.
In terms of market groups, consumer-goods production was off by 0.8% (down 7.1% year-over-year), pushed lower by a large 1.9% drop in home electronics; business equipment fell 1.4% (down 16.5% year-over-year), driven by a 1.0% decline in business supplies.
As we’ve stated over the past couple of months, people can talk about the second derivative (declining at a slower rate) all they want but the market will eventually become tired of this reality. Soon, industrial production will have to turn positive, and specifically this is true for the manufacturing sector, for the equity markets to expand upon this very nice surge we’ve enjoyed from the March lows. We continue to believe GDP will post a mild increase for the third quarter, but this IP reading better follow a plus sign when the June figure is released or we may have to push that estimate out a quarter.
On the positive side, corporate profits should explode a couple of quarters out. The slash and burn with regard to expenses (both payroll and overall business spending) means that it won’t take much in the way of higher sales to fuel the bottom line – year-ago comps will be easier to beat as well. Before we get there though, we may still have to fight through some rough waters.
Have a great day!
Brent Vondera
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