(I can’t help but wonder if either of these readings would have engaged in any meaningful upswing, even from the depths hit earlier this year, without massive government support. Naturally, I can’t help but also imagine the paths these readings will take when Washington must remove its economic crutches – a level of spending and monetary easing that cannot have long lives without creating even greater problems down the road).
And speaking of problems created, the dollar got crushed yesterday, back down deep into the 74 handle on the Dollar Index – hence the old carry trade was alive and well and that kept the see, hear and speak of no risk environment in play.
All 10 of the major S&P 500 sectors gained ground on the session. Utility, telecom, basic material and energy shares led the rally. Financials were really the only true laggard, up just 0.1% for the day.
Volume was weak as less than 1.1 billion shares traded on the Big Board, 10% below even the lackluster six-month daily average of 1.2 billion shares.
Market Activity for December 1, 2009
ISM ManufacturingThe Institute for Supply Management’s manufacturing index showed that nationwide factory activity grew but at a slower pace than the previous month. ISM Manufacturing came in at 53.6 for November, a deceleration from October’s 55.7. This marks the fourth straight month of expansion. The reading did miss expectations for a print of 55.0.
The new orders, production and backlog of orders readings didn’t waiver too greatly. New orders accelerated to 60.3 from 58.5 and production slipped to 59.9 from 63.3 – although what occurs in new orders for the current month largely follows through via production in the month or two ahead, so we should expect factory activity certainly to remain in expansion mode for December.
The backlog of orders, one area we’ve been watching for early signs of a turn in manufacturing employment, fell slightly to 52.0 from 53.5. Along this same line, supplier deliveries slipped too, down to 55.7 from 56.9. Both remain in expansion mode as number above 50 illustrates, but these readings need to move closer to 60 (and sustain those levels for several months) in order to offer a sign that capacity utilization rates are expanding and thus firms will have to hire more workers to meet demand. At this rate, it will be quite a long time before factories feel stretched with regard to current payrolls and work loads – resource utilization rates are way to slack to believe otherwise.
The employment index also remained in expansion mode, for a second-straight month now, even though it declined to 50.8 from 53.1. However, this reading of expansion, even if tepid, is not showing up in the actual data as the monthly jobs report continues to show factory employment is being slashed – 61,000 factory jobs were cut in October, which is a bit more than the three-month average. We’ll see how November shapes up on Friday when the months employment data is released.
The inventory reading continues to show that firms have little confidence activity will continue to progress as the ISM’s inventory gauge fell to 41.3 from 46.9. This reading needs to hold in the upper 40s, the fact that fails to even after the record pace of inventory slashing that occurred a couple of quarters back is telling. Add in that the customers’ inventories reading hit a new low (this means factories believe their customers inventories are too low) and yet factories still have not boosted stockpiles, it shows just how weak confidence is. (When the customers’ inventories is below 45, the overall inventory reading is always either heading for 50 or beyond it – not this time as inventories reading remains low even customers’ inventories has averaged just 40 since June).
Surely GDP will continue to get a little help from this segment of the economy – all it takes is for stockpiles to fall at a slower rate than the previous quarter – but a full-blown inventory dynamic, in which actually restocking is taking place, has yet to occur.
Construction Spending
The Commerce Department reported that construction spending came in unchanged in October from a downwardly revised -1.6% in September (previously reported as an 0.8% increase last month). This number beat the estimate of what was expected to be a 0.5% decline, although that was based on the previous month’s believed 0.8% rise. Based on the big downward revision for September, the result actually missed expectations by a wide margin.
The reading continues to get hit by the commercial side of real estate as spending on non-residential buildings fell 1.5% -- the private-sector aspect of this segment fell 2.5% in October (down 20.6% y/o/y and 31.9% last three-months annualized). Public-sector commercial construction fell too, but just 0.4% for the month (actually up 3.7% y/o/y and down only 1.9% three-months annualized).
Residential construction is keeping total construction spending from really falling. Total residential construction rose 4.2% in October, fueled by a 4.4% increase on the private side – this was divided in half by actual new-home building and home improvements on existing homes. (Private home construction is down 23.6% y/o/y but up 11.1% three-months annualized) Public-sector home construction fell 2.4% for the month after a 4.1% increase in September (up 3.7% y/o/y and up 0.6% three-months annualized).
Pending Home Sales
This number was the big surprise for the day, rising 3.7% for October, blowing by the totally reasonable expectation of a 1.0% decline. The NAR (National Association of Realtors) has done an excellent job of informing buyers of the tax credit expiration (at least the expiration date of November 30 that was known back in October, it has since been extended) and thus I wouldn’t have thought any contract signings in the back half of October as it is taking at least six weeks to close – and the contracts had to close by November 30 to get the credit. But apparently the rush in the first two weeks of October was more than most people had estimated.
By region, pending sales (contract signings) rose 19.9% in the Northeast, 11.6% in the Midwest and 5.4% in South. Contract signings were down 11.2% in the West.
Based on the weekly mortgage applications report we get each Wednesday, November pending sales is going to take a hit. What this means for the next couple months worth of existing home sales (which are not counted until the contract is closed) is another good number for November, based on this October pending home sales reading, and then a substantial decline in December.
There is still a lot of government support out there, we’ll see if it can continue to offset the troubled labor-market conditions. Rock-bottom interest rates and tax credits that put $8,000 in home-buyers’ pockets are indeed juicy lures, but I’m not sure they’ll have the same effect as they have had over the past several months. And then, there is the reality that this government support must be taken away at some point. That’s probably when we see the next wave of housing market trouble.
Vehicle Sales
U.S. auto sales came in at 10.92 million at a seasonally-adjusted annual rate (SAAR) in November. This shows a bit of a bounce from the October reading, which printed 10.45 million, and is just barely higher than the very low readings of a year ago when the credit markets were in chaos. You can see by the chart below, the August bounce that was fomented by the clunker-cash program was largely a one-and-done event. Auto sales should remain well-below the 25-year average of 15 million units SAAR for an extended period as the jobless rate remains terribly elevated and households will have to reduce debt levels.
It’s not only about auto sales, but consumer spending in general. Think about it. The last (and only other) time the jobless rate moved above 10% in the post-war period was 1982-83. That jobless rate and economic contraction was a function of the Fed jacking rates above 15% -- fed funds averaged 12% for the four years that ran 1979-1983. This time, the jobless rate is going to test that 1982 record of 10.8% even as the Fed is at zero. We still have to get through the unwinding of this unprecedented level of monetary easing (whenever it does occur, and it will be a bit still because there may be another wave of this credit crisis to hit). I just don’t think enough people are thinking about the coming tightening campaign, even if it is off in the distance relative to the very short-term mindset that prevails in the current environment.
Have a great day!
Brent Vondera, Senior Analyst
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