Upcoming Indicators (Beginning to Mid March) —->
Personal Consumption and Expenditures: I’ll be looking at factors such as the Savings Rate, Income metrics (are they gov’t related), and expenditures. I think we may be in for a downside surprise as various surveys, such as the Gallup Poll and ICSC Goldman, showed weakness in spending for January. Retail sales showed a positive number but left me scratching my head. Could the weakness have show up here?
Construction Spending: A negative number as seasonality is usually the culprit of weakness, however, a large overhang of homes and the oncoming commercial real estate train wreck will keep this area of the economy relatively weak for 2010.
MBA Purchase Applications: Once again, over the next two weeks I will be waiting for some semblance of a pick up now that we have two more months for consumers to sign on the dotted line and purchase a home before the tax credit expiration. I am concerned that we haven’t seen a pick up already.
ISM Non-Manufacturing: While it’s a given in my view that we’ll have a strong Manufacturing ISM number due to strength seen in most regional surveys, can the same be said for the even more important (though underreported) Non-manufacturing ISM? Some reports pointed towards weakness in February due to the snowstorms (jobless claims, consumer confidence), while January’s ISM report showed strength in New Orders. I’ll be looking for a flattish reading as these two factors balance each other out. Though I wouldn’t be surprised if it came in a little higher, though still lagging the manufacturing survey.
Motor Vehicle Sales: Car sales began turning down last month. Will that nasty trend continue? If it does, it makes the story of an inventory cycle seem more like an adjustment in inventories as end demand continues to stay sluggish.
Beige Book: I’ll just be curious as to what this “snapshot of the economy” has to say about the recent weakness in home sales and possible weakness in spending for January.
Retail Sales: I am expecting an increase in retail sales due to an increasing cost of gas while other reports showed a mild firmness in spending. However, I am expecting a downward revision to January’s report. All in all, a wash.
Jobless Claims: Will jobless claims point to a continuation of a very bad trend? If this continues to worsen, I believe that investors will clearly be spooked. This will be a market moving event. I really don’t know which way it’ll go.
Productivity and Costs: I expect productivity to begin to show signs of leveling out, while costs will continue to decrease.
Jobs Report: I expect to see a pretty bad number here due to two main factors. First and most obvious is the weather. In the past, this has played havoc with economic indicators and I don’t believe this will be an exception. Second, jobless claims have been rising which means that more people have been getting pink slips. Look for this number to be quite ugly. Question is, will the market brush it off as a number that has been skewed by the weather?
Consumer Credit: Should continue to show contraction as deleveraging continues in earnest.
Consumer Sentiment: Stock market has been recovering for much of February will this show up here? Obviously if we begin to see some bad reports such as retail sales, PCE, or jobless claims, we might be in for a downside surprise here too. I expect this indicator to move up a bit on the recovering stock market and warmer weather (I’m forecasting the weather now!).
A Recap (Mid to Late February) —->
Empire Manufacturing: The gauge came in better than economists expected and shows that industrial production in the NY area continues to be buoyed by improving export demand and the continued inventory bounce. Coincidently another report surfaced showing that the NY state economy has begun shrinking again so overall data is mixed. The details within the manufacturing report showed that most of the increase was attributed to increasing inventories, while New Orders, Shipments, Vendor Performance, and Backlogs showed fell or stayed flat (all still positive though). Overall pretty much inline with my expectations of positive momentum. Looking a little ahead, something to keep an eye on are the conditions in China as well as a strengthening dollar which would be a negative for exports.
Housing Market Index: As expected there was a high probability of an upside surprise, but overall this indicator remains in recession/depression terrain. Consider that this is including all the stimulus we have sunk into this sector of the economy and it ends up being a cause for concern. Looking ahead, we have some pretty formidable hurdles coming up for the housing market: MBS purchases ending, and the end of the tax credit, and the possibility of another payment shock. I see a renewed downturn in housing prices, unless the Fed begins to initiate MBS purchases once again. This would probably beat down the dollar once again and commodities would see a new round of buying as the currency gets debased.
MBA Purchase Applications: First Wednesday: The purchase index still shows a disappointing trend downwards despite the upcoming deadline. This supports the fact what the consumer confidence/sentiment surveys show, people do not see housing as an investment anymore and their intentions on homebuying are extremely low. On the other hand, poor weather could have easily affected this reading. Regardless of poor weather, the probability of strong momentum generated by the expiration of the tax credit is significantly decreasing in my view now and is cause for concern. From an applications stand point (lead time is 1.5 to 2.0 months), applications signed in the next two weeks will represent closings in the first two weeks of April, so approximately 2-2.5 months to go for applications to make a significant rebound. — Second Wednesday:
Housing Starts/Permits: Housing starts came pretty much inline with my expectations, flat. Despite the financial media touting a rebound, as far as the bigger picture is concerned, we have been flat for about 5 months now. Also the report weaker than the headline suggests as it was dominated by the volatile apartment starts. Single family starts were pretty low. Permits showed some weakness but again in the bigger picture, the outlook is still looking bullish for increased construction in the months ahead, unfortunately we at a fraction of the levels from before the downturn. In the long run, this is what we want to see as more supply on top of already a substantial shadow inventory would only depress prices more. The housing downturn will indeed last a few more years in my view.
Industrial Production: Industrial production firmed up a bit as expected. While this is bullish as it shows that the inventory bounce continues in earnest, it is backward looking. The automotive sector once again played a large factor though the increase in activity was more broad-based. Focusing on this sector, from the looks of auto sales I don’t expect this to continue in the upcoming months. We also have had the Toyota recalls while the weather was dismal thoughout most of the nation in February. These factors will probably translate to a lower reading next month, but will most likely be brushed off by the markets as an outlier. The overall message though is that industrial production has carried the economy and may translate to more job creation, however, we need to see final demand pick up, or this positive
effect will be only transitory.
PPI: As expected, this indicator is showing inflationary pressure building up at the producer level, primarily as a result of the reflation experiment that the Fed has undergone in the last 8 months. The interesting part is that there are still signs that point to no pricing power on the part of these firms and my suspicion of a margin squeeze might be gaining more validity if the data is to be trusted.
CPI: Well it has finally happened but it was a surprise to have actually seen it. We went negative in the core CPI. And this is after we’ve sunk in more than a trillion dollars into this problem. The force of this deflation is amazing and will continue to permeate through the economy for some time to come in my view.
Leading Indicators: As expected, the leading indicators did show some slowing, but not really as a result of a declining stock prices (oddly enough, stock prices were a positive in the report…go figure). No, the source of the weakness was concentrated on weaker building permits, New orders for non-defense durable goods, and the real money supply. Needless to say, these indicators showing weakness is actually worse than I expected and shows that the growth in our economy is expected to slow in the next 4-6 months (May/June/July). This coincides with the stimulus withdrawal and raises another red flag in my view. Before we start jumping to conclusions, let’s keep an eye on this indicator over the next 2 months to confirm a trend.
Philly Fed Index: Strong report, nothing new here as the inventory bounce continues in earnest. New orders rose which adds validity that we’ll see continued strength in manufacturing until at least May/June. Expectations remain healthy and inventory is being restocked. Employment looking better but only marginally. Once again…we need to see final demand pick up or this will be unsustainable.
Case Schiller Index: The seasonally adjusted (SA) numbers showed a slight increase while the NSA numbers showed a dip. All in, flat prices for the month. With all the inventory still out there and a foreclosure wave on the horizon as well as the expiration of the tax credit, we’ll soon see a double dip. While the spring and summer months might act as support, I expect a pronounced downturn come the fall if not sooner.
Durable Goods Orders: This is one of my key indicators. I’m looking at it as a gauge for the ongoing manufacturing recovery. While January’s report was disappointing for the bulls from a ex-transport perspective, the source of the weakness was pretty concentrated on one sector (Machinery). Most of the areas still showed growth and keeps the manufacturing story as the center of our recovery. Also, revisions upward from previous months put the increasing orders trend intact. I’m keeping my eyes open though for February (might be affected by winter storms), March, and April. I believe that March or April will be the big reports to see if we are topping out on this important forward looking indicator. I expect it to top out soon as end demand still hasn’t grown to the point where business feel comfortable increasing production. The fact that volatility is increasing isn’t a good sign as we usually see this when trends are starting to shift. My eyes will remain peeled but thus far this shows manufacturing possibly topping out come April/May, though it is still to early to discern a change in the trend.
Consumer Confidence: Not as bad as the other two. However, we now have a majority of the surveys pointing back down in what could be a sign that the nation is starting to lose faith in this recovery that pundits speak of. If consumers aren’t convinced of the recovery, it might be a self-fulfilling prophecy.
New Home Sales: A complete dud. Surprised me to the downside and we have broken through the low that many pundits swore was in. Obviously not a good piece of news at all. However, I expect this to rise once again as the tax credit expires and the spring/summer season gets going, however given that this report surprised to the downside perhaps my outlook could also be too hopeful.
Additional Notes: —-Various consumer spending surveys are starting to point down with weakness beginning in January, while recent snowstorms may explain some of the continued weakness, it will still set up February to be disappointing. Considering that investors know that the storms played havoc with the economy, these weak numbers will likely be brushed off. —– Initial Jobless Claims are also back on the uptrend and the bulls are starting to run out of excuses as to why they are rising. This doesn’t bode well for the recovery at all. Unfortunately, due to all the storms, I believe that we’ll be flying blind with most of the data coming out for February. Bad reports will simply be blamed on the weather and absent some external shock (a Greek climax will come soon) I think the market will use this excuse to not move meaningfully lower (risks are plainly to the downside though in my view).—–
Overall the last two months have seen a significant change from less bad to worse than expected. How much longer than the equity market run if we keep seeing news like this trickle in? Profit/Revenue growth rates for Q3 and Q4 that analysts are penciling in are very strong and we might be seeing some cautious news come out of companys’ earning reports for Q1. Consider that many forms of stimulus are about to expire. Can companies meet these lofty expectations when their profit margins are already extremely high? They have cut costs to the bone and don’t have this to fall back on in reporting better than expected numbers and outlooks.