Following a period of protracted decline in economic activity, a recovery occurs when business activity is increasing. This is viewed primarily with increases in Gross Domestic Product (GDP) and employment levels. As businesses increase their sales and are more confident about future activity, they hire more people. The new hires are more confident about their future and spend a portion of their income on business, and the cycle continues. The stock market usually leads an economic recovery, because stock investors look to the future. If investors see an economic recovery 12 months from now, they will start to accumulate shares in companies that will benefit.
There continues to be mixed data regarding the strength of the economic recovery in America. This is creating an interesting divergence between the level of the S&P 500 and the growth rate of the economic recovery, which is far less than many had expected so far.
The Federal Reserve Bank of Philadelphia recently released its index of manufacturing activity, which dropped to -5.2 in May, versus a reading of 1.3 in April. (Source: “Business Outlook Survey,” Federal Reserve Bank of Philadelphia web site, accessed May 17, 2013.)
The survey shows no consistency over the past seven months regarding the current conditions of the economic recovery. The report indicates that the economic recovery has oscillated between positive and negative readings. Current demand for manufactured goods dropped substantially to -7.9 in May, from -1.0 in April. As well, the level of inventories increased to 4.1 in May, versus -22.2 in April.
This indicates that for the surveyed businesses during the month of May, there appears to be less demand for manufactured products, and inventories are piling up, which is clearly not a sign of strength. However, the S&P 500 continues to move higher. The question is: is this upward movement sustainable?
Obviously, no one can predict the future, but investors in the S&P 500 try to anticipate future shifts in the business landscape. While the economic recovery is currently weak, people who are now buying the S&P 500 believe that growth is close at hand. The current data do not support such a strong economic recovery; however, there is the possibility that such a recovery might occur.
One such data point that … Read More
Consumers appear to be holding back on buying non-essential goods, and this could impact the economic recovery.
The durable goods orders contracted a dismal 5.7% in March, according to the United States Census Bureau, representing the largest decline in seven months—a far cry from the 4.3% rise in February and well below the Briefing.com estimate calling for a four percent decline.
Taking out the volatile transportation portion, durable goods fell 1.4%, versus the Briefing.com estimate of -0.1%, equaling the second straight month of declines.
The durable goods readings have largely been inconsistent, as reflected in the chart below, and suggest the economic recovery may be at risk.
Chart copyright © Lombardi Publishing Corporation, 2013;
Data source: United States Census Bureau, April 25, 2013
When consumers are more confident, they tend to spend more on major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This will impact the economic recovery, gross domestic product (GDP) growth, and the ability of companies to expand their businesses.
But whether it’s the added taxes or the fragile confidence from the lack of strong jobs growth, the decline in the demand for goods that are deemed non-essential should be a red flag that not everything is proceeding along smoothly, which could affect the economic recovery.
The fact remains that jobs creation is fragile and not expected to ratchet higher until 2014 and 2015, due to the slow economic recovery.
The recent 88,000 jobs created in March was weak, so it will be interesting to see what happens with the April non-farm payrolls reading due next Friday.
Retail sales have also been … Read More
With the stock market at all-time highs, the momentum has been built on the belief that an economic recovery is close at hand and the world will avoid a global recession. However, new data show that perhaps this belief might be too optimistic.
Markit Economics has just released the Purchasing Managers’ Indexes (PMIs) for many nations and economic zones around the world. Frankly, the data are quite bleak, showing that an economic recovery is certainly not occurring anytime soon, and that a global recession is becoming a distinct possibility.
For April, the U.S. Flash Manufacturing PMI (early reading) came in at 52, versus expectations of 53.8, and last month’s data point of 54.6. Just a reminder: a PMI number above 50 is a sign of growth; below 50 is a sign of contraction. (Source: “Markit Flash U.S. Manufacturing PMI,” Markit Economics web site, April 23, 2013.)
While the U.S. manufacturing PMI data still show expansion, the decline was significant, as was the degree by which it missed expectations. This April PMI reading for the U.S. was the lowest in six months, and is an indication that the economic recovery in the manufacturing sector is starting to slow.
The PMI composite for the entire eurozone was a very poor 46.5 in April, down slightly from expectations of 46.8. While the reading was unchanged from March, it is worrisome that there were no improvements at all. There is no current economic recovery in Europe; in fact, this reading indicates that economic activity has declined for 19 of the last 20 months.
Is a global recession very far away? Obviously, predicting the future … Read More
In President Obama’s election debates and his State of the Union address, a key part of the talk focused on getting Americans back to work. Despite what you are sometimes hearing about the improving jobs market, the reality is that jobs remain somewhat scarce.
By the time you read this, you will know what the non-farm payrolls reading is and, by all accounts, it will not be that good for the jobs market. Briefing.com estimates the creation of 185,000 new jobs in March, which would be well below the 236,000 created in February. This is not what we want to see in the jobs market. The unemployment rate is predicted by Briefing.com to nudge up to 7.8%, from the current 7.7%. Again, not great.
In my estimate, the jobs market is moving along, but not at a rate that will lower the unemployment numbers anytime soon.
The private Automatic Data Processing (ADP) Employment Change reading reported on Wednesday foreshadowed America’s fragile jobs market, as a mere 158,000 new jobs were created in March, well below the Briefing.com estimate of 200,000 and the upward revised 237,000 new jobs in February. The interesting fact was that 74,000 of the new jobs were generated by small businesses with under 50 employees, while a mere 47,000 new jobs were created by large companies with over 500 employees, according to ADP. (Source: “National Employment Trends,” Automatic Data Processing, Inc. web site, last accessed April 4, 2013.)
The March ADP reading was the lowest since 148,000 in October 2012. In fact, since March 2012, there have only been three months with over 200,000 new jobs created. … Read More
The impact of the Federal Reserve’s low interest rates and easy monetary policy can be seen everywhere. The housing sector is seeing another boom thanks to the Federal Reserve. So is the retail sector and consumer spending, in spite of the fact that jobs growth is not at pre-recession levels. The Dow and the S&P 500 also achieved more records on Tuesday. Again, the stock market wealth and all of the 300,000 or so newly minted millionaires have the Federal Reserve to thank.
On Tuesday, the automobile sector joined in on the fun, as easy money and cheap financing rates for new vehicles helped to drive up sales to the highest levels since 2007.
At Ford Motor Company (NYSE/F), sales increased six percent to 236,160 vehicles sold in March, while at General Motors Company (NYSE/GM), sales jumped 6.4% to 245,950 in March.
You can get a 60-month financing term for a new vehicle for as little as 2.24% at the Bank of America Corporation (NYSE/BAC) and 2.69% at Capital One Financial Corporation (NYSE/COF). (Source: “Auto Loan Rates,” My Bank Tracker web site, last accessed April 2, 2013.) The average 60-month rate is around 4.12%, according to Bankrate.com, down from 4.52% a year ago.
You can also thank President Obama for helping to save the auto sector, as the move is apparently paying dividends.
While the renewed spending across America is good for the economic recovery, you kind of have to wonder about the ramifications down the road, when interest rates begin to ratchet higher.
Some members of the Federal Reserve are already beginning to voice their opinion to start reducing … Read More