U.S. stocks fell yesterday as the March retail sales data disappointed what was a growing hope that consumer activity was rebounding in a sustained manner; excitement over an imminent economic rebound got a bit ahead of itself – more pronounced signs of a rebound will come, but not for a few months still, in my view.
Back-to-back speeches/press conferences from President Obama and Fed Chairman Bernanke didn’t help to turn the market around – in fact stocks moved lower. The president relied upon the typical Keynesian “paradox of thrift” argument as a way of justifying a level of fiscal spending that will prove less than auspicious for long-term growth. Bernanke’s speech showed the Fed continues to grasp to a Philips Curve mentality that has gotten them in trouble in the past, blamed the current troubles on the global savings glut and didn’t spend enough time explaining how they’ll unwind all of this liquidity pumping when the time comes. (I’ll discuss these topics and the end of the letter for those interested.)*
All 10 major industry groups ended the session in the red, led by financials (down 7.68%), telecom (down 2.46%) and consumer discretionary shares ( down 2.23%). The relative winners were health-care, energy and tech shares.
Market Activity for April 14, 2009
Producer Price Index (PPI)
The Labor Department reported producer prices fell big in March, down 1.2% -- the reading was expected to come in flat compared to the prior month. On a year-over-year basis PPI was down 3.5% last month - large deceleration from the -1.3% posted in February (biggest decline since January 1950 in fact.).
The decline in producer prices was largely due to a 1.5% decline in consumer goods (which makes up 73.5% of the index) and this component was driven down by a 13.1% seasonally-adjusted decline in gasoline and a 2.4% drop in residential gas. (Gasoline prices actually rose 10% last month, but since this move was less than it normally is for the period, the seasonal adjustment showed a large decline.)
We’ll note that basically all components of PPI fell last month, I don’t want to create the impression that energy was the only segment that was lower, but we wouldn’t have seen such a significant decline on the overall index if not for the move in energy.
The core rate came in flat for the month and on a year-over-year basis core PPI was up 3.8%, down from the 4.0% posted in February.
Retail Sales
The Commerce Department reported retail sale fell 1.1% in March (a 0.3% increase was expected) and when you exclude auto sales the figure fell 0.9% (expected to come in unchanged from the prior month.)
The prior two months’ data were revised significantly higher. January retail sales was revised to show a 1.9% increase (initially estimated at 1.0%) and February was revised to show a 1.0% increase (initially estimated to have declined by 0.1%). Those gains halted a six-month free-fall.
These revisions do ease the impact of the broad-based March decline, but as we’ve been talking about those two prior months’ worth of data were helped by large increases in government transfer payments, the private-sector income numbers for Jan. and Feb.declined. Since nearly all of the income gains over the past four months have come from the government side of things, we do not see a sustained rise in retail sales taking place for some time.
In terms of major segments, retail sales ex autos and gasoline station receipts fell 0.8% in March, after a 0.7% increase in February and a 1.4% jump in January. Sales excludes gas station, building materials and auto dealers (also known as the core rate) fell 0.9% after a 1.1% rise in Feb.and a 1.9% increase in Jan.
This last figure rolls directly into the personal consumption component of GDP, so the January and February readings will help to offset what will be significant drags on first-quarter GDP via inventory liquidation and overall business spending. Based on this data it appears personal consumption will rise at roughly a 1.0% real annual rate for the first quarter after massive back-to-back declines of 3.8% and 4.3% in the third and fourth quarter’s, respectively – those were the largest back-to-back declines in personal consumption since the 1980 recession.
The three-month annualized decline in retail sales has improved greatly – down 4.9% in March vs. -16.7% in February. That’s great news. Still, the lack of private-sector income growth is the concern regarding the next few monthly readings.
A couple of other quick points on consumer activity:
Yesterday the Redbook retail survey (not a highly watched report, but worth a look) did show sales rose 1.1% during the first two weeks of April, unless things fall apart in the back-half of the month this is a good indication we’ll see a bounce when the official April retail figures are released.
But we have to understand that credit card lines are adjusted by models that run off of overall default rates, which continue to rise. Hence, credit lines will be cut so those that use these lines of credit as a lifeline when things go bad will not have as much at their disposal as they may have expected. This will put additional pressure on consumer activity as will keep the level of caution elevated.
Business Inventories
In another Commerce Department report, business inventories fell 1.1% in January (there’s a huge lag to this data, but it’s important nonetheless) which helps to illustrate the inventory liquidation that occurred last quarter. The three-moth annual change accelerated to the downside, coming in at -$222.4 billion vs. -$197.7 for December.
Unfortunately, the sales data fell as well, falling 1.0%, marking the sixth month of decline. However, since inventories fell more than the decline in sales, the inventory/sale ratio improved slightly.
Stock-Index Futures
Futures are lower this morning in pre-market trading, mostly due to comments out of Intel after the bell yesterday. At first, Intel’s comments were met with optimism as management stated the semiconductor market likely bottomed last quarter. However, the company also specified that this does not mean activity is on the rebound just yet – the global economic environment remains “fragile,” according to CEO Paul Otellini.
So the market, at least at this moment, looks to open lower, (and the first decline in mortgage applications in six weeks won’t help, as that figure has just been released to show apps down 11% -- purchases fell 11.3% and refinancings were down 10.9% -- for the week ended April 10.) If we can get better than expected readings from the industrial production and Empire Manufacturing, due out this morning, we may be able to reverse course, but it’s likely these figures will remain weak for a couple of months still.
*On the two topics from above:
On Bernanke and the Phillips Curve, all this tells the market is that the Fed will not make policy decisions based on forward-looking indicators like commodity prices, but rather keep their reliance on the level of unemployment (a lagging indicator) to guide their hand. That is, the FOMC will continue to base monetary policy on the notion that inflation cannot rise until the jobless rate hits a low enough level that they themselves deem inflationary. This is the exact model that led them to keep rates too low for too long back in 2003-2005 and more importantly led to the policy mistakes of the 1970s. While inflation is not an issue now, there is a very strong likelihood it will be in the not too distant future and the Fed better be on top of it -- much more adaptive than a Phillips Curve model based on the most lagging of indicators allows them to be.
What’s more, Mr. Bernanke, in his speech, also morphed into Mr. Greenspan by blaming the global savings glut for the low interest rates of this decade that encouraged individuals and institutions to move farther out on the risk curve as they sought higher yields, but failed to appropriately price that risk. The failure to state that the Fed’s easy monetary policy earlier in the decade is not the direct cause of that situation is unfortunate. For if they has not kept rates too low for too long, the export driven economies -- such as the Asian economies for whom he blames the savings glut -- would not have exhibited such high economic growth rates, and thus they would not have been left with a flood of dollars with which led them to buy massive quantities of U.S. Treasuries, which helped to push long-term rates so low.
On Obama and Keynes’ “paradox of thrift,” the president didn’t directly mention this Keynesian argument but made indirect overtures to it as he stated the government must spend when the private sector won’t. Of course, individuals are gong to rein things in when debt levels are high and the labor market and income growth are weak. Of course, businesses are going to curtail spending when the economy contracts, which is always the case. But just maybe if policymaker chose to ignite things via the mechanism of tax rates – boosting disposable income and providing incentives for businesses to ramp up production – the pullback effect would not be so pronounced.
One wonders if any of these people ever contemplate that just maybe they are at least part of the problem. Businesses know what follows high degrees of government spending – higher tax rates. And they know that higher tax rates are not conducive to growth (because it removes resources from the much more efficient private sector), which diminished their confidence in future sales potential. This only exacerbates the spending retreat.
Alas, we’re on a path of enormous spending, much of which will make its way to the baseline of the budget, the economy will just have to deal with it – and this is a significant part of the problem.
Have a great one…even if it is tax day. You’ll have fond memories of these rates a year or two down the road.
Brent Vondera, Senior Analyst
