U.S. stocks ended pretty much flat on Friday as the financial press blamed the lack of investor commitment on a jump in the savings rates. We think it had more to do with the monthly income data that showed the vast majority of the increase came from government transfer payments, but we’ll get to that below. The NASDAQ Composite managed to post a decent gain.
Renewed concerns that consumer spending will slow hit economic forecasts and that meant pressure for energy, consumer discretionary and industrials shares, which were among the biggest losers.
I find the number of people believing the consumer is poised to bounce back pretty amazing. The job market is going to take another year, at least, before it shows net job creation (and it’s likely to take longer than that) and consumers have a debt problem to manage around right now. The level of debt incurred was manageable at 5% unemployment and rising private-sector incomes – a vastly higher stocks market also helped consumers feel less pressure from the levels of debt that very low interest rates encouraged. But now with the unemployment rate on its way to 10%, private-sector incomes flat and the stock market still 41% off of its 2007 peak…well, it’s no surprise that the cash savings rate has hit a 15-year high; it will continue to go higher too if higher gas prices don’t eat into this savings, which is another issue for the rough consumer environment.
The major indices ended mixed for the week as the broad market closed down 0.25% and the Dow Industrials lost 1.19%; the NASDAQ Composite bucked the trend, closing up 0.59%. Mid cap stocks closed down 0.22% and small caps ended mixed with the Russell 2000 up 0.10% and the S&P 600 down 0.08%.
Market Activity for June 26, 2009
Personal Income and Spending
The Commerce Department reported personal income jumped 1.4% in May, more than four times the amount expected as employers boosted wages and salaries even as they struggle to deal with very weak business conditions. Just kidding, but one would think this to be the case by the way people positively reacted to the headline increase. A look within the data shows wages and salaries fell again in May. The increase in the monthly income numbers was almost totally due to another large increase in government social benefit payments.
Government transfer payments recorded their largest monthly jump yet, up 7.8% in May after the 2.9% increase in April and a1.6% rise in March – this very European-like segment of the data is up 12.2% year-over-year and will have to be paid for at some point – higher tax rates are coming. Rental income was the only real bright spot on the private sector side, up a very strong 5.7% in May and with the housing market in the tank has rocketed up by 66.7% on a year-over-year basis.
That said, this is a very minor aspect of income, making up just $5.2 billion of last month’s $167.1 billion increase in income. Government transfer payments, on the other hand, made up a huge 97% of the income gain for May. Maybe this illustrates why we’re not exactly excited over the large increase in total income last month – the way incomes have increased is hardly sustainable.
The largest private sector aspect of the data, wages and salaries, fell 0.1% in May marking the seventh monthly decline in the past eight months. On a year-over-year basis, wages and salaries are off by 1.1%. Dividend income fell 0.7% and interest income rose 0.7%, pretty much offsetting one another as the dollar change in dividends fell $5 billion, while the increase in interest income was $7 billion.
On the other side of the data, personal spending rose 0.3% last month and followed no change for April, which was revised up from the -0.1% initially estimated. Nominal spending is down 1.8% from the year-ago period.
As incomes easily outpaced spending in May, the savings rate (the cash savings rate as I call it) jumped to 6.7%. The policy makers that believe massive government spending will boost consumer activity are surely dismayed by this reality as they need these transfer payment to be spent.
However, with the shape the labor market is in, along with the decline in consumers’ two largest savings vehicles (stocks and houses) the build in cash savings will continue over the next year or two. On a year-over-year basis, the savings rate is up 4.8%, a huge shift from levels that hovered near zero. We’re looking for this year-over-year figure to move closer to 8% before consumers feel better about their situation. Ultimately, it will take meaningful improvement in the labor market to allow a sustainable move in consumer activity.
Even with the rise in spending last month, the jump in the savings rate is evidence that consumers have cut discretionary spending to the core. I am concerned that if gasoline prices rise much further this will be too much to bear – that release valve (as Daniel Ahn at Macroeconomic Research likes to put it) of cutting discretionary spending as a way to ease the outlays at the pump is no longer there.
I continue to believe that GDP will post a slight positive reading in the third quarter and a more substantial increase in the fourth. However, if policymakers continue along the current path (massive government spending that results in a growing concern over the chances of austere future tax rates and thus less private-sector activity) we may not get the boost from the business side that we’ll need to offset some of the consumer weakness.
That savings rate figure shows that bank deposits are increasing at a robust rate. Problem is, business caution means that the demand for loans is very weak – deposits grew 7.4% faster than loans last year, the widest gap in 30 years, and that number has surely increased so far this year; commercial and industrial loans have declined 8.2% since October. This could signal two things:
One, it may take a bit longer for a positive GDP print to result.
Two, when businesses do begin to increase borrowing again the massive levels of liquidity that is currently sitting fallow will then explode through the system. Since production has been extremely subdued for three quarters now that means a whole lot of money chasing too few goods – and that ladies and gentlemen is how harmful levels of inflation comes screaming out of no where. This is a real concern with regard to the duration of the rebound when it does occur.
Cap and Trade
The Cap and Trade bill passed the House by a narrow margin on Friday night. The quixotic nature of this legislation is troubling enough – demanding that power plants produce 15% of output from “renewable sources” in a decade will not only reduce our competitiveness, it’s absent common sense. We use roughly 50 million of oil-equivalent barrels of energy per day and of this amount wind, solar and geothermal combine to make up less than one million barrels. It’s an understatement to say that this target fails to conform to reality. If people were serious we would double our amount of nuclear power plants over the next decade and remove the recycling ban so that we no longer have a waste storage issue – we seem to recycle everything else under the sun but refuse to do so with the one thing that can make the biggest difference.
But the really troubling aspect of this bill is the protectionism that was pushed into the 1200 page document. It’s a rather circuitous route to protectionism, but protectionism nonetheless.
The authors of this bill apparently understand that raising the price of emission will erode our competitive advantages so they propose to protect steel, cement and chemical manufacturers via tariffs (raising the prices of imported goods so domestic industries that will be saddled with higher costs can compete). While this trade protectionism would not kick in for a number of years, it sends the wrong message to our trading partners who will be likely to impose their own trade restrictions in advance. This is called retaliation, a trade war, and is exactly what we do not need right now.
We can get away with making mistakes from an economic policy standpoint. But when you throw a number of things together, the eventual unwind of an aggressive monetary easing, higher tax rates, the attempt to impose sanctions on imports, a substantial increase in regulations and massive deficit spending I don’t think it is time for investors to take down their guard. This may be a very tempting thing to do over the next several months as the economy will (even if it is relatively mild and short-lived) rebound from these deep depths of contraction. Concern and caution will remain a prudent mindset until we see a shift in the direction of policy.
Have a great day!
Brent Vondera
Renewed concerns that consumer spending will slow hit economic forecasts and that meant pressure for energy, consumer discretionary and industrials shares, which were among the biggest losers.
I find the number of people believing the consumer is poised to bounce back pretty amazing. The job market is going to take another year, at least, before it shows net job creation (and it’s likely to take longer than that) and consumers have a debt problem to manage around right now. The level of debt incurred was manageable at 5% unemployment and rising private-sector incomes – a vastly higher stocks market also helped consumers feel less pressure from the levels of debt that very low interest rates encouraged. But now with the unemployment rate on its way to 10%, private-sector incomes flat and the stock market still 41% off of its 2007 peak…well, it’s no surprise that the cash savings rate has hit a 15-year high; it will continue to go higher too if higher gas prices don’t eat into this savings, which is another issue for the rough consumer environment.
The major indices ended mixed for the week as the broad market closed down 0.25% and the Dow Industrials lost 1.19%; the NASDAQ Composite bucked the trend, closing up 0.59%. Mid cap stocks closed down 0.22% and small caps ended mixed with the Russell 2000 up 0.10% and the S&P 600 down 0.08%.
Market Activity for June 26, 2009
Personal Income and SpendingThe Commerce Department reported personal income jumped 1.4% in May, more than four times the amount expected as employers boosted wages and salaries even as they struggle to deal with very weak business conditions. Just kidding, but one would think this to be the case by the way people positively reacted to the headline increase. A look within the data shows wages and salaries fell again in May. The increase in the monthly income numbers was almost totally due to another large increase in government social benefit payments.
Government transfer payments recorded their largest monthly jump yet, up 7.8% in May after the 2.9% increase in April and a1.6% rise in March – this very European-like segment of the data is up 12.2% year-over-year and will have to be paid for at some point – higher tax rates are coming. Rental income was the only real bright spot on the private sector side, up a very strong 5.7% in May and with the housing market in the tank has rocketed up by 66.7% on a year-over-year basis.
That said, this is a very minor aspect of income, making up just $5.2 billion of last month’s $167.1 billion increase in income. Government transfer payments, on the other hand, made up a huge 97% of the income gain for May. Maybe this illustrates why we’re not exactly excited over the large increase in total income last month – the way incomes have increased is hardly sustainable.
The largest private sector aspect of the data, wages and salaries, fell 0.1% in May marking the seventh monthly decline in the past eight months. On a year-over-year basis, wages and salaries are off by 1.1%. Dividend income fell 0.7% and interest income rose 0.7%, pretty much offsetting one another as the dollar change in dividends fell $5 billion, while the increase in interest income was $7 billion.
On the other side of the data, personal spending rose 0.3% last month and followed no change for April, which was revised up from the -0.1% initially estimated. Nominal spending is down 1.8% from the year-ago period.
As incomes easily outpaced spending in May, the savings rate (the cash savings rate as I call it) jumped to 6.7%. The policy makers that believe massive government spending will boost consumer activity are surely dismayed by this reality as they need these transfer payment to be spent.
However, with the shape the labor market is in, along with the decline in consumers’ two largest savings vehicles (stocks and houses) the build in cash savings will continue over the next year or two. On a year-over-year basis, the savings rate is up 4.8%, a huge shift from levels that hovered near zero. We’re looking for this year-over-year figure to move closer to 8% before consumers feel better about their situation. Ultimately, it will take meaningful improvement in the labor market to allow a sustainable move in consumer activity.
Even with the rise in spending last month, the jump in the savings rate is evidence that consumers have cut discretionary spending to the core. I am concerned that if gasoline prices rise much further this will be too much to bear – that release valve (as Daniel Ahn at Macroeconomic Research likes to put it) of cutting discretionary spending as a way to ease the outlays at the pump is no longer there.I continue to believe that GDP will post a slight positive reading in the third quarter and a more substantial increase in the fourth. However, if policymakers continue along the current path (massive government spending that results in a growing concern over the chances of austere future tax rates and thus less private-sector activity) we may not get the boost from the business side that we’ll need to offset some of the consumer weakness.
That savings rate figure shows that bank deposits are increasing at a robust rate. Problem is, business caution means that the demand for loans is very weak – deposits grew 7.4% faster than loans last year, the widest gap in 30 years, and that number has surely increased so far this year; commercial and industrial loans have declined 8.2% since October. This could signal two things:
One, it may take a bit longer for a positive GDP print to result.
Two, when businesses do begin to increase borrowing again the massive levels of liquidity that is currently sitting fallow will then explode through the system. Since production has been extremely subdued for three quarters now that means a whole lot of money chasing too few goods – and that ladies and gentlemen is how harmful levels of inflation comes screaming out of no where. This is a real concern with regard to the duration of the rebound when it does occur.
Cap and Trade
The Cap and Trade bill passed the House by a narrow margin on Friday night. The quixotic nature of this legislation is troubling enough – demanding that power plants produce 15% of output from “renewable sources” in a decade will not only reduce our competitiveness, it’s absent common sense. We use roughly 50 million of oil-equivalent barrels of energy per day and of this amount wind, solar and geothermal combine to make up less than one million barrels. It’s an understatement to say that this target fails to conform to reality. If people were serious we would double our amount of nuclear power plants over the next decade and remove the recycling ban so that we no longer have a waste storage issue – we seem to recycle everything else under the sun but refuse to do so with the one thing that can make the biggest difference.
But the really troubling aspect of this bill is the protectionism that was pushed into the 1200 page document. It’s a rather circuitous route to protectionism, but protectionism nonetheless.
The authors of this bill apparently understand that raising the price of emission will erode our competitive advantages so they propose to protect steel, cement and chemical manufacturers via tariffs (raising the prices of imported goods so domestic industries that will be saddled with higher costs can compete). While this trade protectionism would not kick in for a number of years, it sends the wrong message to our trading partners who will be likely to impose their own trade restrictions in advance. This is called retaliation, a trade war, and is exactly what we do not need right now.
We can get away with making mistakes from an economic policy standpoint. But when you throw a number of things together, the eventual unwind of an aggressive monetary easing, higher tax rates, the attempt to impose sanctions on imports, a substantial increase in regulations and massive deficit spending I don’t think it is time for investors to take down their guard. This may be a very tempting thing to do over the next several months as the economy will (even if it is relatively mild and short-lived) rebound from these deep depths of contraction. Concern and caution will remain a prudent mindset until we see a shift in the direction of policy.
Have a great day!
Brent Vondera
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