The market’s what’s bad is good mentality doesn’t jibe with stocks moving higher on the positive inventory report. In fact, the market traded lower shortly after the release of that report, but comments from New York Federal Reserve Bank President Dudley, stating that short-term interest rates may remain low for at least six months and possibly up to two years, came to the rescue to help traders’ sentiment regarding the expected shelf-life of ZIRP. Not sure I can say the same for the Fed’s sentiment; comments like this don’t portray ebullience about economic prospects.
The 10 major industry groups were split with half up and half down. Health-care, tech and financials led the way again. Telecom, basic material and utility shares led the losers.
Intel reported that fourth-quarter profit surged three-fold and offered great guidance for both the top and bottom lines. The fabulous results were driven by a three-fold story: massive cost cutting, largely via payrolls; improved business demand as firms move to managing business spending to maintenance levels from the largest collapse in equipment purchases in the postwar era; easy comps as profit was down 90% in the year-ago period. Still, Intel would have posted a nice number even without easy comps as this was a record profit quarter for the tech giant. (They better be careful or some in Congress may view these results as “windfall” profits.)
Thing are likely to get much tougher for the firm over the next four quarters as their gross margin, which super-spiked to 65%, has only one direction to go from here. Further, when you post such a large increase so quickly (again hugely helped by the payroll reductions) it makes it tough to keep the ball rolling. I like Intel, particularly the dividend they now pay -- and they were given room to boost that payout thanks to this number, but like the rest of the universe I’m not sure the profit story has much staying power past two-three quarters.
Market Activity for January 14, 2010
Jobless ClaimsThe Labor Department reported that initial jobless claims rose 11,000 to 444,000 (7K above expectations) in the week ended January 9 – initial claims up but it remains under 450K so no real harm done. The four-week moving average fell 9,000 to 440,750, the lowest level since early September 2008 – just prior to the Lehman collapse.
Continuing claims offered the first positive news that possibly long-term unemployment is beginning to decline a bit. As you may recall, we’ve spent a lot of time talking about this story. As of the latest monthly jobs report, those out of work for at least 27 weeks (the longest duration of joblessness that labor measures) continues to make new highs. But both standard and EUC claims fell for the first time in a while. The standard continuing claims figure fell 211,000 in the latest week. This has been the trend. The problem has been claims for Emergency Unemployment Compensation (EUC) continued to rise – this is what long-term unemployed persons rotate to when their traditional 26 week of benefits run out. This latest data, however, showed EUC claims fell meaningfully for the first time since the beginning of the year. 
As we touched on last week, we’ve watching for the EUC to halt its march higher as evidence that employers just may be starting to hire a bit. This helps to back up our belief that mild payroll increases will begin by February/March. The caveat here is that the standard continuing claims data has a one-week lag to the initial claims number and a two-week lag for EUC. That means we’re talking about the week’s ended January 2 and December 26, so there may be some holiday distortion in the declines. We’ll ultimately have to wait two weeks (get fully past the holiday distortions) for EUC data to confirm this easing.
Retail Sales
The Commerce Department showed that retail sales for December came in well-below expectations, falling 0.3% (+0.5% was expected). The November reading was revised substantially higher to +1.8% from the initially reported +1.3%. Based on the unrevised November figure, December sales would have been up 0.2%, so the estimate wasn’t off by quite so much based on what the consensus was working off of.
Put the past three months together and consumer activity was up a super-strong 11.3% at an annual rate, fostered by a price-driven 35% annualized increase in gasoline. The reading that gets plugged into the personal consumption component of GDP, which excludes gasoline BTW, is up a solid 3.1% for the quarter. This is being distorted by government transfer payments that currently make up a record percentage of total income. Those out of work would have had to reduce expenditures to a greater extent if not for these cash transfers – a trajectory of government spending that is not sustainable and among other things will result in an economic payback.
Excluding autos, retail sales fell 0.2% (+0.2% was expected). Excluding gasoline, sales fell 0.4%. The gasoline station component was one of the few positive readings for the month, up 1% -- the price of gasoline rose about 6%, which more than offset lower volumes. Health-care (up 0.8%), sporting goods (up 1.6%), furniture (up 0.3%) and non-store retailers (up 1.4%) were the other components that showed an increase.
Among the components that declined: electronics sales fell 2.4% -- completely erasing the November gain; building materials declined 0.4%; food and beverage fell 0.8%; clothing sales were down 0.6% -- and erased the mild gains of the previous five months; auto sale fell 0.8% -- but this is after two big months of increase.
This data has bad weather written all over it. Even the eating, drinking component fell – a figure that is dominated by 20-somethings who are resistant to economic weakness. The rise in non-store retailers (online sales) pretty much confirms the weakness was driven by the snowstorms that hit most of the country.
I noticed that there were a few commentators stating the unexpected December decline in retail sales is a sign the economic recovery will be slower than many believe. Not exactly. This data doesn’t illustrate the likelihood of a much less durable expansion, but many other things do as I’ve laid out over the past few months. This data simply shows an easing off of the pretty strong readings of the previous three months, along with some weather-related obstacles.
Again, though one should not expect the consumer to play quite the role they have over the past few years – personal consumption made up 71% of GDP for several years, and still does. That number is going to decline back to the historic average of 65-66%; there’s no way around it as household debt burdens are way too high (a reality that was manageable at 5% unemployment but not at 10%, or even 8%). The government can pump these numbers up for a time, but eventually the economy must stand on its own two feet. Unfortunately, the way we’ve chosen to attack this situation is very likely to hinder private-sector activity for an extended period. Those are the things the financial press should be focused upon, not one month’s spending data.
Retail Sales
The Commerce Department showed that retail sales for December came in well-below expectations, falling 0.3% (+0.5% was expected). The November reading was revised substantially higher to +1.8% from the initially reported +1.3%. Based on the unrevised November figure, December sales would have been up 0.2%, so the estimate wasn’t off by quite so much based on what the consensus was working off of.
Put the past three months together and consumer activity was up a super-strong 11.3% at an annual rate, fostered by a price-driven 35% annualized increase in gasoline. The reading that gets plugged into the personal consumption component of GDP, which excludes gasoline BTW, is up a solid 3.1% for the quarter. This is being distorted by government transfer payments that currently make up a record percentage of total income. Those out of work would have had to reduce expenditures to a greater extent if not for these cash transfers – a trajectory of government spending that is not sustainable and among other things will result in an economic payback.
Excluding autos, retail sales fell 0.2% (+0.2% was expected). Excluding gasoline, sales fell 0.4%. The gasoline station component was one of the few positive readings for the month, up 1% -- the price of gasoline rose about 6%, which more than offset lower volumes. Health-care (up 0.8%), sporting goods (up 1.6%), furniture (up 0.3%) and non-store retailers (up 1.4%) were the other components that showed an increase.
Among the components that declined: electronics sales fell 2.4% -- completely erasing the November gain; building materials declined 0.4%; food and beverage fell 0.8%; clothing sales were down 0.6% -- and erased the mild gains of the previous five months; auto sale fell 0.8% -- but this is after two big months of increase.
This data has bad weather written all over it. Even the eating, drinking component fell – a figure that is dominated by 20-somethings who are resistant to economic weakness. The rise in non-store retailers (online sales) pretty much confirms the weakness was driven by the snowstorms that hit most of the country.
I noticed that there were a few commentators stating the unexpected December decline in retail sales is a sign the economic recovery will be slower than many believe. Not exactly. This data doesn’t illustrate the likelihood of a much less durable expansion, but many other things do as I’ve laid out over the past few months. This data simply shows an easing off of the pretty strong readings of the previous three months, along with some weather-related obstacles.
Again, though one should not expect the consumer to play quite the role they have over the past few years – personal consumption made up 71% of GDP for several years, and still does. That number is going to decline back to the historic average of 65-66%; there’s no way around it as household debt burdens are way too high (a reality that was manageable at 5% unemployment but not at 10%, or even 8%). The government can pump these numbers up for a time, but eventually the economy must stand on its own two feet. Unfortunately, the way we’ve chosen to attack this situation is very likely to hinder private-sector activity for an extended period. Those are the things the financial press should be focused upon, not one month’s spending data.
Import Prices
The import price index came in flat for December, right in line with expectations. This follows a trend that has shown substantially higher prices over the previous eight months. Take out petroleum prices though, which fell 2.0% in December after jumping over the previous few months (up 78.4% year-on-year), and import price rose 0.5% in December.
The ex-fuels price reading was boosted by food and industrial-supply prices. Agricultural imports rose 2.0% in December (up 9.6% y/o/y) and industrial supplies rose 1.8% for the month (up 7.4% y/o/y).
In total, import prices are up 8.6% over the past year – a combination of easy year-ago comparisons and a dollar that lost about 5% of its value as measured against a basket of other currencies.
The import price index came in flat for December, right in line with expectations. This follows a trend that has shown substantially higher prices over the previous eight months. Take out petroleum prices though, which fell 2.0% in December after jumping over the previous few months (up 78.4% year-on-year), and import price rose 0.5% in December.
The ex-fuels price reading was boosted by food and industrial-supply prices. Agricultural imports rose 2.0% in December (up 9.6% y/o/y) and industrial supplies rose 1.8% for the month (up 7.4% y/o/y).
In total, import prices are up 8.6% over the past year – a combination of easy year-ago comparisons and a dollar that lost about 5% of its value as measured against a basket of other currencies.
Business Inventories
Here come the inventories! The Commerce Department reported that business inventories rose 0.4% in November (+0.3% was expected), following the same increase for October – the first back-to-back increases in over a year as they follow 13-straight months of decline. Importantly, the sales data jumped 2.0% for the month following a 1.4% increase in October.
The inventory data is made up of three components: manufacturing, wholesale and retail stockpiles. Manufacturing inventories rose 0.2% and wholesaler increased 1.5%. Retail inventories was the only segment down, off by 0.2% -- would have been even lower if not for auto rebuilding. Ex-auto, retail inventories fell 0.4%. This jibes with what Beige Book showed on Wednesday.
Business sales have rallied 6.2% from the nearly five-year low hit in May and have nearly climbed back to November 2008 levels. That means sales are still down 14% from the cycle peak, but moving in the right direction.
The inventory-to-sales ratio has returned to low levels and this speaks well for additional inventory rebuilding in the coming months. The sales data will have to keep rolling along for this to come to fruition.
The fourth-quarter has gotten off to a great start in this regard. Even if the inventory day shows a pullback when the December figure is released, this component is going to add nicely to GDP – another topic we’ve spent much time on; it is the inventory dynamic. We should get a 4.0%-4.5% GDP reading for the fourth quarter.Looking out beyond 1H 2010, we’ll need final demand to keep the ball rolling as inventory rebuilding is a very short-term catalyst without healthy business and consumer consumption.
Have a great weekend!
Brent Vondera, Senior Analyst
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