Tuesday, March 1, 2011

Bifurcated Economic News

The economic news the past 12-15 months has been quite interesting in the U.S. - it is almost as if we are staring at two petri dishes.  In one, is a lot of dead bacteria; that dish is known as "housing and employment".  In the other dish, is everything else which has rebounded solidly in most cases, although in relationship to the demonic drop suffered in economic activity in 2008 thru early 2009, has been somewhat uninspiring.

The one area that has been impressive is what remains of U.S. manufacturing - but unfortunately we're culled that down to only 11% of GDP (and 9% of employment), so while the figure is closely watched on 'the Street', we are not living in the 60s or 70s anymore when manufacturing activity was a more dominant piece of the economic pie.  [Nov 29, 2010: America Has Less Manufacturing Jobs Today than Before the War.... World War 2]  Today's ISM Manufacturing figure was another impressive data point, coming in at 61.4  (50 is the reading that separates expansion from contraction). 
  • Manufacturing in the U.S. grew in February at the fastest pace in almost seven years, driven by gains in orders, employment and exports that signal factories will continue to propel the expansion.  The Institute for Supply Management's factory index increased to 61.4, the highest level since May 2004.
Prices paid continue to ratchet up as "no inflation" continues to be seen everywhere, except at the Fed:
  • The gauge of prices paid increased to a seven-year high.

Meanwhile on Capital Hill:
  • Bernanke, who will testify for a second day before a U.S. House of Representatives panel on Wednesday, said the Fed expects inflation to remain low and that long-term inflation expectations appear contained, both according to market indicators and surveys of consumers.
  • "The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation," Bernanke said. 
Technically he could be correct because without wage increases to absorb increasing costs, consumers will have to cut back elsewhere.  Hence firms won't have pricing power to pass along rising costs.  Which should be bad for Wall Street as margins are threatened ... in theory anyhow.


Showing the bifurcation in the economy, construction spending fell 0.7% - to the lowest level in 5 months.  Perhaps we can just blame it on the weather, which has been a convenient reason for every illness of late.
  • The Commerce Department said construction spending fell 0.7 percent to an annual rate of $791.82 billion, the lowest since August.
  • Private construction spending in January contracted 1.2 percent as investment in nonresidential projects tumbled 6.9 percent to $244.44 billion, the lowest since August 2004. The percentage decline was the largest since January 1994.
The one area of strength in construction has been apartment buildings, as former homeowners return to their roots.  In just about every other area, the U.S. overbuilt during the credit "house ATM" steroid era.
  • However, private residential construction rose 5.3 percent, likely reflecting a pickup in the construction of multifamily homes as demand for rentals rises.
As for jobs, we have the keenly watched monthly employment data this Friday.  The last few reports have been major head scratchers as the labor data has not really seemed to fit with a lot of other economic markers.  While the unemployment rate has dropped from 9.8% to 9.0% much of this has been due to Americans disappearing from the labor force.  (remember, in America if you don't actively week work for 4 weeks - you no longer are unemployed)   So while many have been expecting monthly job readings of 150-200K per month, this has not happened.   Perhaps one of these months we'll see a 'catch up', as the previous few months of under performance vs expectations all pile into one month.  Frankly we've been waiting for 150-200K job creation since early 2010 - they keep promising us it will be "this month".

Ironically good employment data may be the worse thing for Wall Street because it might mean QE3 is not coming in July.  Or QE4 in March 2012, or QE5 January 2013.
  • The labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” Bernanke said today. “The housing sector remains exceptionally weak,” and “slow wage growth” is keeping labor costs in check, he said.
  • Some, like ex-White House advisor Christina Romer, argue that the economy could benefit from another round of Fed bond buys when the current $600 billion purchase plan ends.

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