imageFMX | Connect – www.fmxconnect.com - (Reported 8/20/2010)

 

 

 

 

 

 

 

 

 

Excerpt from MARKET MUSINGS & DATA DECIPHERING

 

FIVE HUNDRED AND COUNTING
Initial jobless claims did it again — rising above consensus views and again off upwardly revised figures. There is little doubt that the trend in claims is firmly up and that overall labour market conditions are deteriorating. Keep in mind that the August 14th week represented the nonfarm payroll survey week, and an outright decline in private payrolls cannot be ruled out (we shall await ADP which comes out on September 1).


So what happened with the data? Well, claims rose to 500k from 488k (was 484k) and are up now for three weeks in a row and in four of the past five weeks. The last time they were this high was during the week of November 14, 2009. The four-week moving average has also trended higher — 482,500 from 474,500 the prior week and 454,750 a month ago. They were last at this level on December 5th of last year.


Claims are on a clear rising trend but we respect the view that you should never rely too heavily on one data-point — even a nice round number like 500k. Let’s just say that if we see the four-week moving average hit this level, a “double dip” — assuming we aren’t still in a “single-scoop” that began in December 2007 — will be baked in the ice cream cake. Fait accompli.


DON’T BET ON THIS PHILLY
The Philly Fed index was the final nail in the coffin on the ‘double dip’. It may not even be a ‘double dip’ because it is not a stretch to believe that the recession that began in December 2007 was only briefly interrupted by a truncated inventory cycle and the impact — now largely gone — of unprecedented monetary, fiscal and bailout stimulus. What we are now seeing unfold is the primary trendline in the U.S. (and Canada, by the way) economy when left to its own devices — though no doubt the Fed will soon react by yet again dramatically expanding its already pregnant balance sheet.


LEADING INDICATORS ROLLING OVER
The Conference Board’s index of leading economic indicators magically came in at +0.1% MoM, as expected, in July but the diffusion index was low at 55% and has not been better than this since March when it was 70%. The treatment of the shape of the yield curve seems to skew the number by 0.3 to 0.4 of a percent point each and every month, so outside of that the LEI actually fell 0.2% and is down now in two of the past three months. In fact, the LEI is barely up from the Mach 2009 low without the contributions from the yield curve and the stock market, which together accounted for about two-thirds of the rebound.

 

U.S. RECESSION NEVER ENDED; GDP TO CONTRACT IN Q3
Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.


THE BEAR MARKET IN HOUSING STARTS IS STILL FAR FROM OVER
We got the housing numbers for the U.S. earlier this week and we saw single-family starts crater for the third month in a row — by 4.2% in August to a 432,000 unit annual rate. Only six other times in the past 50 years have starts been this low.


But the cutback in production by the builders is necessary to ultimately restore balance to the housing market. It is clear that there is no pent-up demand with mortgage rates diving to new lows and no response coming in terms of new applications for home purchase (down 38% over the past year), customer traffic in the showrooms (tied now for the third lowest level in history) or homebuying intentions surveys (second lowest level in the past three decades, as per the most recent Conference Board survey).


The critical question is: have the builders done enough cutting? In other words, have we seen the lows in housing starts and can we begin the process of building a base for future production? Hell no.


CANADA: COOLING OFF
We received two more pieces of Canadian data that were on the soft side. The July leading indicators came in at 0.4% MoM missing the +0.7% expected by economists and June wholesale sales contracted.

 

David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

 

Source: Market Musings & Data Deciphering

 

 

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