Both the Fed and economists for private firms have economic forecasts for the years ahead, and a look at the estimates shows that the two are in quite a bit of disagreement. Currently, the Fed is estimating that real GDP growth (YoY%) will be -1.25% in 2009, 2.7% in 2010 and 4.2% in 2011. Bloomberg's survey of 75 economists has their median estimate at -2.6% in 2009, 2.3% in 2010, and 2.8% in 2011. The Fed's outlook for GDP is much more rosy than the median economist estimate.
The Fed is also forecasting that inflation will not be as bad as economists expect in 2010 and 2011. The median Fed estimate for CPI is 1.5% in 2010 and 1.55% in 2011. The median economist estimate for CPI is 1.9% in 2010 and 2.45% in 2011.
And finally, the Fed thinks that unemployment won't be as high as economists are predicting either. While the Fed is looking for an unemployment rate of 9.95% in 2009, they expect it to be 9.65% in 2010 and 8.6% in 2011. Economists are predicting unemployment to be at 9.2% for the full year 2009, 9.8% for 2010 and 8.85% for 2011.
In our report last week on the state of the economy and financial markets in the year after Lehman's collapse, we noted that although claims were well off their highs, recent data was showing a weaker (or at least stalled) employment picture. In order for the rally to continue, jobless claims must continue to trend lower. If they tick higher, the rally could be in jeopardy.
Thankfully for the bulls, today's weekly jobs report has the four-week moving average of initial jobless claims and continuing claims moving back in the right direction (lower). The weekly jobless claims report showed fewer than expected initial claims (550K vs 560K), which brought the four-week moving average down to 570K from 573K. More importantly, as long as initial claims do not increase in the coming weeks, this average will continue to decline as the three prior weeks are all considerably higher than current levels.
This week's release of continuing claims also showed a significant drop from prior weeks. While economists were expecting the report to come in at 6,200,000, the actual number of continuing claims was 6,088,000. The current level is now down nearly 12% from its peak earlier in the year.
This morning's employment report for August showed that non-farm payrolls declined by 216K. This is the best monthly reading (if you can call a decline of 200K+ jobs good) in the 'post-Lehman' era.
In the 12 months since Lehman's bankruptcy, the US economy has now lost 5.8 million jobs, which is the largest 12-month decline in history. In percentage terms, the 5.8 million jobs lost in the last year is equal to 4.44% of the total workforce. Over the last seventy years, this level has only been breached during two other periods.
This morning's Factory Orders report for July showed a month over month gain of 1.3%, which was the largest monthly gain since April 2008.
With the largest gain in over a year, one would think it would be cause for celebration and a sign that we're out of the woods. However, when we look at the actual dollar value of Factory Orders over time, we still have a long way to go before getting back to pre-Lehman levels. As shown below, the current level of Factory Orders is still 19.8% below the levels they were at one year ago.
In our last post we looked at the composite index for housing. Below is a table of the month-over-month and year-over-year changes in median home prices in the 20 cities that Case/Shiller tracks. As shown, only two cities (Detroit and Las Vegas) showed month-over-month declines. It's interesting that Detroit was down while Cleveland was up 4.18%. On a year-over-year basis, Cleveland, Dallas, Boston, and Denver are getting close to posting a positive change. If the trend continues, we should see an up arrow some time in the next couple of months.
Many potential homebuyers and/or investors have been waiting for signs that a bottom is in before going out and making a real estate purchase. With the S&P/Case-Shiller housing numbers showing nice month-over-month increases in the last two months, a rush to get back into the market could be on the way, which would push prices higher and higher. Just as there was a rush to get out of the market for fear of not being able to sell near the peak in housing, potential buyers are probably beginning to worry that they could lose out on the good deals that are out there. This type of investor psyche is what pushes markets of any kind higher.
Below we highlight historical charts of the year-over-year monthly change in home prices for the 20 cities as well as the 20-city and 10-city composite indices. As you'll see in the charts, the numbers have clearly been getting better in recent months.
This morning's release of the Case Shiller Home Price Index for June showed its second straight monthly increase. The last time home prices increased two months in a row was back in the Summer of 2006 at the end of the last housing boom. June's 1.4% monthly gain was also the largest monthly increase since June 2005. There's no denying that these numbers are showing considerable improvement.
Bears on the housing market will no doubt try to spin this month's report as artificially boosted by seasonal factors. While June is historically a positive month for home prices, this year's increase was right up there with the types of gains we saw back before the crash in home prices. The chart below shows the monthly change in home prices since 2000, with the red bars indicating each monthly change for the month of June. As shown, this year's increase of 1.4% ranks as the fourth best June since 2000, and above the overall average of 0.92%. So trying to dismiss this month's number as just a seasonal blip doesn't necessarily hold water.
Even though Friday's jobs report showed that the unemployment rate improved from 9.5% to 9.4% in July, the White House said the rate would still reach 10% by the end of the year. Critics said that President Obama gave an overly pessimistic forecast so that he would look better when the actual number comes in better than his expectations. However, traders on Intrade.com are putting the odds at better than 50/50 that the rate will even be greater than 10.25% by the end of 2009. Below we highlight the contract prices (odds) for various year-end unemployment rates. As shown, the odds that the rate will be higher than 9.5% at year's end are 80%. The odds for a number higher than 10% are at 65%. While many people gave a double take when Obama projected 10% unemployment this year right after a report that showed it going from 9.5% to 9.4%, prediction markets actually think he's right on the money.
Today's jobs report came in better than expected across all fronts. The unemployment rate ticked lower to 9.4%, nonfarm payrolls lost 78,000 less than forecast, and weekly hours worked ticked higher. For those interested, below and in the table at right we highlight current and historical trends of the employment picture in the US. As shown in the table, the 16 to 19 year old workforce has the highest unemployment rate at 23.8%, while married women with current spouses have the lowest at 5.5%. Women in general have a lower unemployment rate than men.
As shown in the charts, the unemployment rate during this recession ticked to its highest level since the early 1980s. The monthly change in nonfarm payrolls also reached its lowest level in more than 60 years in March. When looking at losses as a percentage of the total workforce, however, the current recession didn't even get as bad as it did in the 1970s.
Over at Intrade.com, traders can bet whether a US health care plan with a public option will be signed into law before the end of the year. It has actually been one of the more actively traded contracts on Intrade with 2,706 contracts already changing hands. Over the last two days, the odds based on the contract price have dropped from 45% to 25%. Interestingly, the odds stayed stable between 45% and 50% last week and through the weekend, even as a number of issues arose that signaled a delay. The drop didn't start until yesterday when word got out that the Senate Finance Committee was working on a plan that scrapped the public option altogether. It seems that up until yesterday, people thought that the public option would most likely happen, but they just didn't know when. Now they're questioning whether the public option is going to be an option at all. Click here to follow the odds on Intrade.
In another sign of economic stabilization, the Case Shiller 20-City Home price index rose 0.5% from April to May. This was the first monthly rise since July 2006, and it provides further ammo for economic bulls who are anticipating an economic rebound. Skeptics, on the other hand, will write off this rise as a seasonal blip and focus on the 17.1% year/year decline. While seasonal factors may be at play, an increase is an increase, and after 34 months without one, we'll take it.
Over the last few months, we have been noting how several economic indicators have been rebounding to levels they were at prior to the bankruptcy of Lehman Brothers. This afternoon, the NAHB Housing Market Index became the latest indicator to fall into that category. After hitting a low of eight in January, the index has been steadily rebounding and has now more than doubled from its lows. However, before we break out the champagne bottles, we would note that back in 2005 this indicator was above 70. The question now becomes, with so many indicators reaching the levels they were at prior to Lehman's bankruptcy, how far behind is the market? As of today, the S&P 500 would still have to rally by 33% to reach its pre-Lehman levels.
As highlighted in an earlier post, the ADP Employment report has shown improvement for four straight months, but it is still far below levels that we saw prior to the Lehman bankruptcy. This morning's ISM report, however, tells a different story. June's level of 44.8 is the sixth straight month over month increase, as well as the highest monthly reading since the Lehman bankruptcy in September 2008. Now, if only the stock market would follow suit.
This month's release of the ADP payroll report showed that private employers cut 473K jobs during the month of June. This was the fourth straight monthly improvement from March's low of -736K. While many of the market/economic indicators we track have returned to their "Pre-Lehman" levels, the ADP employment report is still 205K below its September 2008 reading of negative 268K.
After an impressive rise (547%) off the lows of devastating decline (-94%), the Baltic Dry Index is currently stuck in a narrow range making lower highs and higher lows. With investors searching high and low for signs that the global economy is coming back to life, you can bet you'll be hearing about it if it breaks out to the upside.
With a reading of 49.3, this morning’s Consumer Confidence report for the month of June came in six points below consensus forecasts, and it was the 13th weakest report compared to expectations since 1999. In the table below, we summarize the average and median performance of the S&P 500 and each of its ten sectors on the day of the release. Overall, the S&P 500 and its sectors have typically averaged positive returns on days of weaker than expected reports. However, in an environment where investors are clinging to 'green shoots' as a sign that the economy is improving, reports like this aren't what they want to see.
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Today's Non-Farm Payrolls report showed a loss of 345,000 jobs in the month of May. Estimates were for a loss of 520,000 jobs, so the actual number came in better than expected by 175,000 jobs. Below is a scatter chart that compares the monthly Non-Farm Payrolls report number to the difference between the actual number versus its estimates since 1998. As shown, this month's report was definitely an outlier. It was still one of the weakest jobs reports over the last 11 years, but it was also the third best report when comparing actual versus estimates over the same time period.
The Baltic Dry Index, which measures global shipping rates, continues to soar back from its low of 663 seen in late 2008. The index is currently on a 23-day winning streak, and at 4,291, it is up 547% from its low. Unfortunately, the Baltic Dry fell 94.7% from its 2008 high, so it still has to rise another 175% to reach new highs. Regardless of the distance from its prior high, the sharp rebound in shipping rates definitely provides ammo for those that argue that the global economy is recovering.
While the stabilization of economic activity in the US has been well documented, similar trends have been evident across the globe. The charts below show the monthly purchasing managers indices for some of the largest global economies. For each of these indices, readings over 50 indicate a growing economy, while readings below 50 imply contraction. As shown, the PMIs for each country have shown sharp rebounds from their lows earlier in the year. However, while stabilization is better than nothing, the PMIs for every country with the exception of China are still below 50.
There has been a considerable amount of debate over the last two days concerning Monday's release of the ISM Manufacturing report for May. The headline reading came in at 42.8 versus consensus expectations of 42.3. Within the text of the report, the economists at the Institute for Supply Management stated that a reading in "excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy." As a result, some optimistic investors are beginning to declare that the recession has ended.
Needless to say, the bearish camp disagrees, as one month does not make a trend, and several indicators have yet to confirm the ISM. The bears certainly have a point, but some of their arguments are starting to look flimsy. One argument we recently heard was that the recession is most certainly not over because the ISM is still below the levels it was at when the recession began. Huh? Say that again?
Before we actually look at prior recessions, let's think about this for a minute. Since the ISM is a measure of economic activity, it is only natural that the ISM should be higher at the start of a recession, when the economy is at its strongest (peaking), than at the end of the recession when economic activity is at its weakest (bottoming). In fact, on an logical basis you would think that the ISM would always be lower at the end of the recession than at the beginning.
Looking at real life recessions shows that this is what does typically happen. In eight of the prior ten post WWII recessions, the ISM was lower at the end of the recession than at the beginning of the recession. Going one step forward, the current level of the ISM is actually higher now than the average reading at the end of all post WWII recessions. Who knows, maybe the bulls have a point.
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On Monday we highlighted the S&P/Case-Shiller housing numbers prior to the release of the February numbers on Tuesday. Now that they've been released, we have updated our chart showing the declines in median home prices in the 20 cities tracked from their peaks. Phoenix has become the first city to see home prices drop more than 50%, while Las Vegas is getting close at -48%. Miami and San Francisco are at -45%, while San Diego, Detroit, and Los Angeles have all fallen at least -40%. Dallas is still at -11%, and Boston and New York rank in the top five for the cities that have fallen the least.
With the consensus calling for a decline of 4.7%, this morning's 6.1% decline in Q1 GDP was the second weakest GDP report versus expectations going back to 1999. In the table below, using our Database of Economic Indicators, we highlight the five weakest GDP reports (compared to consensus estimates) along with the one day sector performance of the S&P 500 and its ten sectors. As shown, just because today's report was so much weaker than expected does not necessarily mean that stocks go down. In January 2006, the actual report came in 1.7% below forecasts, and the S&P 500 still managed to rise 0.78%.
After opening down around 100 points, the DJIA is sitting right near the flat line at midday after a much stronger than expected Consumer Confidence report reversed the losses. In fact, this morning's stronger than expected Consumer Confidence report was the fifth strongest report (39.2 actual vs 29.7 estimate) versus expectations since 1999. In the table below, we highlight the performance of the S&P 500 and each of the ten sectors on days when the actual Consumer Confidence reading came in more than 8 points higher than the consensus forecast. As shown, if history is any guide, the afternoon is likely to end on a positive note. On each of the prior seven days, the S&P 500 ended the day unchanged or higher for an average gain of 1.11%.
This morning's CPI report showed that consumer prices declined by 0.4% versus their levels a year ago. It also confirmed the deflationary trends in yesterday's PPI report, which showed a 3.5% year/year decline in producer prices. Negative prints in the CPI or PPI are rare enough, but for both to be negative in the same month is even more unlikely. Since 1948, there have only been 20 other months out of 734 where both indices were negative on a year/year basis. The last time we saw this occur was back in July 1955. In the chart below, we show the historical average reading of the year/year PPI and CPI. As shown, the current level of -1.95% represents a 59-year low.
While statistics like these cause most people to consider inflation the least of our worries, things have a way of changing fast. As recently as seven months ago (August 2008), the average inflation gauge was rising at the fastest rate since December 1981.