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Highlights
US – Initial Claims disappointed
EU – The ECB cut its growth forecast
JN – Q2 Real GDP Revised Lower
UK – Jobless-benefit claims continue to rise
CA – Lost jobs in August
AU – Unemployment rate rising
NZ – Manufacturing sales fell in Q2
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US – Weak payrolls
EU – Confidence eroding
JN – Capex declined unexpectedly in Q2
UK – Austerity still being defended
CA – BoC left its Overnight Rate at 1.00%
AU – Q2 GDP reversed Q1 contraction, gaining 1.2% Q/Q
US – QE3 gaining momentum
EU – Confidence weakening
JN – Core CPI Prices increase, deflation still expected
UK – Very weak Q2 growth
CA – Economy contracted in Q2
NZ – Strong retail sales beat expectations
US – Philly Fed collapse
EU – Confidence weakening
JN – Corp Service Prices Unchanged, Industry Activity Increased
UK – Weak Retail, factory orders improving
CA – Positive CPI met expectations
AU – “Currency intervention isn’t warranted”
NZ – Exodus continues
It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.
The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.
After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.
And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.
Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.
This is the reverse of what happened in the recent run up of gasoline prices.
Japan should be doing better as well as they recover from the shock of the earthquake.
Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.
A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.
A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.
A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.
The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.
So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.
So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.
Consumer borrowing up in June by most in 4 years
By Martin Crutsinger
May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.
The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.
The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.
Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.
The labor force participation rate is falling roughly in line with productivity resulting in what I’ve been describing as an L shaped recovery as we remain grossly overtaxed for the size govt and credit conditions we currently have.
Editors note: this was originally posted without crediting Karim as the author of the comments below.
Karim writes:
Better than feared and most importantly, lending some consistency with other labor market indicators (claims, ADP, ISM).
Much of the details reversing last month’s across the board weakness.
Claims in low 400s and ISM employment in low-to-mid 50s consistent with private payrolls in 100-150k/mth range.
Also with consistent with Fed forecast of modestly above trend gwth and slow decline in the unemployment rate.
A risk to the outlook going forward is the ‘financial accelerator’ factor as coined by Bernanke and Mishkin. Growth in H1 was at least associated with supportive financial conditions (basically credit spreads and equities). Too many more days like yesterday will offset whatever comfort they get from reports like today’s.
Yes, the first half was revised down to about only about 1.3% real growth.
But it was that amount of growth that generated the reported employment growth in the first half.
And while Q3 forcasts have been revised down, they remain at above actual levels of Q1 and Q2.
The Credit Suisse Global Risk Appetite index has moved into ‘panic’ for
the first time since March 2009. Today’s level is -3.02 (panic is any
reading below -3).
Note that March 09 was the turning point for stocks. Coincidence?
Still no mention of how the federal deficit contributes to savings.
Or how QE and 0 rates have lowered personal income.
Now that the debt ceiling hike looks to be passed,
we’re back to the ‘death by 1000 cuts’ scenario.
Jury still out on whether China is in the process of a hard landing
UK austerity keeping a lid on demand there
Eurozone seems to be slowing as well, as Italy and Spain watch funding costs escalate.
As the carpenter once remarked, ‘no matter how much I cut off it’s still too short…’
But in the first half stocks did show they can make reasonable returns with very modest GDP growth.
While unemployment showed it doesn’t come down with only modest GDP growth.
Personal Spending Down 0.2% While Income Growth Slows
By: ReutersUS consumer spending unexpectedly fell in June to post the first decline in nearly two years as incomes barely rose, a government report showed, suggesting economic growth could remain subdued in the third quarter.
The Commerce Department said consumer spending slipped 0.2 percent, the first drop since September 2009, after edging up 0.1 percent in May.
Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.2 percent.
When adjusted for inflation, spending was flat in June after easing 0.1 percent the prior month. The decline came even as gasoline prices retreated from their peak just above $4 a gallon in early May and suggested the much-anticipated bounce back growth in the third quarter would lack vigor.
Consumer spending barely grew in the second quarter, inching up at an annual rate of only 0.1 percent—the weakest pace since the end of the 2007-09 recession. Spending increased at a 2.1 percent rate in the first quarter.
That contributed to hold the economy to an anemic growth pace of 1.3 percent in the second quarter.
The weak spending in June also reflected tepid income growth after employment growth ground to a near halt in June, with nonfarm payrolls rising only 18,000. Income ticked up 0.1 percent, the smallest increase since November, after rising 0.2 percent in May.
Disposable income ticked up 0.1 percent, also the smallest increase since November. But when adjusted for inflation, disposable income rose 0.3 percent. With real disposable income outpacing spending, savings rose to $620.6 billion from $581.7 billion in May.