Daily Insight

U.S. stocks added to a nice holiday-shortened week (S&P 500 gained 2%) as traders were determined to push the indices higher. Thursday’s economic releases were certainly a help as initial jobless claims fell more than expected and durable goods orders, excluding transportation, also came in much better than was anticipated.

Information technology shares led the broad market higher, with financials and basic material shares also posting market-beating gains.

Volume was about as flat as it gets with just 300 million shares traded. It was a half-day session and thus expected for activity to be light, but this Christmas Eve was about 50% lighter than what we’ve seen over the previous four years.

Interest rates continued their march higher on Thursday, particularly on the long-end as the 10-year Treasury is now yielding 3.80% (spiking from 3.20% as of November 30) – up another 4 bps to 3.84% this morning. We’ll get another $118 billion in government debt auctions this week ($1.4 trillion for all of 2009) so we’ll see how they go, and the direction that rates take.

Market Activity for December 24, 2009
Jobless Claims

The Labor Department showed that initial jobless claims fell 28,000 (a 10,000 claim decline was expected) to 452,000 in the week ended December 19 – nice to see initials back to the 450K level after bouncing back to 480K over the previous two readings. Initial claims are now back to the level of September 2008. The four-week average (chart below) of initial claims fell 2,750 to 465,250.

Continuing claims also fell, down a meaningful 127,000 to 5.08 million -- that is for the standard 26 weeks of benefits. However, claims for EUC (Emergency Unemployment Compensation), which kicks in to provide up to another 73 weeks of benefits, added another 142,000. So, again, this suggests that the decline in standard continuing claims is more a function of those benefits running out rather than a resurgence in job growth. (That said, as I’ve been mentioning since the October jobs report was released, we should begin to see some job growth arise over the next couple of months, it’s just that the increase is likely to be quite mild.)


Until we see EUC begin to trend lower, or at least halt it’s consecutive-week increase, the evidence is just not there that statistically significant job growth will take place anytime soon. And frankly it is unreasonable to expect this to occur just yet. These things take time to materialize even during a normal expansion, which this is not. This time we must contend with very low capacity/resource utilization rates. Therefore, those resources have a longer distance with which to be stretched, if you will, before firms begin to aggressively add to payrolls – average hours worked per week continues to hover near the all-time low and until these hours pick up for existing workers, should one expect much by way of new hires?

Durable Goods Orders

The Commerce Department reported that durable goods orders rose just 0.2% in November (+0.5% was expected), but this seemingly weak headline reading off of a 0.6% decline for October was affected by a large drop in commercial aircraft orders. The report was actually well-balanced and quite strong.

Excluding transportation orders, and thus removing the 32.6% decline in the commercial aircraft segment, durable goods orders jumped 2.0% (nicely outpacing the expectation for a 1.1% increase), which follows a 0.7% decline in October. Total orders are down 6.0% on a year-over-year basis and ex-trans are down 4.9%.

Overall transportation orders fell 5.5% -- vehicle and parts orders declined 0.2% and, again, nondefense aircraft plunged 32.6% after a 39.3% jump in October. The rest of the report looked really good though. Computers, electronics orders rose 3.7%; electrical equipment orders increased 3.2%; machinery orders rose 3.5% (following a large decline of 7% in October).

Those components of the report pushed non-defense capital goods ex-aircraft higher by 2.9% after a 2.0% drop in October. This is the reading we like to watch most closely as it is the proxy for business-equipment spending. This segment is down 8.9% y/o/y, but the last three months have been positive, up 5.5% at an annualized rate.

We need to see this segment, as I’ve been saying for a while now, trend higher; this economy desperately needs help from the business side. One hopes for this to occur, but U.S. corporations appear to be managing capital expenditures to maintenance levels as they manage around lower sales. This will help profits in the short term but will not be helpful for overall economic activity if this process extends for a while – it will keep final demand depressed; business-equipment spending is a huge job creator.

The inventories segment of the report showed that firms continue to reduce stockpiles, which is quite strange based upon the record pace of liquidation of the previous few quarters. The largest inventory liquidation on record occurred in the second quarter, and the third-quarter liquidation only looked good compared to that historic reduction – firms remain abnormally cautious. Durable goods inventories fell 0.2% in November, but the three-month annualized change is half that of the prior month – and that is all it takes to boost GDP. We are still waiting for actual re-stocking to begin, but firms continue to hold off.

Expectations for the fourth-quarter GDP reading are definitely going to be boosted by this report. Shipments of durable goods, which gets plugged into GDP, rose 0.3% following a 0.7% rise in October. That’s a great start to the quarter and will help to offset what may be a drag from the housing component. Housing construction was up in November, but on a quarter-over-quarter basis is down. If the December housing starts reading (which we’ll get in three weeks) falls, this segment won’t contribute to GDP.

Reminded, Yet Again

Everyone probably expected the health-care debate to dominate the Washington storyline for a while, but a little event on Christmas reminded (or re-reminded) us that something else looms larger – no matter how badly we’d like to ignore it, there are people, organizations and regimes that want to do us grave harm. Thankfully, the terrorist’s device failed, buy they’ll keep coming; their desires are surely not contained to taking down airplanes, but much more. As I have written for the last eight years, security is key. Obviously now, we have major economically endogenous issues to also deal with but if we don’t get security right, and the overall policies that greatly diminish the chance of major attack, it makes it that much harder for a normal business cycle expansion to take hold.

Futures are higher this morning. Quite the opposite would be the case if it were that explosive device, rather than the terrorist’s leg, that had ignited.


Have a great day!


Brent Vondera, Senior Analyst