The economic data continued its mixed performance last week with little in the way of surprises. The recovery is definitely slowing and that is quite disappointing considering that it hasn’t been a robust one anyway. The housing market is in tax credit hangover hell and the jobs market is downright dismal but manufacturing continues to be a bright spot. Whether that is enough to maintain a recovery with subdued consumer spending is something we will find out over the coming months.
The weekly retail sales reports from Goldman and Redbook both showed a continuation of a slowing rate of growth that has become apparent over the last few weeks. Retail sales are still rising but the rate of growth has dropped from the high 3% range to the mid 2% range. The cause is obvious – stagnant income and a lack of job creation. With consumers still reluctant or not able to take on new debt, this is a trend that seems likely to continue. That doesn’t necessarily mean the end of the recovery but it does mean that it is more important than ever that foreign economies and countries pick up the slack. One item of good news on that front is the announcement over the weekend that China will relax the Yuan peg to the dollar. If the Chinese allow the Yuan to rise a bit, it will mean increased purchasing power for their companies and consumers.
The good news from the manufacturing sector continues to pile up. The Empire State Manufacturing survey and the Philly Fed survey were both solid reports although the headline reading on the Philly version was a bit disappointing. Both reports showed solid gains in new orders and shipments. Inventories were a bit mixed with the Empire report showing a slight draw and the Philly showing a slight build. Delivery times slowed in both reports indicating some stress on the supply chain. Employment was mixed and it might be that manufacturers have added back what they need to meet current demand. Inventories are low in relation to sales but there seems little appetite to risk a big build at this point for sales that may not appear. We’ve had a nice rebound in the manufacturing sector but confidence is only coming back slowly. Caterpillar last week announced some major investments in capacity expansion but they are the exception not the rule.
The news on the housing market wasn’t as good. Housing starts fell off a cliff last month after the expiration of the tax credit, down 10% from April. Still that is 7.8% higher than last year and multifamily starts were higher. We are building houses at a roughly 600k annual rate now and if we return to previous levels of household formation (around 1.5 million annually) that isn’t nearly enough. On the other hand, household formation seems unlikely to rebound until the jobs situation improves so it may not be an issue anytime soon. Home builder confidence fell badly last month so the next few months may be grim for new construction. We did finally get an up week for mortgage purchase applications, 7.3% higher to a merely dismal rate.
Meanwhile, inflation remains subdued but despite much handwringing about potential deflation the rate has not turned negative. The PPI clocked in with a 5.5% gain year over year while the CPI showed a gain of 2%. I find it interesting that everyone is so worried about deflation when the CPI is coming in exactly where the Fed has indicated its target lies. With the ECB now engaging in its own form of quantitative easing, I won’t waste much time worrying about deflation. Whether the Fed launches another offensive in the great war on falling prices is yet to be determined but the extended period of engagement seems likely to continue being extended. The Fed will not be raising rates anytime soon.
Jobless claims rose again last week and are now within strking distance of 500k when we should be talking about getting under 400k. There is no way to characterize anything in the jobs market as good and if anything the last few months has seen a worsening. There is a theory going around right now that companies cut employment too much at the beginning of the recession and that they will add back a lot of those workers but frankly I don’t see it. I think what companies have discovered is that they are functioning quite well without those workers and unless something happens to change their outlook, they aren’t hiring anyone anytime soon.
Stocks had a good week rising a bit over 2%. From a technical standpoint the major averages have regained the 200 day MAs but it is far from clear sailing from here. For the S&P 500 there will be major resistance just overhead at the 1150 level and I do not expect it to retake that level easily. There are just too many uncertainties for the market - or the economy for that matter - to advance at this point. President Obama, apparently oblivious to the effects of increased uncertainty, used the BP spill to renew his call for a cap and trade system. While there are good reasons to want to reduce our dependence on oil imports – most of them non environmental by the way - the uncertainty introduced by a legislative battle over cap and trade right now is too high a price to pay for environmental purity. With a variety of taxes already set to rise next year, the addition of a carbon levy may just be too much for the economy to bear.
One market that has remained in a bull trend is precious metals. Gold and silver are both in well defined and well recognized uptrends and while Ben Bernanke may not understand it, the folks doing the buying sure don’t seem to have any doubts. Buying gold and silver is the equivalent of stockpiling ammo and canned goods which many of the gold buyers are no doubt doing as well. People are more willing to park their capital in non productive gold than they are to take a risk investing in something productive. In other words they are more interested in preserving their wealth than in attempting to increase it. That is a powerful if frightening statement and does not bode well for the future of the US economy. If our capital is tied up in gold bars we will not be making the necessary investments to expand the supply of goods and services in the future. With demand continuing to rise that is a recipe for a future rise in prices. Gold is an inflation hedge that sows the seeds of the inflation from which it is intended to protect.
As I said last week, I think we are in a holding pattern until after the election. I don’t actually expect President Obama to have much luck passing cap and trade in an election year but then I didn’t think he’d be able to pass health care reform either. Obviously he believes if he doesn’t pass it before the mid terms it isn’t likely to pass at all so he has little to lose in pushing it. I don’t expect Congress members facing a hostile electorate to feel the same way though. Keeping your job in a tough economy is a priority even for politicians. In the meantime, this summer should be a great time to do some research and accumulate good companies paying good dividends at cheap prices.