Economy: December 2009 Archives

In a letter to a Senator, Federal Reserve Chairman Ben Bernanke said that he expects "slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation in the period ahead." 

This came on the same day that the government said the producer price index surged by 1.8 percent, more than double the increase analysts expected.  Even stripping out the volatile energy and food costs still resulted in an increase in the core value of 0.5 percent. That was the biggest increase in prices in more than a year.

Bernanke and his colleagues opened a two day meeting today to set their target interest rates.  Given the high levels of unemployment and the general weakness in the economy, it is highly unlikely that the Fed will increase interest rates from their current record lows of near zero.

Bernanke noted that in addition to the ten percent unemployment rate, manufacturing capacity utilization is at 68 percent.  That is lower, he noted, than the trough of every recession since World War II.

Traders sold off stocks on the producer price index numbers.  The Dow dropped by 0.5 percent to 10,452, ending a streak of five days with a gain.  The S&P 500 declined by 0.6 percent to 1,108.  The Nasdaq also fell, shedding 0.5 percent to 2,201.

While the markets reacted to the producer price index numbers, the big news for the week will come tomorrow, with Bernanke and his colleagues at the Fed releasing the minutes of their deliberations on interest rates.  Nobody expects the Fed to increase rates but they will look at the minutes for clues on future Fed actions.

The Commerce Department reported today that retail sales for the month of November were $352.1 billion, an increase of 1.3 percent from October and 1.9 percent from November 2008.  Excluding auto sales, which are volatile, retail sales increased by 1.2 percent from October.

Gains were lead by gasoline stations and electronics and appliance stores.  These two sectors saw an increase in sales of 6.0 percent and 2.8 percent, respectively.  Sectors showing decreases were furniture and home furnishing stores, clothing and clothing accessories stores, and miscellaneous stores.  These sectors were off by 0.7 percent, 0.7 percent, and 1.8 percent respectively.

The consensus estimate for retail sales was for an increase of 0.6 percent, with estimates ranging from a decline of 0.8 percent to an increase of 1.3 percent.  Thus, the actual number matched the most optimistic estimates.

Auto sales are also increasing, after a big drop when the cash for clunkers program ended.  The seasonally adjusted rate climbed to 10.9 million sales, up from 10.5 million in October.

Analysts at the Bank of Tokyo Mitsubishi said that the retail sales numbers show that the consumer is increasing spending as the economy moves away from recession.  The stabilization in the labor market is responsible for this, they said, "giving consumers greater confidence to spend a little more."

In addition, as consumers see their net worth increasing with stocks surging and home prices stabilizing, they may open their wallets.  Total net worth increased by five percent in the second quarter of the year, and stock prices have increased since then.

Yesterday, we got data that's consistent with the early phases of a recovery on the jobs front.  Now we're getting better retail sales data.  This bodes well for the economy as it tries to put the worst recession in decades behind it.

"We are at the end of a difficult generation of business leadership.  Tough-mindedness, a good trait, was replaced by meanness and greed, both terrible traits.  Rewards became perverted. The richest people made the most mistakes with the least accountability."

The comments didn't end there.

"The bottom 25 per cent of the American population is poorer than they were 25 years ago. That is just wrong.  Ethically, leaders do share a common responsibility to narrow the gap between the weak and the strong."

So who would have said such a thing?  Would those have come from the recently departed Ted Kennedy?  Perhaps his fellow democrat from Massachusetts, Barney Frank?  Or maybe they came from someone like Michael Moore or Ralph Nader?

Actually, they came from the CEO of one of the world's largest companies.  Jeffrey Immelt, the CEO of General Electric, made those comments as part of a speech he gave at West Point.

Immelt's comments, if not the most pointed and sharp criticism of his fellow executives, is very close to it.

Immelt also took aim at the anti-regulation crowd.  Immelt said that business should welcome government as "a catalyst for leadership and change."  He further said that "I should have done more" to address the radical changes that occurred in the economy during the fall of 2008.

Immelt's comments are likely to be seized upon by those pushing for more regulation of financial companies.  They're likely to be dismissed by those opposing it, and those individuals will likely point to Immelt as a failed executive.

Regardless, his comments are definitely thought provoking and should give pause to those who say that corporate executives are always against regulation and don't care about the growing inequality we see between the wealthy and the rest of the population.

The Labor Department reported that initial jobless claims rose to 474,000 for the week ending December 5.  That was an increase of 17,000 from the prior week's unrevised figure of 457,000.  The four week moving average, which smooths out the fluctuations that can occur with the weekly data, dropped by 473,750, down by 7,750 from last week's revised average of 481,500.  Continuing claims decreased by 303,000 to 5.16 million, and the four week average for this figure was down by 123,500 to 5.42 million.

There were 21 states with decreases in unemployment claims of more than 1,000, lead by California's decrease of 28,672 claims.  However, it's important to keep in mind the reason for California's decrease, which was due to a shorter workweek.  On the downside, there were seven states where there was an increase of more than 1,000 claims, with Wisconsin's 8,067 increase the highest.

Weekly jobless claims are very volatile over the past two months of the year, as the holiday season makes it more difficult for the government to adjust the data for seasonal fluctuations.  Nevertheless, economists provided estimates on how many people they thought would file initial claims, and the consensus was for a drop to 455,000.  Estimates ranged from 380,000 to 490,000.

The four week moving average dropped to its lowest level since the week ending September 27, 2008, when it was 470,250.

Nomura Securities said that the level of initial claims "is consistent with only moderate job losses and a very strong signal that firing is tapering off."  The company added that the figures are consistent with "a gradual improvement in the labor market."

Employers have cut 7.2 million jobs from their payrolls since the recession began in December of 2007.  However, according to the Economic Outlook Group, "companies are reassessing their staffing needs in the face of the recovery and slowing the pace of layoffs."  Despite this, companies are not showing "any inclination to begin hiring."

Overall, the jobs data is consistent with an economy in the early stages of a recovery.  Jobs are always the last to recover, and there needs to be rationality on the part of investors.  With 7.2 million jobs lost, even a return to the job creation rates of the 1990s, when 22 million jobs were created over the decade, means that it will take years to replace the jobs that were lost during this recession.  At 2.2 million jobs created per year, it will take about three years and three months to return to the same level of employment we saw before the beginning of the recession.

In a sign that consumers are slowing down the pace of their shopping, the International Council of Shopping Centers and Goldman Sachs reported that chain store sales slipped by 1.3 percent from last week.  The pace of chain store sales is still up by 2.6 percent on a year over year basis, as last year shoppers were very reluctant to spend with the near implosion of the financial system in September still fresh in their minds.

The ICSC still forecasts same store sales to increase by two percent over last year, which means that the holiday shopping season won't be a complete bust, but that it will only show moderate improvement over the worst in decades.  For the holiday shopping season, a one percent increase from the year ago period is their forecast.

As you know, consumer spending is two thirds of the economy, so it's a key indicator of where the economy is going.  This particular survey is very timely, as it provides investors with a snapshot of what's happening with chain store sales on a weekly basis, unlike the government's data which provides a monthly snapshot.

That monthly data will be released on Friday, and it's sure to be closely watched.

As you know, one of the sources of information that we use here in order to provide you with information on what's happening in the financial world is American Public Media's Marketplace.

Marketplace is a great source of information.  Just like the rest of public media, because they are not reliant on advertising, they are able to focus on news they feel is relevant, not news that they think will draw the greatest number of listeners.  So, instead of constant coverage of balloon boy, you'll get real news.

But that doesn't mean they can't have fun.  Here's something that sums up all the week's business news in a one minute poem.

Marketplace Minute with Bill Radke 12/04 from Marketplace on Vimeo.

This is something that's definitely worth your time!  Check that and the rest of Markeplace's offerings out.

Investors will get a big dose of economic data in the upcoming week.  Perhaps the most closely scrutinized data will be the data on retail sales and initial unemployment claims.

The first big event of the week, however, won't be a release of economic data.  On Monday, Ben Bernanke addresses the Economic Club of Washington DC.  In light of the jobs data that came out last week which showed that November job losses dropped to 11,000 -- and some economists predicted that may be revised to a gain -- investors are now concerned that the Fed may start to remove some of the liquidity that they have injected into the system.  That would slow down economic growth, but it's a necessary move in order to prevent inflation from rearing its ugly head.

Later on Monday after Bernanke's speech, data on consumer credit will be released.  Analysts expect that the amount of credit that consumers are using will drop, which is no surprise given the consumer's new focus on thrift and saving instead of spending.

Early in the morning on Tuesday, investors will get some insight into how the holiday shopping season is going so far.  The International Council of Shopping Centers (ICSC) and Goldman Sachs will release data on same store sales for the week.  Many investors are looking at the holiday shopping season for signs on whether consumers are opening up their wallets.  This will help give them some information to work with.

Then, on Thursday, investors will be watching the initial unemployment claims figures for a guide on how the state of the labor market.  With all indicators showing that the labor market is turning a corner, this will be closely watched to see if the weekly data helps confirm the trend with monthly payrolls.

Finally, the week closes with a trifecta of economic data in the morning.  First up will be the Commerce Department's release of retail sales for the month of November.  Investors will be looking at this data to see whether it confirms the data they get from the ICSC-Goldman Sachs data.

Investors will also see the University of Michigan's consumer sentiment index, which will provide them with another look at how the consumer, who accounts for two thirds of the economy, sees things.  There can be no robust expansion without the consumer taking place, so this data is critical.

Then, five minutes after the data on consumer sentiment is release, investors will have to digest data on business inventories.  Declines in inventories show that businesses are not confident about the economy, and thus are letting the amount of stock they carry decline.  On the other hand, increasing inventories show the opposite.  Lately, many analysts have said that inventories are getting to a point where they as so low that they need to be replenished.  This would mean that production will increase, which would mean that hiring would be required in the manufacturing sector.

After the week, we should have much more information on how the consumer feels, how the jobs market is trending, what the Fed is thinking, and how businesses feel about the economy.  That data can be used by investors to determine what the best course of action is.

After getting much better than expected news on the labor market, stocks climbed.  However, the initial pop, which saw major indices climb by more than one percent, stocks gave back much of their gains.

The S&P 500 swung between gains and losses 20 times per day according to data compiled by Bloomberg.  At the close, all of the major indices were up.  The Dow climbed by 0.2 percent to 10,389.  The S&P 500 was up by 0.6 percent to 1,106.  And the Nasdaq climbed by one percent to 2,194.

Economists all agreed that the much better than expected payroll numbers was good news.  National Bank Financial, whose estimate came closest to the actual number, said that there could be a return to increasing payrolls after the revisions to the initial data.

Still though, Credit Suisse said that while the trend is positive, the economy may not have yet hit the trough in employment.  While revisions have been in the positive direction lately, "we shouldn't take that as evidence that we're at the bottom."  The National Bureau of Economic Research, which is the official judge of when recessions begin and end, said that it's likely "the trough in employment will be around this month."

So while the trend in jobs was good news for investors, worries about jobs were replaced with worries about what the Fed might do with interest rates.  If the job market returns to growth, then the Fed will likely unwind its unprecendented measures to inject liquidity into the system and then they will raise interest rates.  Rising interest rates tend to drive down stock prices, so investors were concerned.

Even so, the good news is that jobs, which are a lagging indicator, seem close to turning the corner.  If that's the case, then stocks will rise as the economy picks up.

The Labor Department reported that payrolls in November declined by 11,000.  That is way down from the revised 111,000 jobs lost in October, and is the lowest level of payroll cuts since the beginning of the recession in December 2007.  The unemployment rate also dropped, falling to ten percent from 10.2 percent.

Not surprisingly, some sectors of the economy did better than others.  Construction employment dropped by 27,000.  Manufacturers shed 41,000 jobs in November.  There were also losses in the information technology sector, which lost 17,000 jobs.  Many of the job cuts in that sector came from the telecommunications sector, which reduced payrolls by 9,000.

Sectors showing gains in employment were the professional and business services sector and the health care sector.  The gains in those sectors were 86,000 and 21,000 jobs, respectively.

There was also good news on the number of hours worked and average hourly compensation.  The average workweek increased by 0.2 hours to 33.2, and employees got paid more per hour worked, with their pay climbing by a penny per hour to $18.74.

In response to the report, Labor Department Secretary Hilda Solis said "I am encouraged by the pattern of moderated job loss; however, I will not be satisfied until there are robust job gains."

The actual report absolutely blew away the consensus estimate, which was for a drop in payrolls of 125,000.  Estimates ranged from a drop of 30,000 to 180,000.  The unemployment rate was expected to stay steady at 10.2 percent, with estimates ranging from 9.9 percent to 10.4 percent.

The economist with the most accurate forecast came from National Bank Financial in Montreal.  He said that the improvement in corporate profits is resulting in "a much brighter labor market.  Confidence has been restored and firms now have started to redeploy their cash."

RDQ Economics said that the jobs numbers should "reduce anxieties about the sustainability of the economy."  However, they warned that there was a "large degree of slack in the labor market."  And Goldman Sachs warned that there may have been a "structural" change in the labor market, where employers have learned how to squeeze more output out of fewer workers.  The upside, according to their economists, is that companies may find they cut jobs too aggressively during the downturn and will find they need to respond with equally aggressive hiring with the economy recovering.

Even though the jobs numbers are much better than expected, it is important to keep in mind that 7.2 million jobs have been lost since the beginning of the recession.  Thus, even if the economy returns to the kind of growth we saw in the 1990s, when payrolls expanded by 22 million over the decade, it will take over three years to return to the employment levels we saw before the recession began.

In a sign that the labor market is improving, the Labor Department reported that initial unemployment claims for the week dropped by 5,000 to 457,000.  Continuing claims increased to 5.47 million, an increase of 28,000.  The four week moving average, which smooths out weekly fluctuations, dropped to 481,250.  That was a decline of 14,250 from the previous week. The continuing claims four week moving average also declined.  That number fell to 5.54 million, down 75,750 from the previous week's figure.

Despite the overall improvement in the claims figures, 19 states showed an increase of more than 1,000 claims.  Only one, Michigan, had a decline of more than 1,000 claims, as fewer layoffs in the auto industry reduced the number of job cuts in that state.

The 457,000 initial claims was the lowest number of claims filed since September 2008, and it was significantly better than what analysts had expected.  The consensus estimate for initial claims for an increase of 14,000, which would have put the claims number at 476,000.  Estimates ranged from 450,000 to 500,000, so the actual number was towards the optimistic side of projections.

Many analysts had expected an increase in claims for the week, but they said that conditions were improving in the job market.  Analysts at JPMorgan Chase said that they saw a "steady downward trend" in initial claims and others predicted that there would be a "very large decline" seen in the early December numbers.

As the economy begins to emerge from the worst downturn since the Great Depression, companies are shedding fewer employees.  However, they remain reluctant to add to their payrolls and are waiting until they are confident that the economy has returned to growth before they resume hiring.

Barclays Capital said that the latest claims numbers show that "the labor market is turning" and that the economy will see a turn to "positive job growth over the next few months."  This turn to job growth will be key an economic recovery.  The fact that economists are starting to use that phrase is an encouraging sign in itself.

E-commerce sales in the United States rose by 14 percent compared with last year, according to Coremetrics.  Analysts had projected growth of anywhere from five to ten percent, so the actual results were much better than expected.

However, while the growth in online sales is good news, it's important to keep it in perspective.  Online sales only account for six percent of total retail sales, so much of the holiday spending will be done in traditional stores.  The growth in the online sector will have a small impact on overall retail sales for the holiday season, which the National Retail Federation is expecting to decline by one percent.

And just like in traditional stores, retailers online are using discounts to get consumers to shop.  Amazon began running promotions about a week before the Thanksgiving weekend kickoff to the holiday shopping season.  Their promotions included discounts on LCD televisions and some CDs priced at $5.

So while the discounting online will eat into the margins of retailers, there are likely winners.  Who will those winners be?

The companies who take the merchandise ordered online and deliver it to the customers who ordered it.  Discounts and free shipping may hurt margins of retailers, but they boost the profits of UPS and FedEx.

FedEx expects to process 13 million packages on December 14, which is its busiest day.  Last year, they processed 12 million packages, so in one year, they'll see an increase in packages of 8.3 percent.  In order to deal with the additional traffic, FedEx will hire 10,000 temporary employees.  Its bigger rival, UPS, will hire 50,000 additional workers.

According to analysts, two things that consumers look for when shopping online are ease of purchase and free shipping.  So, with one of the best tools online retailers have being waiving shipping costs, expect UPS and FedEx to benefit.  As Marketplace said, the surge in online shopping can be summed up as win one for the shipper.