Bespoke Investment Group

Contributions to Real GDP Growth in Q4

Below we highlight the breakdown of contributions to the 5.7% Real GDP Growth in Q4 (YoY).  Consumption and inventories were big contributors to growth, along with exports due to the weak dollar.  One area that didn't contribute to the 5.7% GDP growth was government.  In fact, government's contribution to Q4 GDP actually acted as a drag, as the marginal contribution from the Federal side was more than offset by the drag of state and local governments.  Click here to visite the BEA website.

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GDP Rises to Highest Level Since 2003

While the ultimate pace of the economic rebound continues to be debated, GDP in the fourth quarter rose 5.7% (expectations were for growth of 4.6%), which was the fastest pace in six years.  Granted, this growth follows an even bigger decline of 6.4% in the first quarter of 2009, but at least it's a start.  Judging by the performance of equities in the fourth quarter, and the earnings reports we've seen so far, we already knew the fourth quarter was strong, the big question is whether or not this growth will continue in Q1.  Based on what we've seen so far in terms of guidance, companies seem to have a positive outlook.

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Bernanke Poll Results

Two days ago we asked Bespoke readers if they thought Bernanke would be confirmed for a second-term by the Senate.  As shown below, 88% responded 'yes' and 12% responded 'no'.  Over at Intrade, the odds are now all the way up to 98%.

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Initial Jobless Claims Break Downtrend

The weekly initial jobless claims number came in much higher than expected today at 482,000 versus estimates of 440,000.  As shown in the chart below, this jump up to 482,000 has broken the downtrend that was in place since mid-2009.

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Non Farm Payrolls: Beggers Can't Be Choosy

Even though today's non-farm payrolls report was weaker than expected (-85K vs 0K est.), November's report was revised from a loss of 11K to a gain of 4K.  Unless this reading is revised again next month, November's gain (albeit small) puts an end to the longest monthly streak of job declines since at least 1940.  Beginning in January 2008, the US economy posted a record 22 consecutive months of job losses for a total decline of 7.16 mln jobs.  If we include December's losses in the calculation, the US economy has now lost 7.24 mln jobs over the last two years.

Given the fact that the US economy just went through its longest streak of monthly job losses in at least seventy years, there really is no way to sugarcoat the misery in the US labor force over the past 2+ years.  Even if we look at the data based on a percentage of the US workforce, the declines are among the highest ever.  Over the last two years, total nonfarm payrolls are down 5.24%.  The only other time where we saw a larger decline over a two-year stretch was back in 1946, when total non-farm payrolls declined by nearly 10%.  However, we would note that back in 1946 we were transitioning out of a war time and into a peace time economy.  At any rate, the numbers are clearly trending in the right direction now and the worst definitely appears to be over for this cycle.

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San Francisco, Minneapolis Housing Up 15% From Lows

Using the most recent S&P/Case-Shiller home price data from October, below we highlight how much each city that is tracked has risen from its 2009 lows.  The 20-city composite index is currently up 5.3% from its low reached in April.  Eleven cities are up more than the composite index, while nine are up less.  Tampa and Las Vegas are the only two cities that traded at new lows in October, while Seattle and Charlotte are less than 0.5% away from their lows.  On the positive side, San Francisco and Minneapolis are both up about 15% from their lows reached earlier this year.  That's a pretty nice rebound!

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October Case-Shiller Housing Numbers

While close, no cities tracked by S&P/Case-Shiller saw year-over-year gains in the month of October.  Housing prices are generally off of their lows reached earlier this year, but the 10-city composite index is still down 6.4% over the last twelve months.  Below we highlight the month-over-month and year-over-year changes in the Case-Shiller home price indices for October.  As shown, seven cities were up in October versus September, while thirteen were down.  That's a step back from recent months where most cities saw month-over-month gains.  Tampa, Atlanta, and Chicago were all down more than 1% from September to October.

Denver was the closest to showing year-over-year gains in October at -0.11%.  San Francisco, San Diego, DC, Dallas, Boston, and Cleveland are all down less than 5% year-over-year.  Phoenix, Las Vegas, and Tampa are the only three cities down more than 15% over the last twelve months.

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2010 Country GDP Growth Estimates

Below we highlight consensus 2010 GDP growth estimates for 28 countries (+Europe) based on Bloomberg's survey of economists.  As shown, all but one country is expected to see GDP growth in 2010.  Spain is the lone country expected to see a decline in GDP at -0.40%.  China is expected to see the most growth by a wide margin at 9.40%.  Indonesia and Singapore rank second and third as 5.55% and 5.50% respectively.  The US is tied with Canada for the best GDP growth estimate (+2.6%) of the G-7 countries.  European G-7 countries and Japan are expected to see growth in the 1%-1.5% range.

Our research shows that in the four quarters coming out of a recession, the US has averaged GDP growth of 5.4%.  With a consensus estimate of +2.6%, economists are clearly expecting a weak recovery in the US.  However, does anyone remember a time when economists weren't expecting a weak recovery?

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Government Spent $1.90 for Every $1 It Took In Last Month

The monthly budget statement was just released today, and in November the federal government took in $133.6 bln and spent $253.9 bln.  This works out to $1.90 going out for every $1.00 coming in.  Believe it or not, this is actually an improvement from October when the ratio was $2.3 going out for every $1 coming in!  Over the last 12 months alone, the Federal government has racked up a deficit of $1.4 trillion.  Needless to say, this pace of spending versus income can't keep up forever, and today's lousy 30-year auction is an indication that investors aren't too keen on locking up their funds in long-term IOUs from Uncle Sam right now.

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November Same Store Sales Generally Weak

This morning's news flow on same-store sales shows that November was not a friendly month for the malls.  Of the 24 companies that issued results, only eight showed an increase versus November of last year and seven managed to beat the Briefing.com analyst estimate.  It's hard to believe that retailers couldn't post better sales than last year when the financial markets were in free-fall.  However, one could make the argument that last year's sales came at the expense of margins, so even though sales are down, less aggressive discounting could help margins improve. 

With the bulk of retailers reporting weak November numbers, it's hard to anticipate a strong holiday season, especially since many companies rolled out holiday promotions earlier than expected. 

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Which City Will Turn Positive First?

The S&P/Case-Shiller housing price numbers for September are set to be released tomorrow morning, and the big question is whether or not we'll see a year-over-year increase in home prices in any of the 20 cities that Case-Shiller tracks. 

Below we highlight the home price levels of the 20 cities and two composite indices in September 2008 and August 2009.  August numbers were the last ones released since there is a two-month lag in the data.  As shown, Dallas and Denver are the closest to showing a year-over-year increase in prices, as both were down less than 1% from 9/08 to 8/09.  Both cities need to register very small month-over-month gains to see a year-over-year increase.  If either of them turn positive tomorrow, the financial media will likely jump all over it.

 

Government Spending: Where Does It End?

On Thursday, the Treasury Department released its monthly budget statement which summarizes revenues and spending for the month of October.  After one looks at these figures, it's hard to believe that they are accurate, but unfortunately they are.  Unless you have been living under a rock for the last several years, you know that our Federal Government has been spending money at rates that would make even a sub-prime borrower blush.  But even taking this into account, these numbers are still startling, if not scary.

During the month of October, the Federal Government spent $2.30 for every dollar of revenue it took in.  Given the fact that this is the fifth time this year that the ratio has exceeded two, one might think that this type of deficit spending is commonplace.  However, going back to 1970, October was only the 13th month that the ratio ever exceeded two.  Prior to 2008, the ratio exceeded two an average of once every 6.5 years.  In the last two years, the ratio has exceeded two an average of once every three months!

The charts below highlight the twelve month rolling totals of government revenues and outlays. It doesn’t take an accountant to see that these two lines are moving in the wrong direction.  Given the fact that nobody thinks Washington is going to reign in spending, the only way to solve the gap is through higher revenues (raising taxes) or increasing the money supply.  Is it any surprise that barely a day goes by where the dollar doesn't trade down in value?

In last week's Wall Street Journal, there was an article that discussed how some unemployed Americans who are living on severance packages are depleting their savings and maxing out credit cards in order to maintain their $100K+ lifestyles.  It's ironic how we can be so quick to look down on these types of people for not being able to adjust to the new reality they find themselves in, yet at the same time barely an eyebrow is raised in DC when our Federal Government is spending like it's making $100K, even though its earnings are like those of a $42K worker.

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Better Than Expected Initial Jobless Claims

Today's lower than expected reading in initial jobless claims (512K) for the week ending 10/31 brought the four-week moving average down to 523.75K, which ties for the lowest reading of the year (1/10).  With nine straight weeks of declines in the four-week moving average, it's hard to argue that things aren't at least improving.

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Was Yesterday's ISM an Early Warning For More Inflation Down the Road?

In addition to the Indian Central Bank's purchase of 200 tons of gold from the IMF, one reason for gold's strong rally today can be found in yesterday's ISM.  In each month's Report on Business, ISM publishes the results of its monthly commodities survey where it asks respondents which commodities are rising in price and which are declining.  In this month's survey, respondents saw price increases in eleven commodities and decreases in only one.  This month's net reading of +10 brought the three month moving average to eleven and is the highest level since September 2008.

The chart below compares the three month average net reading in the ISM Commodities Survey (CS) with the year over year change in CPI.  Over the last ten years, trends in the CS have often preceded moves in the CPI.  So when the net reading in the CS rises, increases in the CPI are typically not far off.  Therefore, given that the net number of commodities rising in price is currently at +10 from a low of -15 in February, don't be surprised if upcoming inflation reports come in on the high side of expectations.

 
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Declines in Initial Jobless Claims By State: East vs. West

While initial jobless claims have been in a downtrend on a national basis since March, different states have seen different rates of declines.  In addition to the weekly national report on initial jobless claims, the Department of Labor also reports claims data on a state by state basis.  Although these numbers are not seasonally adjusted, they can help to gain insight as to which areas of the country are recovering (or stabilizing) the quickest.  In the map and tables below we have highlighted the ten US states that have seen the largest and smallest percentage declines in initial jobless claims since their recession peaks. 

Looking at the chart shows some interesting trends.  In terms of states with the largest decreases in jobless claims, all but two of them (North Dakota and Kansas) are in the eastern half of the United States, including Michingan, which has seen the highest decline of any state in the union (84%).  Granted, the state had one of the highest unemployment rates, so there is a lot of room for improvement.  The southeast has also seen a notable improvement.  Four of the ten states with the largest decrease in initial claims are the cluster of Kentucky, Tennessee, North Carolina, and South Carolina.

The states with the smallest decreasees in initial claims for the most part also share some common traits.  First of all, just as most of the states with the largest decreases are in the eastern half of the country, all but three of the ten states with the smallest decreases (Arkansas, Florida, and Maryland) are in the western half of the United States.  Another theme shared by most of these states is that they are all heavily reliant on tourism.  So it would appear that Americans aren't quite confident on their outlooks to spend money on vacations.

   

 
  

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Weekly Initial Jobless Claims: The Downtrend Continues...For Now

This morning's release of weekly initial jobless claims showed a smaller than expected decline from last week's level of 531K.  Although the smaller than expected decline was somewhat of a disappointment, the trend remains down.  The four-week average of weekly claims has now declined for eight straight weeks and remains in a steady downtrend since its highs in March.  In fact, the most recent reading is the lowest level since the second week of January. 

The real test for this indicator will come in the weeks ahead.  As shown below, in calculating the four-week average, next week's calculation will drop a level of 524K, so in order for this indicator to decline again next week, we will need to see an initial claims reading below 524K.

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Washington's Action (or Inaction) Speaks Louder Than Words

No matter where they sit on the political spectrum, politicians and voters can generally agree that the key to economic growth is in small business.   Throughout their campaigns last year, both Barack Obama and John McCain drove home this point all the time.  With politicians seemingly in agreement on the importance of small businesses to the economy, it is ironic that many small businesses are stuck in a holding pattern waiting to see how the actions of these politicians will impact their businesses.

As discussed in today's Wall Street Journal ("Political Uncertainty Puts Freeze on Small Businesses"), small businesses across the country are holding off on expansion or adding jobs due to "uncertainty created by Washington's bid to reorganize a wide swath of the U.S. economy."  Whether it's the health care debate, taxes, or the impact of climate change legislation on energy prices, business owners are finding it increasingly difficult to effectively plan for the future.  As a result, they are hunkering down and putting any plans for expansion on hold.  The end result is that the magnitude of any economic recovery will likely be muted.

The debates over health care, taxes, and climate change legislation have pros and cons on both sides.  There are certain aspects of the various plans that would be beneficial to small businesses and some that would be burdensome.  For many of them, however, even if the ultimate outcome is unfavorable, it's better the devil you know than the devil you don't.  The sooner the uncertainty becomes certain, the sooner small businesses (and all businesses) can move forward.  For now, it's still just watching and waiting, and it's a drag on the recovery.

August Case-Shiller Housing Numbers

The August S&P/Case-Shiller Housing numbers were released this morning to little fanfare.  Some investors were looking for a few cities to show year-over-year increases in median home prices, but for now they'll have to wait until the September numbers come out. 

Prices continue to bounce nicely off of their lows, however.  Only Las Vegas and Seattle traded at their multi-year lows in August, while the rest of the cities analyzed have bounced.  The composite 10- and 20-city indices have now bounced 5% off of their lows, while three cities (Cleveland, San Francisco, and Minneapolis) are now up more than 10%.  Prices in New York and Miami are only up 3%, while Boston, Chicago, and Washington DC are up about 7%-8%.

On a year-over-year basis, Dallas, Denver, Cleveland, and Boston are the closest to showing year-over-year gains, while Las Vegas is down the most YoY at -30%. The composite indices are still down 11% versus August 2008 prices.

Below we highlight historical charts of the year-over-year percentage change in median home prices for the 20 cities and 2 composite indices that Case-Shiller tracks.

 

ABC Consumer Comfort Index Still Near Lows of the Cycle

There's been a decent amount of commentary today regarding last night's release of the not so widely followed ABC Weekly Consumer Comfort Index.  At a level of -50, the index remains deeply depressed, and it is one of the only measures of confidence that has yet to show any meaningful rebound.  The double dippers out there would have you believe that this is the canary in the coal mine, and a sign of things to come. 

A look at the historical record of this index, however, shows that its reliability is weak at best.  In the two prior recessions during which this index has been in existence, the indicator kept declining when the recession was well in the rear-view mirror.  Following the 1990 recession, the index didn't show a meaningful uptick until late 1993, and it didn't turn positive until February 1997.  In the 2001 downturn, it wasn't until early 2003 that the indicator began to turn higher, and it never turned positive until November 2006.  After looking at this indicator's prior record, one quickly realizes why this is one confidence indicator that most people have never heard of.

Philly Fed Positive Three Months in a Row

If you needed more evidence that the recession that began in December 2007 has ended, this morning's Philly Fed report should provide it.  While the actual number came in below forecasts (11.5 vs 12.0), it was still positive for the third straight month.  The last time this indicator was positive for three straight months was from September through November 2007, which was the last three months leading up to the start of the recession.

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Tomorrow's Employment Report

The media is touting tomorrow's jobs report as the "most important in history."  This will be the 9th jobs report this year, meaning this is the 9th time it has been the "most important in history" as well!  The consensus estimate among economists is for a loss of 175,000 jobs in September.  Economists are also looking for an unemployment rate of 9.8%.

We're asking Bespoke readers to play economist tonight and tomorrow leading up to the 8:30 AM ET release by taking part in the two polls below.  Will the nonfarm payrolls report and unemployment rate come in better or worst than expected?  Please answer the two questions below, and we'll post the results before tomorrow morning's release.  Thanks for participating!

Will tomorrow's Nonfarm Payrolls report be better or worse than the current estimate of -175k jobs.
	Better (less jobs will be lost)
	Worse (more jobs will be lost)
Free polls from Pollhost.com

Will the unemployment rate come in above or below 9.8%?
	Above 9.8%
	Below 9.8%
Free polls from Pollhost.com

Was the Chicago PMI Leaked?

Conspiracy theorists are buzzing this morning regarding the release of the weaker than expected Chicago PMI.  Economists were expecting a level of 52.0, but the actual level came in well below 50 (46.1).  Even though the report was released to the general public at 9:45 ET, the S&P 500 began its nosedive minutes before the official release of the report.  At first glance, most would agree that the report was leaked.

 

While everyone likes a scandal these days, a deeper look at an intraday chart of the S&P 500 and the firm that compiles the Chicago PMI (Kingsbury International) shows that there was most likely nothing nefarious taking place.  The S&P 500 certainly did decline prior to the official release, but traders should be aware that anyone who wants early access to this report can do so provided they are willing to pay for it. 

On the company's website, Kingsbury describes the Chicago PMI as, "a proven monthly ‘first look’ at business, government and NGO economic activity in the USA."  They then go on to say that subscribers to Kingsbury's data will receive "access to this market-moving data 3 minutes before public release."  In other words, Kingsbury will 'leak' the report to anyone who is willing to pay at least $200 per month.

With this information in mind, another look at an intraday chart of the S&P 500 shows that today's decline began at 9:42, which was (not coincidentally) three minutes before the official release of the Chicago PMI when Kingsbury alerts their subscribers to what the official release will be.  While there appears to be nothing illegal taking place, it does provide another example of how the market is stacked against the individual investor.

 

Year Over Year Change in Home Prices

A reader asked that we provide the year-over-year changes in median home prices following our earlier post on the Case-Shiller numbers today, so we have done so below.  As shown, the composite indices are still down about 13% year-over-year, but this is up from the -20% readings we saw earlier this year.  Las Vegas is down the most year-over-year at -31%, followed by Phoenix (-28%), Detroit (-25%), and Miami (-21%).  These four cities are the only ones with year-over-year declines of 20% or more.  Boston, Denver, Dallas, and Cleveland are all at -5% YoY or better.

We also provide long-term charts of the year-over-year percentage change in median home prices for the 20 cities that S&P/Case-Shiller tracks along with their 10-city and 20-city composite indices.  Some cities look to really be turning the corner, while others are still dragging.

Gains in Home Prices Off the Bottom; Cleveland Up 11.4%

The July Case-Shiller home price numbers were released today, and while the year-over-year numbers are still down nearly 13% in the 10-city composite index, all cities but one (Las Vegas) are off their lows.  Below we highlight the percentage change from the recent bottoms in median home prices for the 20 cities that Case-Shiller tracks. 

As shown, 10 cities are doing better than the composite indices, and 10 cities are doing worse.  Cleveland has seen the biggest gain in home prices off its low at +11.4%.  San Francisco ranks 2nd at +9.4%, followed by Minneapolis (+9%), Dallas (+7.9%), and Denver (+7.1%).  All of these are pretty big gains, and these numbers are just through July.

The composite 10-city and 20-city indices are up 3.6% from their lows.  Miami, New York, Tampa, Detroit, Seattle, and Las Vegas are the six cities that have seen gains of 2% or less.

Lower Than Expected Initial Jobless Claims

This morning's Initial Jobless Claims report showed that initial claims came in 20K less than expected (530K vs 550K).  This brings the four-week moving average down to 553.5K, which is the lowest level since January.  Back in early July, we noted that the trend in jobless claims was an early signal that the recession was over.  The continued decline in claims that we have seen since then is further evidence that the recovery remains on track.

 

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