SPG Trend Advisors Blog

On Friday the Commerce Department released its first revision of second quarter GDP, Fed Chairman Ben Bernanke delivered the opening speech at the Fed’s annual summer retreat and Intel announced a downward revision to its third quarter earnings outlook. All of these items were important news stories and all served to cement our previous comments on our blog and website that the economic recovery in the U.S. has stalled and is in danger of aborting.

The downward revision to second quarter GDP was expected after the June trade deficit widened to almost $50 billion led by a surge in imports and a surprising decline in U.S. exports. Economist estimates dropped into the 1%-1.5% range. The actual number reported on Friday was 1.6% and the equity markets breathed a sigh of relief and rallied that the number wasn’t worse. It shouldn’t have. Details behind the headline number reveal economic growth from the last vestiges of federal stimulus that we believe will not be repeated in future quarters. So we view the revised GDP report as dangerous to the outlook for the economy going forward. Personal consumption is not improving and government and business spending in the quarter have been augmented by factors we do not believe will continue.

Ben Bernanke announced on Friday the Fed would not allow the economy to fall into a deflation cycle similar to the Japanese experience in the 1990’s. However, his speech was devoid of new details about how that would be accomplished. Nonetheless, the stock market was reassured and rallied strongly if incorrectly.

Lastly, Intel reported a downgraded outlook for revenues in the current third quarter. Of all the news on Friday we believe this was the most important because it is a warning to us of the vulnerability of the current recovery cycle in corporate earnings. A faltering in corporate earnings would remove the primary support to the stock market and a major prop to the U.S. economy.

Please see our detailed article on these items and a more thorough analysis of the economy in a new Economic Presentation we are publishing on our website, www.spgtrend.com.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, corporate earnings, deflation, Economic Growth, economic outlook, GDP

In our July 6th website article, “Economic and Capital Markets Update”, we concluded our bearish forecast with the advice, “we would use an anticipated market rally in July from good second quarter corporate earnings to move towards our intermediate-longer term strategy”.  Despite our negative assessment of the economic data of the last two months and our downgraded economic forecast for next year, we expected the combination of an oversold stock market and strong second quarter corporate earnings reported in July, would produce a strong equity market rally that we would use to sell equity positions in favor of the re-allocation we advocated for the intermediate-longer term. As if on cue, the equity market rally we were expecting arrived the next day, July 7th, as the major U.S. equity market averages rose approximately 3%. Over the next five trading sessions, the major averages added another 3%-4%, peaking on July 14th on the backs of strong earnings from major bellweather companies like Alcoa, CSX and particularly Intel. However the economic news released last week continued a string of weak reports including retail sales and industrial production for June, a pessimitic Federal Reserve economic outlook and finally another collapse in consumer sentiment, this time in the University of Michagan survey reported on Friday. The weakening economic data and outlook  undermined the earnings rally and accompanied by weak operating earnings from major international banks, the stock market rally of July 7-14 reversed with a 3% decline in the major averages on Friday. Importantly, the rallies in virtually all of the major U.S. equity indices failed at or around the 50% retracement from the June market lows, a key development for market technicians and traders who now believe the aborted rally at such a key technical level spells the end of the July rally and a resumption of the market decline begun this past May.

From a technical standpoint they may be right. From an economic standpoint they could also be right. The stock market is a forward looking mechanism and the increasingly weak economic data being reported look like it is corroborating our stated belief that the economy is stalling. The Fed’s downwardly revised economic outlook and the huge decline in consumer sentiment in both the Conference Board and University of Michigan surveys portend the kind of economic retrenchment we warned about in our July 6th website article. The consumer sentiment readings are particularly worrisome because they reflect a deep level of pessimism that can be a self fulfilling contraction in consumer spending, already weak in this recovery. We still expect a summer spike in consumer spending from increased vacation travel and we think it may provide another oversold rally in the equity markets when reported in August and September. However, the stock markets could be at or below the June lows when the news hits and the economic outlook for late this year and next could have eroded further.  This week will be crucial to see whether Q’2 earnings can halt the market reversal and give investors a better exit point. We still believe stock market rallies in July or later should be sold into. The stock market uptrend from March, 2009 is over.  Current earnings no matter how strong cannot outweigh a deteriorating economic outlook that portends a peaking in the earnings cycle over the next four quarters.

Morris R. Segall, CFA, CIC

Economic Trends aborted stock market rally, consumer sentiment, oversold stock market rallies, peaking in corporate earnings cycle, pessimistic Fed outlook

Friday’s unemployment report for the month of June was weaker than economists had expected and weaker than the surface numbers show. It also was the latest in a series of weaker and disappointing economic data reported last week. Last week saw a continuation in weak consumer spending  in May for the second month in a row despite healthy gains in consumer incomes over the April-May period. The consumer savings rate increased in May for the second month in a row to 4% reflecting consumer caution. Also, last week, the Conference Board reported consumer confidence in June fell dramatically from 62.7 to 52.9. Clearly the stock market declines in May and June are depressing consumer attitudes but respondents are also again expressing difficulty in getting jobs and are increasingly pessimistic about both current conditions and future expectations. We have repeatedly stated in our economic presentations, since the economy began recovering last year, that the absolute level of consumer confidence in this survey have been well below levels normally seen in postwar economic recoveries and indicated to us a muted consumer reaction to the economic recovery.  Rounding out last week’s economic reports were: a greater than expected decline in the ISM purchasing managers index reflecting a pause in the upward trend in orders and shipments seen since last year and a decline in hiring  by respondents; an increase in first time unemployment claims for the last week in June, taking first time claims to over 470,000 for the third time since May and well above the level of 350,000 seen in previous economic expansions; and finally, factory orders for May dropped for the second consecutive month after rising steadily since last spring. 

But the June employment report contained cause for concern despite the expected decline in census worker jobs and a reduction in the unemployment rate for the first time this year. The number of discouraged workers at 1.2 million is up by over 400,000 from last year. The number of people in the work force, as measured by the Household monthly data,  is down by over 1 million workers since June of 2009 and despite that drop in the labor force, the employment participation rate is down to 64.7% from 65.7% in June, 2009. A full year after the economy began recovering, the average workweek is only at 33.4 hours versus 33.0 hours in June, 2009. Over the last twelve months, average hourly earnings are up by only 1.7%, less than the 2% annual rate of inflation as measured by the CPI through May of this year. The private sector created only 83,000 jobs in June, below an expectation of approximately 100,000+. Of that 83,000, approximately 21,000 were in temporary help services and 37,000 were in leisure and hospitality. A number of leisure and hospitality jobs, 28,000, were in amusements, gaming and recreation that may be seasonal hires to cope with a very active vacation season. Other professional and business services added another approximately 25,000 jobs and healthcare added approximately 17,000 jobs. Most of the remaining sectors in goods producing, services and governments cut jobs in June. The June numbers follow a downwardly revised estimate of 33,000 private sector jobs created in May and establishes a pattern of weak private sector hiring for the two month period when empirical and other evidence should be creating the opposite result.

Tomorrow we plan to publish our updated economic and capital markets analysis and forecast on our website, www.spgtrend.com. It will extend the theses we have articulated in our blog articles since May. That is the expansion cycle in the U.S. equity market has reversed because of the international credit alarms caused by sovereign debt issues in Europe and these developments are having a negative impact on the U.S. economic recovery cycle. The economic data of last week, particularly the monthly job report, lead us to believe the U.S. economic recovery is  pausing while businesses and consumers assess the outlook for the remainder of this year and next.  We are afraid businesses in particular are already starting to plan “cutbacks” in anticipation of a weaker economy going forward.

Morris R. Segall, CFA, CIC

Economic Trends recovery cycle, stock market, unemployment

Today looks like one of those watershed events which could mark a defining moment in the Presidency of Barack Obama. First, the President is forced to fire his hand picked general leading the war in Afghanistan for at the least conduct unbecoming and at the worst insubordination. Second, the Federal Reserve Board at its monthly meeting described the economic recovery as “proceeding”, i.e. stalled and weakening. Today’s Fed statement confirms for us the change in our economic and capital market outlooks we have been expressing in our prior blog articles beginning last month. We have believed the situation in Europe is serious and will get worse and it is having a depressing effect on the capital markets and in turn our economy.

In our website article, “The Election”, November 17, 2008, we commented that Barack Obama and the Democrats in Congress had a “short window to pacify a desperate electorate” and risked enacting programs that had “short term palliatives at the risk of eroding longer term U.S. financial strength and flexibility”. It would appear that window of opportunity to turn the economy around and fulfill the mandate of 2008 is about closed. The angry electorate of 2008 is absolutely livid in 2010. Voters are angry with the “bailouts” of Wall St. and corporate America while “Main Street” still struggles with unemployment, stagnant income and surging health care costs. The lack of success in the wars in Iraq and Afghanistan add to voter discontent. The object of voter ire is President Obama and his party that look disconnected and ineffectual. The President’s style of eloquent speeches but lack of decisive follow through is wearing thin on the American electorate.

Nowhere does the President look more ineffectual than in the arena of foreign policy. We commented in our website article on “The Obama Foreign Policy…”, January 7, 2010, the President was in danger of committing serious mistakes in Afghanistan by forcing a short timetable for military victory on the U.S. military. The President’s Afghanistan policy was clearly not supported by military leadership in the field who felt they were given an impossible task predestined for failure. No military officer accepts that. The shock in General McChrystal’s dismissal is the fact that he and his aides were so publicly contemptuous of the President and his administration. You have to go back to Vietnam for this kind of military “mutiny” to the President’s war policies. On the heels of foreign policy setbacks in the Middle East, soured relations with Turkey and Brazil and now a disconnect on economic policy with Europe, the Obama foreign policy is notably devoid of success and apparently now losing respect.

The loss of confidence in the President and his party to successfully deliver results domestically and overseas is in our opinion,  making the Obama presidency resemble that of Jimmy Carter and we believe will have similar electoral results in this year’s congressional elections and the presidential election of 2012.

Morris R. Segall

Economic Trends Barack Obama, elections, foreign policy, Jimmy Carter

May retail sales reported this past Friday showed a surprising decline of 1.2% from upwardly revised April levels. We usually would would look at the May decline as a normal respite to strong gains in the previous month. So while retail sales, excluding food and gasoline sales, did increase significantly (.7%) in April, the comparable decline in May sales amounted to 1.2% and the declines encompassed many areas of discretionary consumer spending including building materials, clothing and autos. In addition, the level of retail sales in May, again excluding grocery and gasoline station sales, was also approximately .5% lower than comparable retail sales reported in March. After surging through the first four months of this year, consumer spending may be stalling, at least temporarily, as a result of the dramatic and severe decline in the stock market last month. We commented in our last blog posting, June 6, 2010, that “ the pace of the U.S. economic recovery could be retarded by the current stock market decline”.  Combined with the expiration of the home buyer tax credit and impending expiration of extended federal unemployment benefits, consumer spending could be at least taking a hiatus if not a more serious retrenchment. We expect consumer spending will rebound from May levels over the summer as Americans take vacations this year and increase domestic travel  due to lower gasoline prices and overseas travel due to the strong value of the U.S. dollar.

 The question is will it and if so by how much. Consumer incomes will have to grow consistent with the .3%-.4% rates of the March-April periods to provide the resources necessary for consumers to step up their spending. The psychology of consumers facing new wealth destruction from the stock market, suppressed equity in their homes and new fears regarding economic and job growth could cause consumers to become cautious again. A cautious consumer will not fill the void being created by abating Federal stimulus and aid programs.

At this time we are sufficiently concerned about the recent confluence of negative events in Europe, the worldwide capital markets and the suppressing effects on U.S. economic growth to revise downward our projections of  U.S. and overseas economic growth for this year and next. In our April 4th blog posting, “Happy Days Are Here Again…”, we projected U.S. economic growth in the second quarter would be in the range of 4%-6% largely based on the surge in consumer spending we were detecting coming out of the severe winter. Indeed, consumer spending in the first quarter accounted for 2.4% of the 3% growth in the first quarter, the highest level since the onslaught of the recession. We now believe second quarter GDP growth in the U.S. will range between 3%-4% due to lower expectations of consumer spending from our previous forecast. We continue to project total U.S. GDP growth for 2010 of 3% but within a range of 2.5%-3% rather than the 3%-3.5% previously projected. For 2011, we are using a projected range of 1%-3% for U.S. GDP growth next year, down from our previous expectations of 2%-3% growth and we are telling clients and audiences that this revised outlook is subject to further change as developments here and in Europe become clearer. Commensurate with our lower expectations of  U.S. and worldwide economic growth this year and next, we now project disinflation in the U.S. over the remainder of this year and into next as the upward pressure from rising commodity prices seen in the first half of this year reverses from the recent fall in energy and industrial commodity prices.  

We will publish a more detailed discussion of our current economic and capital markets analyses and forecasts on our website, www.spgtrend.com.

Morris R. Segall, CFA, CIC

Economic Trends consumer spending, disinflation, wealth destruction

Friday’s unemployment report for May was just what the stock market didn’t need- a disappointing jobs creation picture. Total nonfarm payrolls grew by a little over 400,000 in the month of May, but virtually all of that increase was due to temporary hires for the U.S. Census. Most of those workers will be terminated by the end of the summer. Only 41,000 jobs were created in the private sector in May according to the business establishment survey, well below the 150,000+ jobs expected. We have been commenting in previous blog postings about the increasing inaccuracy of the monthly business establishment survey in reporting job creation. Most of our criticism has been focused on the erroneous seasonal adjustments and the errors in reporting job creation in the small business sector. Most of the monthly reporting errors result in overstating job creation that are then reversed when the Labor Dept. makes its semiannual revisions in the winter and summer of each year. However, this time we believe the May jobs report is actually understating job creation. Empirical data and other employment measures point to a larger job creation in May than the 41,000 reported on Friday. We believe the May number will be revised upward in subsequent monthly reports over the summer. But that is where the good news on jobs ends. First time unemployment claims are “stuck”  around 450,000, far too high to indicate strong  job creation. In addition, other measures in the May jobs report continue to point to high levels of discouraged and underemployed workers and most discomforting,  a continued high level, nearly 50%,  of workers unemployed are jobless for 27 weeks and longer. We estimate that we are building a “hard core” unemployment rate of over 6% as a result of the recession and the historically weak economic recovery.

Also on Friday was news from Hungary that their fiscal situation was becoming dire to the point of possible debt default. The announcement was a surprise since it was assumed the IMF bailout of Hungary last year was sufficient to avoid default. The prospect of another European country sliding toward debt default was sufficient to break the euro below critical levels of $1.20 on Friday and raise the threat levels again of more widespread financial crisis in Europe. The Hungarian announcement created new strains on the financial system in Europe with lending spreads and costs of credit default insurance rising again. The situation in Europe is becoming more alarming as default risks spread from Southern Europe to Central Europe and likely to Eastern Europe next. The austerity programs being enacted by the governments in Southern and Western Europe and the U.K. will exacerbate the problems in Central and Eastern Europe that depend on exports to the Eurozone for much of their GDP growth. The financial system is now on heightened alert again to see where this latest emergency in Europe will lead. The outlook for containing the European sovereign debt problems is becoming more bleak.

The combination of a weak employment report and the dire news from Hungary, reversed a stock market rally that began before Memorial Day and carried strongly through last Thursday. The market decline on Friday eroded market technicals and has cast doubt on the view that the market decline in May was a correction and not more serious. We have stated in our most recent blog entries that we believe the market action in May signals a “Sea Change” in the international capital markets cycle. The market action on Friday confirms that view for us. We now believe we are moving towards a short-intermediate term trading range on the Dow 30 Industrials of between 9,000-11,000. We reiterate our belief that the market highs recorded at the end of April-early May, are the highs for this market cycle. While the U.S. economic news has been improving since last summer, going forward, the economic news becomes more problematic as Federal stimulus recedes and the stock market itself becomes the main story in the economy. It is estimated a trillion dollars of market value was lost in the month of May and June is extending that. The market decline is replacing risk assumption with risk aversion and when investors see their portfolio values at the end of May, there is the fear consumer spending will retrench just when the economy needs more robust consumer spending. We believe it is possible the pace of the U.S. economic recovery could be retarded by the current stock market decline. We  continue to stress defensiveness in our capital market strategies and emphasize U.S. dollar denominated assets.

Morris R. Segall, CFA, CIC

Economic Trends capital markets strategies, Economic Growth, European sovereign debt, May unemployment, stock market

As we conclude the celebration of Memorial Day and the end of the month of May we look back at a month that in our opinion signaled a “Sea Change” in the international capital markets cycle of 2009-10 and a refocusing on the crisis of international sovereign debt. As we wrote in our blog entries of May 6th, “From Optimism to Panic: A Greek Tragedy” and May 10th, “From Panic to Relief…”, the swift and severe collapses in equity and commodity prices signalled to us something more than a correction in overbought markets. The events since then have confirmed that despite substanial moves on the part of  worlwide international banking authorities to support the Eurozone and the euro currency. As we forecast, international monetary support has also been joined by austerity fiscal programs forced into enactment by the large debtor nations of Europe. Very good economic news around the world, particularly in the U.S., has largely been wasted by eroding asset prices and declining investor confidence. Unfortunately, the European efforts to “turn” the crisis are shorter term palliative measures and do not address the longer term concerns of successful debt reduction and economic vitality. We mentioned in our previous posts that the sovereign debt issues in Europe and the U.S. are longer term problems that will not go away with monetary bailout and fiscal austerity programs. The capital and commodity markets are signalling that. We will publish shortly our analysis of sovereign debt problems on our website, www.spgtrend.com. Suffice it that we are pessimistic because of retarded economic growth and strained liquidity in Europe and our belief lower debt/GDP targets in Europe over the next 2-3 years will not be met. We believe this will continue to overshadow the equity markets. 

As a result, we have dramatically shifted our capital markets strategy after our May 10th posting. While near term rallies from oversold conditions are likely, we are not expecting the capital markets to resume their sustained “uptrends” and reach new highs in this cycle. We have been counseling our clients and our audiences of our concerns and the need to become more defensive, reduce volatility and protect principal. We will delineate our new Capital Markets strategy in a new website article also forthcoming.  Readers should contact us for details.

The ongoing oil spill in the Gulf of Mexico is a long term ecological disaster and will have more serious economic consequences the longer it continues. The governmental and public response will parallel the reaction to the Nuclear power accident at Three Mile Island in 1979. America’s nuclear power program has been stunted ever since. We believe one of the beneficiaries of the Gulf oil spill will be a revisiting of the nuclear option as an answer to America’s power generating problems.

Lastly, some good news in May. On Friday, the Commerce Dept. announced  increases in personal income in March and April that would signal improvement in consumer disposable incomes. Just what is needed to support a continuation in consumer spending that increased in the first quarter. While consumer incomes increased in April, consumer spending did not and we now have to worry whether the stock market decline in May will show up in restrained consumer spending in June and beyond. With the stimulus to housing expiring, elevated consumer spending will become more important to overall U.S. GDP growth going forward into next year. Readings on consumer income and spending will become amongst the most watched economic statistics as we go forward. We will certainly be among the spectators.

Morris R. Segall, CFA, CIC

Economic Trends

In our last posting, “From Optimism to Panic…”, May 6, 2010, we stated last week’s panic in the capital markets needed a quick and forceful international response to restore order to avoid further destructive speculation. Refreshingly, the Europeans moved quickly and decisively and along with assists from the IMF, the Federal Reserve and the Bank of Japan, structured an aid and liquidity package totalling almost $1 trillion. Importantly the package includes mechanisms for the European Central bank to purchase sovereign and bank debt and, along with other central banks, add liquidity to the Eurozone. Clearly, the EU leaders and finance ministers meeting in Brussels over the weekend learned the lessons from their mistakes in the Greek bailout. They wasted little time and came up with a large package that addressed the current problems facing  European governments and banks. It was also important for the response to be global so the participation of central banks around the world left no doubt of the international support for the euro and the eurozone.

In response, equity markets around the world, led by Europe, have surged today, relieved at the strong international response to the current crisis.

However, the sovereign debt problems in Europe are not solved and the countries of southern Europe and the U.K. will need to initiate significant spending reduction programs as part of overall debt reduction plans. Those spending reduction programs will not be popular domestically and social unrest should be expected.

 There are political costs as well as seen in the indecisive elections in Britain which turned out the long reigning Labor Party but left the victorious Conservative Party short of a majority in Parliament. The Conservatives will have to fashion a parliamentary coalition in order to govern. In yesterday’s regional election in Germany, Chancellor Merkel’s governing Christian Democratic Party lost decisively thus depriving Chancellor Merkel of a mjority in the Upper House of the German Parliament. She will now have to compromise with opposition parties to successfully govern. Indeed, today Chancellor Merkel announced she would not be seeking tax cuts that she had promised to pursue in her fiscal agenda but have been opposed by her principal political opposition.

The political uncertainty now being created in Europe will raise political and economic risks in Europe and the U.K. While Europe has for the time being avoided financial disaster, the longer term problems of sovereign debt risk remain.

Morris R. Segall, CFA, CIC

Economic Trends

Thursday’s roller coaster ride in the stock market, punctuated by a nearly 1000 point drop in the Dow Industrial average before recovering 700 of those points, is culminating a shift from market optimism to outright panic. Since Monday, May 3, the major market averages have declined 6%-7% based on increasing fears of debt defaults in Europe led by the well publicized difficulties in Greece.  After protracted negotiations with its eurozone partners and the International Monetary Fund, a financial “bailout” package for Greece was announced last weekend that would appear to have headed off an imminent debt default.  Prior to the selloff of the last three days, the major market averages had risen on average 9% from the period February 3 to May 3  spurred by improving economic news in the U.S. and confidence in a “bailout” solution to Greece’s debt problems. Investor sentiment was overwhelmingly positive and risk aversion had been replaced by risk assumption. So what went wrong?

First, the Europeans, particularly Germany, horribly botched the Greek bailout and turned a serious dilemma into a full blown crisis. The reluctance of Germany to agree to contribute to a eurozone loan facility for Greece dragged out the process of support and brought Greece to the precipice of default. It allowed market traders and creditors to speculate on a Greek default when the issue should have been put to rest weeks ago.

Second, the draconian spending terms imposed on Greece by its European partners and the IMF apparently did not allow for the response of the Greek people. Reform of Greek finances and reducing its outsized debt must certainly entail large spending cuts by the Greek government. However, a population long dependent on public spending was not going to accept such life changing spending reductions without protest, including demonstrations, riots and strikes. The violent reaction of Greeks to the austerity program approved by its government has upset investors, market analysts and market traders. It has led to questions about the ability of the Greek government to enact the austerity program and thus successfully access the bailout money and avert default.

Third, once again the credit rating agencies have not done their jobs and have added to the current climate of fear by now lowering credit ratings on eurozone countries including Spain and Portugal. Italy may be next. Where were these agencies over the last two years when the balance sheets of these countries became so leveraged?  The credit ratings of these countries should have already been lowered. Reducing them now only adds to the negative speculation.

This “Greek Tragedy” has now led to rampant speculation about possible debt defaults in other eurozone countries, namely Spain, Portugal and Italy. It has refocused attention on the massive sovereign debt levels of the industrialized world, including the U.S. and raised fresh questions on how these debt levels will be reduced or if they can. We believe the events of the last three days have dramatically changed the equity market environment here and abroad. In the short term the panic selling of the last three days will expend itself. It may have done so on Thursday. It is also possible that U.S. equity markets may have seen their highs in this cycle. We are reevaluating our capital market strategies.  A strong employment report for April will help stabilize the equity markets temporarily.  A dissapointing report will accentuate the current market downslide. 

The sovereign debt issues in Western Europe are not going away. They will overhang debt and equity markets until creditors and investors are convinced credible debt reduction fiscal programs are enacted and accepted by the local populations. We will address the intermediate and longer term issues of soverign debt in a more extensive article on our website. For the moment, we believe a forceful international response to the destructive speculation regarding soverign debt defaults in Western Europe is necessary, and quickly, to restore order to the equity and credit markets.

Morris R. Segall, CFA, CIC

Economic Trends

The March monthly unemployment report was the latest in a series of positive economic reports that confirms an expansion in the economic recovery. Since late February, we have observed a perceptible pick-up in consumer spending since the end of the severe winter weather. We have noticed an increase in traffic in restaurants and malls and have heard firsthand of increased travel by consumers. This empirical data has been confirmed by reports from major retailers and cruise ship lines over the past two weeks of increased revenues in the month of March.  The spring thaw has unleashed pent up spending which we have expected would spur a real economic recovery when the unemployment situation improved. While we believe new job losses have peaked, we have stated in previous comments that the chronic level of long term unemployment and the suppressed level of wage and salary income growth would be depressants to increased consumer spending.  Despite repeated evidence that the level of long term unemployment is not improving, consumers are apparently satisfied with their financial conditions to allow an increase in discretionary spending.  Combined with a continued surge in factory orders from businesses and rising exports, we expect first quarter GDP to be a solid 3% based on a strong March performance and the second quarter could be even stronger with growth in the 4%-6% range based on:

1. A strong rebound in housing to take advantage of the extended home buyer tax credit set to expire in June. We  would not be surprised to see that credit extended again to compensate for the lost time in January and February due to harsh winter weather.

2. An increase in auto sales as replacement demand increases due to the extended age of the automobile fleet and the detrimental impact on cars from this winter’s weather.

3. Continued and broader increases in capital equipment orders from businesses that are seeing increased sales, pent-up demand for capital equipment and rising corporate profits.

4. Increasing exports to fast growing and recovering overseas economies.

5. Increased federal spending from the accelerated release of stimulus funds.

If our projections are correct, strong consumer spending in the second quarter will lead to an inventory replacement cycle in the third quarter and increased industrial production from building backlogs. We do not foresee a double dip recession in the second half of this year.

However, we do expect a slowdown in GDP growth in the second half because the current surge in consumer spending cannot be sustained under current employment and consumer income conditions. We expect the current increase in consumer spending will come from savings and reduced reduction in consumer debt. While that helps spending in the short term it is cause for concern longer term. We have consistently commented in our posted economic presentations that a consistent effort on the part of American consumers to save more and reduce debt results in a healthier, more consistent and more creditworthy consumer that can sustain an increasing level of economic growth. Thus, while the industrial sector and exports can keep economic growth going through this year, reduced federal subsidy programs and lower levels of consumer spending make the economic outlook for 2011 more difficult to predict. Furthermore, commodity and energy prices are already on the rise which will increase inflation going forward and we expect the Fed will have to raise interest rates by this summer. The confluence of rising prices and interest rates will put additional pressure on consumer incomes and spending.

So while the economy is improving, sustained recovery still needs permanent job creation and the absorption of the large pool of long term unemployed.

Morris R. Segall, CFA, CIC

Economic Trends business landscape, consumers, economics, GDP, government, March monthly unemployment report, trends, unemployment

Beginning with last week’s sudden increase in the discount rate by the Fed, the expanding product scandal at Toyota and Tuesday’s surprising decline in the consumer confidence index from the Conference Board, the news has been bad for the economy and bad for the equity markets.

While the increase in the discount rate was no surprise, given Chairman Bernanke’s prior comments signalling such a move was likely, the timing and manner of the increase was quite surprising and unsettling. For months the Fed and Chairman Bernanke have stated the economy was still quite fragile despite its recovery. Public statements repeatedly reaffirmed the highly accommodative Fed policy of low interest rates. So why did the Fed not wait for its March Board of Governors meeting to announce its increase in the Fed funds rate?  Why did the Fed wait until the stock and bond markets were closed last Thursday to make its announcement?  These actions have been uncharacteristic of Fed actions which have emphasized transparency. We believe the Fed action is another in a series of moves toward normalization of monetary policy and an effort to drain excess liquidity from the financial system. But we believe the nature of the Fed action was aimed more toward foreign investors than for domestic consumption. We believe the continuing rumblings of overseas discontent with current American monetary policy and the revelation of significant sales of U.S. Treasury holdings by China created enough unease in Washington to send a signal to foreign investors that the Fed was ready to move on excess liquidity concerns. Keep in mind the current backdrop of increasing sovereign debt risk in Europe and the Middle East. The rising concerns over the increasing national debt and credit ratings of the U.S. government and the ongoing auctions of U.S. Treasury notes and bonds that are running on average at $100 billion per month. If the Fed action was precipitated by foreign concerns, monetary policy may not be as dependent on the fragile state of the U.S. economy as the Fed has stated.

The unraveling of the Toyota product image as more and more product defects surface and the company’s response becomes more suspect will hurt Toyota manufacturing and sales in the U.S.  Of course this will benefit Ford and GM but the manufacturing, parts supplier and dealer networks of Toyota in the U.S. are important contributors to the U.S. economy and are not fully replicated by domestic manufacturers, particularly given the downsizing of Detroit in the recession. Toyota imports are important economic contributors to West Coast ports and domestic rail and truck volumes. The problems of Toyota are an important reminder of the vulnerability of brand image and customer brand loyalty and how vigilant company managements must be to maintain them. This will be a textbook case taught in business schools of how not to handle quality control and customer relations issues.

Tuesday’s unexpected steep decline in the Conference Board’s consumer confidence index for February is very disturbing.  After showing improvement as the economy recovered and the stock market moved higher the Conference Board index plunged to a reading of 46 from a level of 56.5 in January. The steep decline in the third quarter of economic recovery is not at all typical.  The reading of 46 is consistent with the low levels recorded in the depths of the recession last year.  More distubing are the subsector readings within the index.  The measure of responses indicating positive sentiment to  current conditions was less than 20%, a 27 year low. Almost 50% of respondents felt jobs were hard to get versus less than 5% of respondents who felt jobs were easy to get. Over 45% of respondents felt business conditions were poor. Sentiment readings on the near term outlook also fell significantly from January levels. In short, consumers are depressed currently due to ongoing unemployment and consumer income pressures and discouraged about meaningful improvement in the near term. This level of pessimism can be self fulfilling and act as depressants to consumer spending which must improve if the current economic recovery is to be sustained and expanded.

All of this will not be lost on the stock and commodity markets as witnessed by Tuesday’s declines.  Unless news from the consumer sector reverses, the equity and commodity markets will be hard pressed to rally further from current levels in the near term. Conversely, strong corporate earnings and a steady improvement in the manufacturing sector are providing support to the markets. We still believe the markets are vulnerable to correction in the near term but remain positive on equities and commodities intermediate-longer term. The signals coming from the Fed herald the end of zero interest rates and augur ill for the fixed income markets, particularly at the short end of the maturity spectrum.

Morris R. Segall, CFA, CIC

Economic Trends business landscape, Consumer Confidence, consumers, economics, economy, government, The Fed, Toyota

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Presentations 2009 economy, Add new tag, business landscape, Capital Markets, consumers, crisis, debt

Today’s unemployment report for the month of January was revealing for what it did not tell us. That is, are we about to turn the corner on unemployment ?  The report showed a modest 20,000 loss in jobs in the month of January,  a virtual flat performance with the month of December, 2009. Of more note was a .3% drop in the stated unemployment rate from 10% to 9.7%, the lowest rate since last summer. However, as we commented in our blog article, “November Unemployment: Is this the Peak?“, December 4, 2009, the Labor Department made annual revisions to its monthly employment reports. As expected, the revisions show more job losses in 2009 than previously reported. According to the revised calculations, the economy lost over 600,000 more jobs in calendar 2009 than previously reported including a large downward revision of 65,000 lost jobs in the month of December, 2009 to a revised total of 150,000 lost jobs in that month. So a flat January job loss result with December is not a job improvement. We therefore are skeptical of the drop in the unemployment rate. In addition, the average workweek in January remains depressed at 33.9 hours and the civilian labor force participation rate in January continued to reflect historical lows below 65%. There are other important items in the January employment report. Goods producing industries, largely in construction, lost another 60,000 jobs bringing the total for the last three months to almost 150,000. Financial activities and transportation and warehousing sectors lost another 35,000 jobs in January on top of the almost 29,000 jobs lost in December. These are generally high wage jobs.  Finally, long term unemployed, those out of work 27 weeks and longer, continue to rise to a record 6.3 million in January. This is the chronic problem in the unemployment picture. While new job losses continue to diminish, continuing job losses continue to rise.  The increasing universe of long term unemployed will continue to suppress consumer spending and therefore an acceleration in the economic recovery.

The January unemployment report did contain some positives. The number of temporary help workers increased by another 50,000 in January and since September by nearly 250,000. While this number is being augmented by hiring for the U.S. Census this year, the recent five month trend augurs well for ultimate permanent job creation later this year. For the first time since the recession began, manufacturing added jobs in January, albeit a small number (11,000), but it is significant and supports the economic improvement in the factory sector which we noted in our recent “Economic and Capital Market Update“, February 1, 2010 on our website. We expect further improvement in manufacturing employment reflecting the upside momentum in factory orders, particularly in the technology sector.

All in all, the January monthly unemployment report while encouraging is still not conclusive evidence of a transition to meaningful job creation in the current economic recovery.

Morris R. Segall, CFA, CIC

Economic Trends business landscape, consumers, economic improvement, economics, economy, GDP, government, January Unemployment, Labor Department, politics, U.S. Census

After playing politics with Ben Bernanke’s nomination in the wake of last Tuesday’s election loss in Massachusetts, the Democrats with help from the stock market on Friday, thought better of their populist pandering on Monday and began to rally around the beleaguered Fed Chairman. Criticism began late Friday with the stock market selloff and built up over the weekend. In our blog article of December 8, 2009, “Ben Bernanke: Hero or Goat“, we warned of the market ramifications of politicizing the Fed and its Chairman’s reappointment process. Congress got the message over the weekend and will now probably vote to reappoint Ben Bernanke.

Friday’s stock market sell off culminated a week that saw the market decline over 500 points and erased the gains accrued in the first two weeks of the year. After rising virtually non stop since its lows in early March of last year, the stock market entered 2010 strectched and overdue for a correction. Last week’s market decline could be the beginning of such a correction. Despite good news on corporate earnings and sound fiscal action on the part of the Chinese government to curb speculation in their economy, stocks sold off reversing their pattern of seeing the “glass half full” on virtually all economic and corporate news. It remains to be seen if this new pattern of stock price decline will revert to the short lived selloffs of last year or develop into a long overdue correction. Such a correction would be good for the stock and commodity markets longer term. The latter have been particularly ebullient over the last year with outsized gains that are ripe for profit taking.

In a couple of days we will get our first look at the fourth quarter GDP. Consensus estimates are for growth of 4%-5%. In our blog article, “Third Quarter GDP Revised Down“, November 25, 2009, we stated “strong contributions in consumer spending and business fixed investment would be needed from downwardly revised third  quarter GDP levels”.  After watching numbers “see saw” in housing, unemployment and retail sales in the fourth quarter, we believe fourth quarter GDP will be within consensus estimates led by large gains in business fixed investment, notably machinery and equipment, and government spending with a solid contribution from personal consumption and a positive contribution from net exports. Since the third quarter of last year the manufacturing sector is the strongest part of the economy with factory orders and shipments maintaining their recovery from depressed recession levels. However, the strength in fourth quarter economic data is not expected to be sustained in the first quarter of this year. Post holiday retail and housing sales are expected to dip leaving economic growth to the government and industrial sectors. Economic growth is still dependent on government stimulus in the face of continued high levels of unemployment and the improvement in unemployment is still the key to sustained economic recovery. At this time we do not expect a “double dip” recession when government stimulus ends in the second half of this year but the visibility of economic growth is clouded by the stimulus programs which have distorted the normal trends of economic recovery and have resulted in a “sawtooth” pattern of economic data since the recession ended in the third quarter of last year. We expect that to continue until the private sector can sustain this recovery on its own.

Morris R. Segall, CFA, CIC

Economic Trends Ben Bernanke, economy, employment report, GDP, government, stock market, trends, unemployment

Tuesday’s  stunning victory in Massachusetts by Republican Scott Brown to fill the Senate seat of the late Ted Kennedy is undeniable evidence of the failure of the Democratic Party and President Obama to capitalize on their voter mandate in 2008. In what should have been a year of great accomplishment with passage of landmark legislation in healthcare, the environment and economic reform the President marks his inaugural anniversary with no great success in his domestic agenda and his party losing its super majority in the Senate. Coupled with recent Republican victories in gubernatorial elections in New Jersey and Virginia and the retirement of several leading Democrats in the Senate, the Democratic Party is firmly on the defensive with low voter approval ratings and the object of intense voter anger. We have been commenting on building voter anger in our website articles (See “Long Term Outlook“, October 8, 2006, “The Election“, November 17, 2008 and “I am Mad as Hell…”, March 23, 2009) and it has now reached a fever pitch exacerbated by the severe recession. We repeat the mantra we have stated since 2006, “an angry electorate is an unpredictable electorate”.  A more detailed review and analysis of the domestic political environment and its implications will be covered in an upcoming website article. For now, we make the following observations:

1. The President must take responsibility for his party’s decline and his program failures. The President is an eloquent speaker but he does not follow the speeches with forceful actions. We commented in our July and August blog articles on the failure of the President’s healthcare initiative BECAUSE of splits within the Democratic Party. With all of the political capital expended by the President on healthcare, his failure to unify his own party and rally public support on this issue have been fatal. The election of Scott Brown in Massachusetts and the decline in public approval have made the President’s healthcare initiative all but dead.

2. Likewise, the loss of the Massachusetts Senate seat will now slow if not halt the President’s initiatives on carbon taxation, immigration, financial system regulation and other major agenda items that encompass higher taxes and increased federal government presence.

3. The anger in the electorate and the failures of the President and the Democratic Party have now resurrected the Republican opposition and make them a credible threat to unseat Democrats in this year’s Congressional elections. Faced with public anger and reelection, Democrats in Congress will be less inclined to support the President. Significant losses by the Democrats in the House and Senate will likely result in legislative gridlock for the remainder of President Obama’s term. The President would increasingly look like a one term president. This will prevent solutions to the major socio-economic issues we face in the next decade and cloud our longer term economic outlook. This will however alleviate increased regulation of business and provide a more benign environment for the stock market in the shorter term.

4. This latest political setback for President Obama will not go unnoticed overseas. A president already viewed as weak and unsuccessful overseas (See our recent website article, “The Obama Foreign Policy“, January 7, 2010), will be weakened further if he cannot control his own political party and win the public debates on domestic policy.  It will be harder to get agreements from allies and concessions from adversaries particularly if the president looks like a one termer.

Tuesday’s Senate election in Massachusetts has altered the domestic political landscape and thus the economic outlook for the next two years. Its repercussions will be felt not only here in the U.S. but around the world as well.

Morris R. Segall

Economic Trends Democratic Party, democrats, economy, Election, government, Massachusetts, Massachusetts Senate, political, politics, President Obama, Republican Party, republicans, Scott Brown, Ted Kennedy

Ben Bernanke appears to be fighting for his life before Congress where several members from both major parties and one of the independents in the Senate are rejecting his reappointment as Chairman of the Federal Reserve Board for a second four year term.  The opponents of his reappointment blame Mr. Bernanke for aiding and abetting the excesses in the financial system that resulted in its meltdown and taxpayer bailouts of many of its institutions. In their zeal to lash out at the stewards of fiscal and monetary policy during the financial crisis of the past two years, the critics of Ben Bernanke fail to include one of the most culpable parties to the worst financial crisis since the Great Depression and that is Congress itself. From the enactment of the Bank Holding Company Act in 1956 and its subsequent amendments which allowed banks to buy non bank financial entities outside of the supervision of the Federal Reserve System, to the repeal of the Glass Steagall Act which had separated the commercial and non-commercial banking activities of banks in 1999, to the lax oversight of Fannie Mae and Freddie Mac, federally chartered institutions that were the backbone of mortgage securitizations and transactions which fed the lending bubble. For over 40 years the Congress has consistently enacted legislation that enabled banks and other lenders to engage in high risk activities OUTSIDE of the supervision of the Federal Reserve Board. So when the Fed complained that it was losing control of the financial system, Congress did nothing.

In our website article of December 7, 2007, “The Treasury Plan: Is This the Solution?“  we outlined our skepticism of the success of the Treasury plan of then Treasury Secretary, Henry Paulson, to effectively “dance around” the mortgage crisis by adjusting mortgage rates and terms in the hope of forestalling the inevitable losses from mortgage defaults. It was not until March, 2008 that the Federal Reserve forcefully attacked the loan loss problem by swapping Treasury paper for the problem debt held by mortgage lenders. The Fed subsequently expanded Discount Window facilities to both commercial and for the fist time, non-commercial banks like investment banks and brokerage firms so these firms could have liquidity. In fact in our ongoing economic presentations such as the ones  posted on our blog and website,  there is an entire section of slides and commentary entitled “The Government”s Response” to the severe credit crisis. It shows the leadership of the Fed in increasing the money supply, reducing interest rates and expanding its own balance sheet by purchasing the “toxic” assets of the banking system to provide it with liquidity necessary to keep the system afloat.  By most objective scutiny of the Federal Government’s handling of the credit crisis, including our own jaundiced view, if there is a hero in this debacle, it is Ben Bernanke who literally pulled out all the stops to keep the financial system in this country from totally collapsing, particularly after Henry Paulson triggered a system panic by allowing Lehman Bros. to fail. We may not have liked the bailouts of many of these instituions but as we have stated in prior commentaries, the country runs on credit and letting the banking system fail was just not an option.

If one wants to point a finger at the Fed for allowing the credit bubble to build, it needs to be pointed at Alan Greenspan who instead of musing on the illogical low level of interest rates in 2004-05 in the face of the real estate boom should have raised interest rates and loan reserve and capital requirements to slow the creation of credit. Upon succeeding Greenspan in January, 2006 Ben Bernanke’ s Fed started raising interest rates through the spring and into the summer of that year and held those higher rates until the recession began in late 2007.

We and other observers believe Ben Bernanke will be reappointed to another term after this current thrashing. He better be. A rejection of Ben Bernanke AND an ill advised replacing of the Federal Reserve as the nation’s principal regulator of monetary policy and the financial system, would create a loss of confidence in foreign bankers, creditors and traders and would depress our bond markets and exacerbate an already “free falling” U.S. dollar. The President needs to show leadership on this issue and strongly reaffirm his support for the reappointment of Ben Bernanke and not let Congress make him the “goat” of the recession. If Congress wants to assess blame for the financial mess, they should begin by looking in the mirror.

Morris R. Segall, CFA, CIC

Economic Trends Ben Bernanke, business landscape, Capital Markets, credit crisis, economics, economy, government, obama, treasury, trends, unemployment

Today’s unemployment data for November was a surprising loss of only 11,000 jobs, well below economists’ expectations of 100,000-150,000 jobs lost in the month. In addition, the unemployment rate for November declined unexpectedly to 10% from October’s 10.2%. Consensus expectations were for the unemployment rate in November to be flat at best with October’s cycle high. The Labor Dept. also revised downward previously reported job losses in September and October. Monthly job losses have been revised downward for each month since August by a total of over 200,000 jobs. Since August, monthly job losses have averaged below 200,000 versus over 300,000 average monthly losses in the May-July period. The decline in monthly job losses parallels the strong improvement in first time unemployment claims reported weekly. Since mid September, first time unemployment claims have fallen approximately 100,000 and are now running at approximately 450,000 for the last two weeks in November.

In isolating the areas of reduced job losses we note that healthcare continues to be the area of the economy that has consistently added workers during the recession. Since September, healthcare has added an additional 100,000 workers and nearly 900,000 workers since the recession began in December of 2007. Other areas of job improvement since September are: the federal government and state government education accounting for an increase in approximately 50,000 jobs; and professional and business services adding over 100,000 jobs largely in temporary help services.  Importantly, for the first time this year, the average workweek increased to 33.2 hours from a cycle low of 33.0 hours in October.  The average workweek improved more in the manufacturing sector expanding to 40.4 hours from 40.0 hours in September. This reflects the recurring order and shipment strength in the manufacturing sector since last summer.

Conversely, most other areas of the economy continued to record job losses including manufacturing, finance, construction, retail and wholesale trade and information services. While the Labor Dept. reports almost 41% of reporting industries are now hiring, a cycle high, that leaves nearly 60% that are not. The surge in temporary help jobs indicates businesses are wary of the economic recovery and are reticent to add to payrolls. Furthermore, the labor force has declined by over 100,000 workers since September indicating an increase in discouraged workers despite the improvement in the economy. The decline in the civilian labor force would also partly explain the decline in the unemployment rate in November. Another benchmark of employment in the weekly and monthly reports indicate no improvement in the numbers of long term unemployed and under-employed workers. In fact, the numbers of long term unemployed increased to over 9 million or 38% of total unemployed at the end of November, a record level.  In addition, while first time unemployment claims have declined sharply, they are still recording well above 400,000 claims per week. Finally, the response from consumers in recent surveys indicate jobs are hard to get by an overwhelming margin despite the economic improvement in the third and fourth quarters. These measures do not support the monthly improvement in employment reported by the Labor Dept. since August and we have repeatedly said so in our blog articles on the monthly employment reports going back to last July.

Nonetheless, if the monthly employment report from the Labor Dept. is indeed true and not distorted by seasonal adjustments and faulty assumptions that are part of this survey’s results, then  it would appear that unemployment in this cycle is peaking and job creation is virtually around the corner early next year. This would be well ahead of consensus expectations, including our own, in projecting a peak in unemployment and the transition to job creation in the middle and latter part of 2010, respectively. It is important to note that the Labor Dept. will be making final revisions to its 2009 monthly employment data in March of 2010. In its initial revision to 2009 monthly employment data in August, the Labor Dept. revealed that unemployment this year was actually almost 900,000 workers higher than originally reported. Similar revisions were made to monthly data in 2007 and 2008. With that as a background and the contradictory results of other unemployment data and surveys, we are skeptical the employment cycle is turning this strongly and this fast.

Morris R. Segall, CFA, CIC

Economic Trends consumers, debt, economic, economics, economy, employment report, GDP, government, recession, trends, unemployment

Yesterday’s second reading on the third quarter GDP showed a downward revision from the robust 3.5% preliminarily reported at the end of October. As November wore on expectations of the second and more definitive read on the third quarter was for a downward revision to the 3% level but no one was alarmed. It was considered more or less statistical.

After taking a look at the revisions from the preliminary report we are concerned for the following reasons:

1. Personal consumption was revised down from 3.4% growth to 2.9% with spending on goods dropping from 8.1% growth to 7.2%.
2. Business capital spending dropped from 11.5% growth  in  the preliminary report to 8.4% in the revision with large downward revisions in the growth of inventories and business structures.
3. Federal government spending growth was revised upward from  2.3%  to  3.1%.
4. Growth in final sales of domestic product was revised downward from 2.5% to 1.9%.

This revised mix of weakness in business and consumer spending with all of the federal government stimulus in the quarter is alarming and casts further doubt on the underlying strength in the economy as federal stimululs abates going into next year. Our assumption of 1%-3% GDP growth in the fourth quarter will need strong contributions in both consumer and business fixed investment from the revised third quarter levels. We detect an improved level of retail sales in the quarter but  will need to see sales results of “Black Friday” to see if that is true. A disappointment in this weekend’s sales will cause a shift in outlook for both the economy and particularly the capital markets which have been seeing the glass “half full” in November despite the warning signs in consumer sentiment, new home sales and continued high levels of unemployment. It is noteworthy that the market gains in November have been accompanied by low levels of trading volume, an ominous sign for sustained capital market gains.

In our previous website and blog articles on the preliminary third quarter GDP, we remained skeptical of the durability of the third quarter gains and said we would be watching fourth quarter economic data closely for future direction. With the downward revision in third quarter numbers, we will be even more vigilant to see if this economic recovery has “legs”.
Best wishes for a Happy Thanksgiving holiday and stay tuned.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, consumers, economics, future trends, GDP, global, government, recession, stimulas, unemployment

SPG Trend Advisors and its affiliate, Sage Policy Group, make presentations on local and regional economies, the national economy, international and geopolitical issues and capital market events. We offer these presentations for our readers to gain additional information from our commentaries and further explanation of our analyses and forecasts.

Below is the first in a series of presentations we plan to showcase here on the SPG Trend blog.  While this was given on November 21, 2008, the content is still highly prescient:

Presentations economy, recession

The Russian stock market is down in dollar terms over 25% since our articles of August 6th, “International Economics” and August 11th, “The Dollar, Commodities and Geo-Politics”. It is down even more when valued in the rubles. Since the invasion of the Republic of Georgia, foreign capital has been fleeing the country and creating a financial crisis in the country.

Russian currency, capital markets and credit are in free fall as foreign investors abandon their investment in Russia due to its recent actions of “bullying” private sector companies, particularly foreign based investment. In addition, Russia’s invasion of Georgia has soured foreign investors on the tactics and foreign policy of the Putin government.

In the section on Russia in our Aug. 6th article we wrote about the negative foreign investment climate being created by the Russian government’s political actions and in our Aug. 11th article we wrote about the negative impact on Russian-American and Russian-European relations as a result of its invasion of Georgia. While the official government reactions to Russian militarism have been muted (in the case of the EU), the current financial crisis in Russia is definitely the reaction of world investors and creditors to what is now perceived as a high risk investment climate and one they do not wish to support.  Refer to the sections on Russia in our articles of Nov. 12, 2007 and Aug. 6, 2008 and our articles of Dec. 4, 2007 and Aug. 11, 2008.

Economic Trends