US Perspectives: Mixed Economic Data, Again

Robert Johnson, CFA 30.07.2011
Facebook Twitter LinkedIn

Both economic and earnings news this week were mixed, while the United States debt limit discussions had a relatively muted effect on the week overall. It still appears the market is giving Congress the benefit of the doubt that they will manage to get something done before the U.S. hits the debt limit next week. I, too, believe that we will muddle through, doing as little as possible as late as possible. If Congress doesn't manage to do something in time, the market will probably collapse for a few days as our elected officials eventually get their act together. Given this mess, it's surprising the S&P 500 didn't lose more than the 4% that it did over the last week and the 6% it has lost since the end of April when the market made its high for the year.


More Negative Earnings Surprises Balanced by Reports of Shortages
While the number of upside surprises and overall earnings growth so far appears consistent with S&P earnings growth of over 12%, there seem to be more high-profile misses this quarter than in previous quarters. This week telecom supplier Juniper (JNPR) joined the ranks of disappointing results that already includes Terex (TEX), Ingersoll Rand (IR), and Caterpillar (CAT).


A softer European market, a modestly slowing China, poor government spending, and poor results relative to anything related to U.S. construction seemed to be some of the common themes among the disappointments. Oddly, a few firms (Terex and PACCAR (PCAR)) indicated that parts shortages (unrelated to the Japanese situation) kept sales from being better. One software company reported a shortage of salespeople kept sales from being better. So while there continues to be softness around the edges of the U.S. economy, some of these anecdotal stories aren't consistent with an economy that is collapsing.


Mixed Economic Data, Again
On the economic front, home prices increased for a second month and unemployment claims made a huge one-week bounce that is probably too good to be true. Pending home sales looked better, boding well for the upcoming existing home sales reports. Meanwhile, new home sales remained deep in recession. Durable goods orders were disappointing even as shipments remained remarkably robust. While the GDP report for the June quarter disappointed some with 1.3% real growth, it actually did slightly better than I expected. Other than another month or two of high car prices, which will boost the inflation rate, the last of the negative effects of the Japanese supply issues should have washed through most of the economic statistics.


Despite relatively benign second-quarter numbers, the statisticians threw us all a huge curve ball, reducing the first-quarter GDP growth rate to 0.4% from 1.9%, based largely on adjustments to inventories and a downward revision to exports. Given that consumption numbers and investment numbers were largely untouched, I am not terribly concerned. However, the data now perversely show that the economy picked up steam between the first and second quarters; this doesn't seem to square with other data including the employment report and company data that are showing a deceleration. The revision will make it more difficult to reach my 2.5% growth rate for the full year, but I still believe it is possible. The need for me to make a downward adjustment will depend on the next two months of employment data.


GDP Grows at 1.3% in Second Quarter, First Quarter Revised Sharply Downward
A low GDP growth number should come as no surprise to our readers, as auto production had a negative impact on GDP in the second quarter after a huge positive contribution in the first quarter. In my mind, the numbers could have been a lot worse for the quarter. Autos touch so many parts of the report that it isn't terribly relevant to tear apart the individual categories. That said, most categories that weren't auto-related didn't show a lot of change versus the first quarter. The big changes were as expected, a large swing in net exports (for Japanese goods and oil imports) and a rebound in defense spending. And construction moved from a negative to a positive. Weather, high oil prices, the Japanese situation, and up and down inflation numbers all served to artificially depress second-quarter numbers. I suspect that growth will sharply accelerate to a rate of more than 3% in the second half as auto production comes on line and  Boeing (BA) ramps up shipments of its new jetliners. More favorable weather should also be a factor in third-quarter results, boosting energy and utility demand sharply and raising demand for seasonal goods like fans and air conditioners.


First-Quarter GDP Real Growth Reduced to 0.4% from 1.9%
The BEA also took the opportunity to revise the last five or more years of GDP data with this report. As I suspected, the recession now looks worse and the recovery looks slower. I was surprised at the magnitude of the reduction in the first-quarter 2011 GDP growth rate--down to a mere 0.4% from 1.9%. The majority of the adjustment was related to inventories, with net exports also contributing to the large revision. Consumption and business spending--the key drivers of economic activity--remained virtually unchanged from the previous GDP report. While the reduction looks scary and creates headlines, I am not reading much into the unusually large revision. Next week I will update readers with a table detailing the key contributors to this economic recovery.


Initial Unemployment Claims Dip--Is It a One-Time Fluke?
Initial unemployment claims dipped to 398,000 from 422,000 in the latest week. While I will take good news any time I can get it, I suspect that a return of auto workers after the auto industry's summer shutdowns, the end of the Minnesota furloughs, and processing issues in California all contributed to the improvement. Whether a number this low is sustainable is an open question, but I wouldn't panic if the number backs up again for a couple of weeks. On a sad note, I am afraid the improved layoff results are coming too late to aid the July employment report; this week's data came after the July 15 date used for the employment report (the initial claims data was for the week ending July 22, and most U.S. auto plants reopened after their normal summer shutdown on July 18).


Housing on Balance Better but Still Not Much Progress
On the housing front, prices and pending home sales both increased and did better than expected, while new home sales disappointed and continued to trudge along the bottom. The reports seemed to suggest that the housing market continues to disappoint both the bulls and the bears--failing to move into full collapse mode but not showing any signs of an upside breakout, either. This far into the year, it looks like we'll have to wait until 2012 to see much of a contribution to the economy from the housing industry. Eric Landry, our housing analyst, summed up this week's reports:


Case-Shiller released a second consecutive sequential gain, with more likely to come. May home prices in the Case-Shiller 10- and 20-city indexes increased 1.1% and 1%, respectively, from April. Seasonally adjusted, the 10-city index enjoyed a 0.15% increase, while the 20-city index declined a miniscule 0.05%. At the same time, April results were restated to show roughly 0.4% seasonally adjusted increases for both indexes. The takeaway is that prices are undoubtedly stabilizing in many regions. As we've been saying for a couple of months now, the housing market is currently in the midst of a pretty respectable seasonal upward trend. The current Case-Shiller sequential gains were strongly suggested from our real-time listing data. Based upon this loose relationship, we'd expect June sequential gains (not seasonally adjusted) to be of the same magnitude or stronger than those just reported, with July gains softening a bit but still remaining above well above zero.


New home sales remain depressed, with inventory at record lows. 

June sales of newly constructed homes decreased slightly from May levels to a seasonally adjusted annual rate (SAAR) of 312,000 units. Declines were most pronounced in the Northeast and West regions, with the former suffering a 16% drop and the latter a 13% decline. The Midwest was up 10%, and the South was up 3%. New home sales remain at incredibly depressed levels, well below any historical trough going back to the early 1960s. The likely long-term path is almost assuredly toward higher new home sales--the question is when. With the spring selling season wrapping up, it's looking like 2010 will be the third consecutive year with sub-400,000 new home sales. The inventory of new homes again set a record low, falling to 164,000 from 167,000 in May, and the month's supply decreased by 0.1 to 6.3 months at today's selling pace. We think next year could be one in which the market enjoys improving sales, as prices appear to be finding a bottom as we speak. The absence of rapidly falling prices is the first step in restoring a semblance of confidence in what for many is the largest investment of a lifetime. If, somehow prices could find some stability over the coming months, there's a chance 2012 and 2013 could enjoy higher unit production. We're not holding our breath, however, as today's housing market has been prone to disappoint at every turn.


Investors shouldn't get too excited about strong year-over-year pending home sales. June contract signings for residential real estate sales increased 19.8% from last year and 2.4% from May. Both the South and West regions were up midsingle digits sequentially, while the Northeast was flat and the Midwest was down midsingle digits. Actual closings closely track pending sales with a month or two lag, so investors can expect decent annual growth when July existing home sales are released next month, provided the correlations hold up. The problem, however, is that last year's pending home sales were heavily impacted by the expiration of the tax credit, making for extremely easy comparisons. As a result, investors should probably look for July existing home sales once again to be in the mid- to high-four-million range.


Coming Up: Employment Numbers Cap a Data-Filled Week
After last month's disastrous employment report, the market will be holding its collective breath for next week's employment report. Recall that June's report showed growth of just 18,000 jobs, while the consensus for July is for job growth of about 85,000 better but still below average population growth.


Seasonal adjustments, which were a huge negative in June, will provide a bit of a tailwind for the July report. Modestly lower initial claims for early July also suggest an improving employment report, although this week's highly positive claims number came too late to help the July figures. The restart of the auto industry also may come too late to help much.


On the positive side, hot weather and storm-related repair work could help boost the employment data. Our staffing companies analyst, Vishnu Lekraj, also indicated that their business was the strongest in June compared with the other months of the quarter, and the last few weeks have been even stronger. Based on these factors, I believe we might be able to crack six-figure job growth for July, besting the consensus. If not July, then the data should be looking better by August.


PMI Data Could Disappoint
While I'm not watching manufacturing that closely right now, the market is. Last month the Purchasing Managers Index, provided by the Institute of Supply Management, came in stronger than expected. While the consensus is for the PMI to improve to 53.7 from 53.3, I think a decline is a more likely scenario given that a fair number of manufacturers have reported disappointing earnings and that the auto industry was out of commission for a good part of the month. The Chicago regional PMI was also down, albeit modestly, on Friday. I am not looking for a collapse here, but a move to 52 might be in the cards.


Auto Sales Up at Last?
Japanese supply-chain issues have limited the supply of Japanese cars in the U.S. for several months. Sales that had been running consistently at 13 million units dropped to 11.5 million units last month (seasonally adjusted annual rate). Short supply and the resulting price increases hit auto sales hard. This month the consensus is for a small rebound to 11.8 million units. I imagine unit sales won't increase much until supply completely recovers (potentially as early as August), prices come down, and incentives go up.

Facebook Twitter LinkedIn

About Author

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

© Copyright 2024 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy        Disclosures