Keeping An Eye Out: Late April 2011

In an effort to keep tabs on my thesis and whether reality is matching my forecast, I periodically review my outlooks and compare them to recent news/events.  Please click (here) for my latest outlook for comparison purposes.

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–> Overall we continue to see growth in the Manufacturing sector on the back of a lower dollar (buoying emerging market demand) and steady domestic demand.  However, the sector has shown some weakness as of late and the outlook is not as rosy as a couple of months ago. Eurozone sovereign debt issues remain unsolved (and seem to be worsening), while China remains in tightening-mode. The probability of a negative surprise from Europe or China is increasing.  On the domestic end, higher oil prices are posing a short to medium-term risk to consumption growth. On the bright side, job growth should continue to provide support in the immediate months ahead. This trend is clearly in play from the looks of weekly consumption metrics, which haven’t shown any significant slowdown.  Also, while the Eurozone and China are having their just-mentioned issues, they are still expanding.  The manufacturing recovery continues, but the outlook is looking increasingly cloudy and is mostly in line with my thesis at this point.

–> The Service Industry mirrors what’s going on in the manufacturing sector. It remains in growth mode (which is good).  Since it accounts for roughly 90% of the economy, it is imperative that the sector continues to grow so that the recovery can remain in place. The US dollar remains weak, which will serve as a tailwind for continued growth if the global economy remains healthy. Once again, here’s where the outlook becomes more uncertain. China has its inflation problems and increasing political risk in the Eurozone may provide for turbulence in the coming quarters. Overall I expect the sector to continue to contribute positively, but uncertainty regarding the outlook is increasing.

–> Housing: Obviously there isn’t much good news on the housing front. Outside of seasonality, growth in home sales and mortgage applications remains anemic, while a record number of foreclosures are in the pipeline. These ingredients signal lower home values in the months ahead (double-dip is given imho). On the bright side (I had to dig), the job market continues to heal, which may help.  Mortgage rates look to fall in the months ahead (have you seen Treasury yields?) and may provide support as well.  Finally, over the longer-term, the laws of supply and demand are finally free from government intervention.  We are slowly working our way through the downturn and after glancing at various long-term housing metrics such as the home ownership rate and price to rent ratio, I’d say we are about 65-75% through the downturn. A sense of indifference towards housing is slowly creeping into the public’s mind and that is a good signal of a secular low beginning to develop.  While it may take a while before real estate values begin to rise again, we are slowly making our way through the long down-cycle.

–> Consumption: So far, good news. Consumption growth remains mostly unaffected by recent spikes in commodity prices as per weekly consumption metrics (Goldman and Redbook).  This bullish activity can be traced to a continued healing in the job market with back-to-back 200K+ gains in the BLS jobs report for the first time in the recovery, while the unemployment rate continues to come down.  Now for the negatives.  Commodity prices are clearly having an effect on the consumer in my view.  Confidence surveys have been deteriorating markedly and we are seeing similar behavior before the consumer finally caved in 2008.  Housing values are officially double-dipping as well. Wage growth remains almost non-existent and coupled with commodity price increases (gas/food), translates to negative real wage growth. In my thesis, I spoke about how consumption in the US would remain weak for some time to come. I also mentioned how the straw that could break the camel’s back and actually cause consumption to contract again were higher commodity costs.  Well, they are here.  Quoting from my outlook: “at what point are prices so high that they suppress confidence and consumers hide their wallets again? (Think Summer 2008)”.  That is the key question facing the US economy at this point in my view.  How much can the consumer take?  On the bright side, the job market continues to heal with leading employment indicators (such as the JOLT Survey and the Conference Board’s Help Wanted Index) mostly pointing towards continued job creation.  Another key question is “can this continue?”The outlook is very very uncertain at this point.  Uncertainty = elevated risk.

–> Jobs:  Overall, the job market continues to heal but as you can see from this article, the improvement has been excruciatingly slow.  To compound the uncertainty, jobless claims are foreshadowing a pretty big hickup for April. Hopefully this reverses.  On the bright side, there are pockets of strength.  As I previously mentioned in the “Consumption” portion of this report, the JOLT survey points toward continued improvement in the job market as do other leading employment indicators.  However, overall they don’t point to any acceleration in the immediate months ahead. This is mostly in-line with my thesis thus far. Job growth remains tepid and growing headwinds with regards to end-demand are growing.  The outlook remains uncertain but with a slightly bullish hue.

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