US Review: Economic Recovery is Gaining Momentum

Economic Recovery is Gaining Momentum 
Developments in the economy this week were generally better
than expected and served to underpin our long-held view of slow
growth while simultaneously diminishing the credibility of the
double-dip crowd.

We raised eyebrows a few weeks ago with our upbeat holiday
sales outlook. This week’s stronger-than-expected retail sales
report for the month of November suggests that our forecast for a
5.0 percent year-to-year increase  in holiday sales should be on
track. Some of the strongest monthly gains were seen in sectors
associated with holiday shopping  like department stores, general
merchandise stores, and, of course, clothing stores.

Strength was not limited to consumer spending. We also learned
this week that industrial production rose 0.4 percent in
November with gains spread across many sectors including
consumer appliances, business equipment, construction supplies
and materials. Outside of motor vehicles, output was even
stronger, up 0.7 percent on the month. This strength is consistent
with our expectation for continued growth in business investment
as a support for continued growth, as we recently expressed in
our Annual Outlook for 2011.

Speaking of the manufacturing sector, various regional surveys
released this week provided a more encouraging view of industry,
at least in some parts of the country. In the New York area, for
example, the Empire Index from the NY Federal Reserve bested
the consensus forecast with gains in new orders and shipments.
One hundred miles to the south, the Philadelphia Federal Reserve
also reported a gain of roughly two-points in the Philly Fed Index.
While the gain was rather modest, the consensus had expected a
decline to a level of 15. The details of the report also revealed a
faster pace of growth in orders and unfilled orders. Also worth
noting in these surveys was the continued pricing pressure for
manufacturers. This pressure shows up in the surveys in the
“prices paid” measure which jumped in both the Empire and the
Philly Fed measures.

The concern about rising prices for manufacturers is that it can be
difficult for businesses to pass on those price increases to
consumers when unemployment is still high and consumers are
discerning about their spending habits. When producers cannot
pass on price increases, it comes out of the corporation’s profits.
In addition to what purchasing managers tell us in surveys,
“hard” price data do indeed appear to be rising at a fairly steady
clip. The producer price index jumped 0.8 percent in November.

Prices further back in the pipeline also increased with
intermediate goods up 1.1 percent and crude goods up 0.6
percent. However at this stage in the economic cycle, the
increases in wholesale prices have yet to show up in consumer
prices. Indeed, the consumer price index (CPI) for November
increased a mere 0.1 percent and core prices were also up 0.1
percent. On a year-over-year basis, the CPI is up only 1.1 percent.
We  do  not  look  for  much  of  a  pick  up  in  consumer  inflation
anytime soon—a factor that may weigh on corporate profits.


Existing Home Sales • Wednesday 
Existing home sales fell 2.2 percent to a 4.43 million unit seasonally
adjusted annual rate in October. Single-family homes dropped 2.0
percent, while multifamily homes slid 3.6 percent. Despite recordlow mortgage rates, sales have been extremely weak amid high
unemployment, tight credit, underwater mortgages and fear of
further price declines. Adding salt to the wound lately has been the
foreclosure signing issue. The supply of homes for sale fell to 3.86
million in October, but the weak sales pace kept the inventory/sales
ratio at a still-high 10.5 months. Following the expiration of the tax
credit, the median sales price has plunged again from $183,000 in
June to $170,500 in October. We expect all of the above factors to
continue weighing on sales in the months ahead. However,
November sales may have gotten a boost from the resumption of
some foreclosure sales. Recent increases in mortgage rates are yet
another headwind, but could prompt some fence-sitters to act.
Previous: 4.43M  Wells Fargo: 4.65M
Consensus: 4.75M


Durable Goods Orders • Thursday 
Durable goods orders fell 3.3 percent in October following a strong
September reading that was driven by a surge in non-defense
aircraft orders. In October, all major categories saw declines, led by
computers and electronics. Non-defense capital goods, excluding
aircraft, a proxy for future business investment, slid 4.5 percent. In
addition, the inventory/sales ratio  climbed to 1.61, the highest in
over a year and on par with levels seen during the 2001 recession.

This suggests production could slow in the months ahead as
inventory replenishment slows. However, recent economic data
show that the economy has picked up a bit. This, along with the
volatile nature of this indicator, suggests we should see a better
reading in November. Emerging market strength, along with
replacement of aging equipment and capacity expansion, could
support orders despite the rising inventory/sales ratio.

Previous: -3.4%  Wells Fargo: 1.9%
Consensus: -0.6%


Personal Spending and Income • Thursday 
Personal spending rose 0.4 percent in October, slightly less than
expected but slightly better than September’s pace. Personal
income rose 0.5 percent following no change in September. Wages
and salaries rose 0.6 percent, the most since May, as employment
jumped by 172,000. Still, core PCE inflation, the Fed’s preferred
measure, was a record-low 0.9 percent. With incomes rising faster
than spending, the savings rate edged up to 5.7 percent. Pent-up
demand, rising incomes, job gains, a stock market rally and builtup savings are all supporting spending during the holiday season.

We expect to see another decent reading for spending in November.
However, income growth may be  tempered a bit by the weak job
gains seen in November. The rebound in the unemployment rate
could give some consumers reason to be cautious, but any
slowdown in spending, if it occurs, will likely not happen until after
the holidays.
Previous: 0.4% Wells Fargo: 0.4%
Consensus: 0.5%
https://www.wellsfargo.com/
Full report: US Review:  Economic Recovery is Gaining Momentum

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The US Dollar had quite a good week

FX Market Overview

Last week might have been frantic on a political and demonstration front but the markets were quite subdued. Sterling had quite a good week in spite of a largely lacklustre data diary but the fact that neither the Bank of England nor arch Sterling nemesis Governor Mervyn King talked the Pound down was probably enough to give the Pound a bit of a fillip. UK inflation, retail sales and employment figures are the biggies for Sterling traders and the spread of forecasts shows that these are pretty tricky to call. Consequently, we are expecting a very volatile week for the Pound.

The US Dollar had quite a good week as well as US data started and finished the week on a positive note. We get the interest rate decision from the US Federal Reserve this week; that won’t yield and change in the interest rate level and the announcement has already been made about the expansion of the quantitative easing program so we are not expecting too much change there either. The rest of the week is chock-a-block with US data. Everything from inflation to manufacturing and from producer price figures to housing market data will flood onto the market over the week and the US Dollar is likely to be pushed and pulled by events in Europe and elsewhere.

The announcement by China that inflation picked up to 5.1% means many traders are expecting action from the Peoples Bank of China to curb growth and spending. That could well have a positive impact on the US Dollar as investors slink away from riskier trades and find solace in the arms of the US treasury. We watch the east with interest.

The Euro faces an equally frantic data diary this week with just employment, industrial production and inflation data all due for release along with a vote of confidence in the Italian Prime Minister which could cause a minor tremor if he loses. That isn’t envisaged though because the press (most of which Mr Berlusconi owns) is supporting him. However, the major theme of debt problems in Portugal, Spain, Italy, Greece and Ireland continues to cause consternation and the Euro remains vulnerable to bad news. Sovereign bond yields are still under pressure as investors steer clear of Euro denominated bonds issued by the countries mentioned above. We were treated to reassurances by President Sarkozy and by Chancellor Merkel over the weekend but that doesn’t appear to have had much effect. And yet Sterling is struggling and failing to get to €1.20 and the Euro - US Dollar exchange rate is finding plenty of buyers at $1.3150. What will it take for the Euro to capitulate? I don’t know but, although the charts aren’t showing it, I have a feeling in my bones that it will.

Elsewhere, China’s inflation data and the lack of substantive action by the Chinese authorities to rein it in has played into the hands of China’s overseas suppliers. Suppliers in New Zealand and Australia will be very happy that they have a great export market which appears immune to global developments so it is no surprise that the Australian and New Zealand Dollars are both stronger this morning. I wrote last week about how the NZ Dollar struggled at the NZ$ 2.11 level against the Pound and guess what, it did it again. Well done to all of you who bought NZD around the NZ$ 2.09 to NZ$ 2.10 levels.

Quite apart from the data and politics of the situation, remember also that this is a very busy trading period as companies start to settle their December payments early and prepared to shut down for the Christmas break. The next 3 weeks have the potential to be some of the most volatile and unpredictable for the year. That may sound like a negative but it really isn’t. Volatility is opportunity when it comes to exchange rates so please do think about your requirements and let’s have a discussion about how you can get the best out of the market over the closing days of 2010.

Finally, proof that good and bad luck are sent by the masters of the universe to balance things out. A family who won $8 million on a lottery in Utah were so frightened of losing the lottery ticket as they travelled from Brigham City to Idaho to collect their winnings that they invested in a fire proof safe and put the ticket in the safe in the back seat of their trust (rusty) old 1982 Datsun. However, when they reached Lottery headquarters, they discovered the heavy safe had broken through the floor of the car and had been lost en route. As the ticket is unsigned, whoever finds the safe and opens it wins the prize. I think there will be a bit of metal detecting going on in the next few weeks don’t you.

Quote

Luck affects everything; let your hook always be cast; in the stream where you least expect it, there will be a fish.
Ovid

http://www.halofinancial.com/

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State Monthly Activity Index - US Watch

• Activity slowed in 26 states and improved in 21, according to data through October.
• Based on the 3-month moving average, 19 states are expanding, 26 states are contracting, and 5 states are stable with no growth. This growth pattern is similar to the prior month.
• According to the month’s contemporaneous index, 29 states expanded while only 14 contracted. These upticks are consistent with the observed +174K addition to nationwide non-farm employment in October.
• Given the lower-than-expected outcome for U.S. non-farm payrolls in November, we expect December’s state indexes to weaken.
• Across the BBVA Compass Sunbelt, activity picked up in Arizona and pulled back in Alabama, Colorado, Florida and New Mexico, while it remained stable in Texas (the highest growth in the region) and California (sub-par, low growth).

Behind the Numbers

Nationwide, the state monthly activity indexes confirm our expectation of a slowdown in 2H10. Compared to 6 months ago, the 3-month moving averages (3mma) are lower in 38 states. The indexes reflect the continued slow pace of private sector job creation, a softening pace of export growth along with further declines in home prices, sales and construction activity. As stimulus programs that boosted short term growth fade and the strength of the private-sector led recovery remains questionable, we expect these indexes to change little in the months ahead as we move into 2011. Given that the 3mma of the indexes in 31 states are below 0, growth is occurring well below trend in a majority of states.

The strongest monthly expansion occurred in Arkansas due to widespread employment gains in the services sectors, while Delaware’s economy contracted along with its labor market. On a monthly basis, 29 states saw expansion, as their payrolls increased in October. This outcome is consistent with the +172K jobs added in October. The U.S. preliminary employment report for November reported only +39K net job gains, and thus we expect December’s state indexes will weaken.

Texas, New Hampshire and Vermont’s 3mma indexes are the highest in the nation, as relatively low unemployment rates, positive growth in service sector employment and upturns in home price indexes (in Texas and New Hampshire) aid expansion. Nevertheless, declines or little growth in the construction, manufacturing, and the retail and wholesale trade and transportation sectors underscore weak activity nationwide.

Within the BBVA Compass Sunbelt, Texas continues to lead the region’s expansion; however, its pace of growth remained the same as the previous month. While Texas added a net of 47,900 jobs in October, nearly 40% of the total came from the government sector, and an additional 18% came from construction. Additions to manufacturing, trade and services sectors were unremarkable. The purchase-only housing price index has displayed a favorable positive trend in 2010, as 3Q10 data reveal a 1.10% year-over-year increase. This trend supports the state’s housing market and construction activity – year-to-date building permit activity is up 3.0% over 2009. Furthermore, while the year-over-year pace of exports softened in 3Q10 as expected, they continue to boost Texas’ petroleum and manufacturing industries.

In Alabama, October non-farm employment was flat, as no sector registered large gains. The housing price purchase index declined slightly in 3Q10, and remains close to 4% down on the year. Arizona’s employment outlook brightened, as service sectors registered strong growth, and the construction industry increased payrolls significantly. The housing price index, however, continues to slide, and is down nearly 10% on the year as of 3Q10. California’s home price purchase index slid slightly and is down less than 2% on the year; however, the all transaction index turned upward in 3Q10 and suggests a stabilization of prices. California added nearly 39,000 jobs with widespread gains across all but two major sectors. The decline in Colorado’s home price purchase index accelerated in 3Q10; however, building permit activity is higher for the year. The mining, construction and government sectors added a combined total of 5,100 jobs – over 70% of Colorado’s total net addition.

In Florida, the housing price purchase index slid slightly in 3Q10, and employment creation remains extremely weak. Total nonfarm payroll managed to tick up 6,900 jobs in October; however, the leisure and hospitality sector spiked 2% to add 17,800 jobs. Thus, other sectors continued to shed workers. Finally, while New Mexico managed to increase employment slightly, 80% of the total job creation occurred in the government sector, and the remainder came from the construction and other services’ sectors. New Mexico’s housing prices continue to slide, but are down approximately 4% on the year.

Bottom Line

November’s state monthly activity indexes reveal the 2H10 slowdown, as the 3-month moving averages are lower today than they were six months ago in 41 states. In the BBVA Compass Sunbelt region, this slowdown is most evident in Florida, Alabama, and Arizona as these states experienced a boost due to fervent export demand and stimulus measures that boosted housing sales. Alabama’s sharp rise in activity rapidly brought down unemployment; however, Florida wades through low growth and unemployment heads upward. In California, the observed job creation in October is a welcome sign; however, it is too early to determine whether it has reached a stable turning point. As for Texas, while the rate of private sector job creation has slowed, it remains positive, and the state continues to boost its output. As we head into December, we expect our state activity indexes to indicate a moderation of economic activity.

http://www.bancomer.com/economica

Full report: State Monthly Activity Index - US Watch

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U.S. Review: A Slightly Brighter Outlook for the U.S. Economy - Weekly Economic & Financial Commentary

U.S. Review
A  Slightly Brighter Outlook for the U.S. Economy

• The proposed deal between the White House and some  members of Congress to extend Bush-era tax cuts, reduce payroll taxes  and renew emergency unemployment benefits dominated headlines. GDP growth should get a slight boost in the coming year.  
• Weekly first-time unemployment claims fell by 17,000 to 421,000 in the week ending  December 4, the lowest reading of the year. 
• The U.S. trade deficit  narrowed sharply from $44.6 billion in September to $38.7 billion in October driven by strong export growth. 

U.S. Review : “It’s Beginning to Look a Lot Like Christmas…”

While it was a fairly light week for economic data, the proposed deal between the White House and some members of Congress to extend the Bush-era tax cuts, reduce payroll taxes and renew emergency unemployment benefits dominated headlines. Once the details are ironed out and some semblance of the package passes, most economists agree  that GDP growth should get a slight boost in the coming year. This is indeed good news as the pullback in federal government spending next year was one of the major challenges for economic growth. We now expect real GDP to grow at a 2.6 percent annual pace in 2011 (for more details, please see our report: Annual Economic Outlook 2011).

The increase in economic growth, however, will still not be enough to bring the unemployment rate significantly lower. The unemployment rate should remain stubbornly above 9 percent well into 2012. As economic growth picks up in the coming quarters, much of the upward momentum in the unemployment
rate will likely come from discouraged workers re-entering the workforce due to improving labor market conditions.

While an obstinately high unemployment rate seems daunting (and despite the disappointing November employment report), there are clear signs employment is improving. To help illustrate this point, we turn to five reliable indicators to gauge the strength of employment growth: temporary hiring, length of the workweek, initial jobless claims, the ISM index of employment and job openings relative to the size of employment. All measures have shown signs of stabilizing in recent months.

Weekly first-time unemployment claims fell by 17,000 to 421,000 in the week ending December 4, the lowest reading of the year. The four-week moving average, which is our preferred way to look at the volatile series, fell  to 427,000 the lowest level since August 2008. The decline in the four-week moving average
suggests improved payroll numbers ahead, but we still need claims to drop below 400,000 on a consistent basis for a self-sustaining recovery.

The number of people receiving extended and emergency benefits also dropped last week. We suspect the decline is related to claimants who exhausted all available benefits options. These numbers will probably continue to decline in the weeks ahead, until legislation extending unemployment benefits is passed.

Other data highlighting employment conditions were the Job Openings and Labor Turnover Survey. The job openings rate increased to 2.5 percent from 2.3 percent. The increase brings the number of job openings to 3.4 million and the ratio of unemployed to job openings to 4.4.

Another clear sign the economy continues to grow is the recently released data on the trade balance. The U.S. trade deficit narrowed sharply from $44.6 billion in September to $38.7  billion  in  October  driven  by  strong  export  growth.  All things being equal, we expect the decline in the deficit to have a positive effect on GDP growth in the fourth quarter.

Producer Price Index • Tuesday 
The October Producer Price Index rose 0.4 percent, led by increases in energy prices. The core PPI, which excludes food and energy, declined 0.6 percent in October, which was mostly due to falling prices for light trucks and passenger cars, which were down 4.3 percent and 3.0 percent, respectively. Intermediate goods prices increased in October to 1.2 percent, with core intermediate goods also rising 0.6 percent. Increases were also observed in crude goods which rose 4.3 percent, likely due to increases in commodity prices.

We expect that the November PPI rose 0.3 percent on a monthly basis, and the core PPI edged up as well. With manufacturers unable to pass along higher prices to consumers there may be a negative effect  on profits going forward. Our forecast indicates that the producer price index will rise 3.4 percent in the fourth quarter of 2010 on a year-over-year basis.
Previous: 0.5% Wells Fargo: 0.3% 
Consensus: 0.7% 


Industrial Production • Wednesday 
Industrial production (IP) in October was unchanged, held back by unseasonably warm weather, which resulted in a 3.4 percent drop in utility output. Production in the factory sector rose 0.5 percent in
October due to a 1.6 percent increase in motor vehicle output and a 1.4 percent increase in machinery. Output of business equipment rose 1.1 percent in October and is up 10.1 percent on a year-over-year basis.

In contrast, production of consumer goods has pulled back, up only 3.7 percent year-over-year. Increased
exports are likely helping to boost manufacturing output and will probably offset any drag from the reduction in inventory building.

We estimate that IP increased 0.4 percent in November. Our forecast continues to indicate a slowdown in IP through the end of this year and the first quarter of 2011, mostly due to continued reductions in inventory building.

Previous: 0.0%  Wells Fargo: 0.4% 
Consensus: 0.3%

Housing Starts • Thursday 
Housing starts declined substantially in October, down 11.7 percent. Declines were observed across the board with multifamily starts plunging 44 percent and single-family homes falling 1.0 percent. Building permits rose slightly to 555,000, which is likely the new normal—at least for the time being—for the housing market.

Some good news can be seen in the apartment market where demand has been rising steadily over the past year. We expect housing starts increased slightly to 540,000 in November due to continued low mortgage rates and some payback from the disappointing levels observed last month. Our forecast continues to indicate that housing starts have bottomed out, but new starts are estimated to total only 560,000 in the fourth quarter of this year.
Previous: 519K Wells Fargo: 540K 
Consensus: 550K
www.wellsfargo.com/
Full report : U.S. Review: A  Slightly Brighter Outlook for the U.S. Economy - Weekly Economic & Financial Commentary

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US Review: Fed continues to expect solid growth for the time being

US Review
Fed continues to expect solid growth
for the time being

The Federal Reserve this week released the minutes of the November 2/3 FOMC meeting, when the Committee announced its intention to purchase another USD 600bn of longer-term Treasuries by mid-2011. According to the minutes, most Fed officials, “saw the benefits [of an additional monetary stimulus] as exceeding the costs.” The program was expected to “put downward pressure on longerterm interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar.” The Fed’s intention, therefore, was not only to lower yields but also to lift equity prices and weaken
the US dollar. In addition, the minutes reveal that the Fed held a videoconference meeting on October 15.

During that meeting, the Committee discussed, among other things, the costs and benefits of a numerical inflation target, and a target path for the price level as well as the potential costs and benefits of setting a target for a term interest rate. No action on either of these topics was taken. Finally, the minutes included a new set of quarterly economic forecasts (cf. table).

In general, we find it hard to align the deep concerns about the economic outlook – as repeatedly stated by Chairman Bernanke and his most important deputies – with GDP growth forecasts of 3½% to 4½% over the next three years. That does not seem like an environment in which the US central bank has to go basically ‘all in’!


US economy in late summer grew
faster than initially assumed
According to the Bureau of Economic Analysis’ second estimate, US real GDP rose an annualized 2.5% in 3Q, which is half a percentage point more than assumed so far. The upward revision was triggered by stronger consumption growth, less negative net exports, and higher government spending (at state & local governments). Inventories, on the other hand, expanded less strongly than initially estimated. Corporate profits continued to expand in 3Q, although their increase (+2.8%) was the lowest in seven quarters.


According to the BEA, “the increase in unit profits reflected a larger increase in unit prices than in unit labor costs and the unit non-labor costs.” Finally, the current-production cash flow – the internal funds available to corporations for investment – decreased USD 57.8bn in 3Q. It was the first decline since 2009 and the largest drop since early 2007.

Capex spending to take a breather
Durable goods orders fell 3.3% in October. It was the largest monthly decline since January 2009. Orders in the core group (nondefense capital goods ex aircraft) declined 4.5% mom, but the less volatile 3M/3M change still stood at a healthy 9.4% annual rate in October. Shipments of capital goods ex aircraft, which are used to calculate capex spending in the GDP report, declined 1.5% in October. That is the biggest monthly decline in 1½ years. These numbers suggest that investment expenditures for equipment & software, which
surged at double-digit rates for the last four quarters, are bound to take a breather at the end of the year.

Consumer spending keeps rising
Personal income rose 0.5% in October, while consumer spending (PCE) increased another 0.4%. Real PCE was up 0.3%, while real disposable income increased 0.3% mom (+2.5% yoy). The savings rate edged up slightly to 5.7% from 5.6%. These numbers show that the economic recovery in the US is becoming more sustainable, as the improvement in the labor market is finally supporting consumer spending.

After increasing solidly over the last couple of months, real PCE in September exceeded again their pre-crisis level, and they keep trending higher. Initial jobless claims, the most timely labor market indicator, even fell to the lowest level in more than two years. But while we also think that the downward trend in claims remains intact, the latest improvement might be exaggerated. The backdrop is that the week ending 20 November is the week after Veteran’s Day. Seasonal factors expected a 22% wow spike in claims, whereas the actual increase was “only” 13%. Hence, claims might rebound next week.
http://www.unicreditmib.eu/
Full report: US Review: Fed continues to expect solid growth for the time being

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