After a nice Thanksgiving spectacle of turkey, pumpkin pie, relatives, cool days of bright California sunshine, and college football, it's time to turn back to the serious business of the economy.
Here is a review of the latest data.
I see no fundamental issues that would change my last opinions on the state of things. The same forces that have been driving the economy, up or down, still exist. Which means that we are probably improving slightly, or at least we are not dramatically falling, but future prospects do not indicate we will have anything but a slow, if not stagnant, economy. The problem is that although some things are improving, they aren't improving enough, or aren't significant factors to drive the economic growth upward and create enough jobs to make the employment meter move to the positive.
Black Friday
Black Friday retail sales were viewed by most analysts as being "improved." Sales were $45 billion for the weekend and overall, brick and mortar and online, average spending increased 6.4% over last year. According to a ShopperTrak report, brick and mortar store spending was flat from a year ago at $20.5 billion which seems not to be very encouraging. Online shopping was up 9%, which indicates a strong trend which will only increase. Amazon reported a whopping 25% increase in traffic for Black Friday over last year. Cyber Monday showed an increase in sales of between 15% and 21%. For Thanksgiving and Black Friday online sales jumped 15% over last year.
Gallup reported today that as of Saturday, their poll said that average daily spending was up to $92 for the three days from last year's $83.
Will it all be bling as I reported last week? It is a long season so, perhaps bargain-hunters have blown their wads. Stay tuned.
Consumer sentiment as measured by the U. of Michigan survey turned up in November:
Consumer sentiment moved solidly and consistently higher through the month of November. The index came in at a final 71.6 for the month, up from 69.3 at mid-month and vs 67.7 in October. Both the assessment of future conditions and current conditions show strength.
Regional Economic Activity
There have been some good reports from the regional Fed banks. The Philadelphia Fed reported an amazing surge in economic activity in November, up 22.5%. New orders rose more than 15 points to 10.4. Shipments also rose more than 15 points, to 16.8. The region's manufacturers are adding to their workforces as the jobs index rose more than 10 points to 13.3. This was a bit of a shock since earlier that week the NY Fed reported that the Empire State had a bad November, down 11.1%:
[A] major month-to-month decline in new orders, at minus 24.38, together with an equally major decline for unfilled orders, at minus 24.68. Contraction in unfilled orders has been ongoing since April, keeping a lid on production needs. Shipments fell a very steep 25 points to minus 6.13 in the month, the workweek fell to minus 12.99 with delivery times, at minus 9.09
But then the rest of the country showed good results as well:
The Federal Reserve Bank of Chicago’s National Activity Index improved in September and is now only slightly negative. The Richmond Fed Manufacturing Survey was up last week, as well, to its highest level since August. And the Kansas City Fed survey was up for the third month in a row.
October personal spending (PCE) was up 0.5% (up 3.6% YoY) and income improved by 0.4% (up 4.1% YoY). This is a good report for income, but spending is still lackluster.
Jobs
This is the problem area.
Initial unemployment claims fell 34,000 in the November 20 week to a far lower-than-expected level of 407,000 (prior week revised slightly higher to 441,000). The four-week average is down 7,500 to 436,000 for a nearly 20,000 improvement in the month-ago comparison.
Continuing claims fell for the third week in a row and at 142,000 posted their biggest decline since July. The four-week average fell 51,000 to 4.309 million. The unemployment rate for insured workers fell one tenth to 3.3 percent for its lowest rate of the recovery.
This is positive news and reflects a trend I noted before.
The problem is that while unemployment is trending down, jobs aren't increasing. Part of the problem is that while the big corporations are hiring, the rest of the country isn't:
More than 4 in 10 employees (42%) at workplaces with at least 1,000 employees reported during the week ending Nov. 14 that their company was hiring, while 22% said their employer was letting people go. At the other extreme, 9% of workers in businesses with fewer than 10 employees said their employer was hiring, and 16% said their employer was letting people go.
Between 200,000 to 250,000 new jobs are needed each month to turn the unemployment rate upward.
Corporate Profits
Corporate profits are increasing but the reports are a bit mixed for Q3:
Corporate profits in the third quarter posted at an annualized $1.427 trillion from $1.383 trillion in the prior quarter. Profits in the third quarter were up an annualized 13.5 percent, following a 3.8 percent gain the previous period. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are up 28.2 percent on a year-on-year basis, compared to up 38.7 percent in the second quarter.
It is the YoY trend that I would have expected to be better by now, but it isn't:
If the multinationals do well as the result of the declining value of the dollar, I would expect this MoM trend to improve.
Business Week's Howard Rosenblatt reports:
I have completed a preliminary Q3 2010 review based on the current S.E.C. filings (finals in mid-December) and the statistics that have emerged are ones of healthier balance sheets with continued cost controls and limited expansion. ...
Capital expenditures appeared to grow at an encouraging 14% rate. However, I still am not seeing an expansion, which leads me to continue my prior belief that the increase is due to required maintenance, which has been building up over the past year-and-half (note this still in review, labor intensive); detailed data typically is given in the annuals, which won’t be filed (in bulk) until late January 2011.
Cash has grown significantly (there were some extra cash items, such as sales), easily setting its eighth consecutive quarter of record cash holdings. The level was attainable thanks to another quarter of strong earnings and cash flow, along with the corresponding cost controls that have become the normal standard practice. Cash levels currently represent 10.6% of market value, with Information Technology having more than 16% of their market value in cash. These continued high levels represent a war chest for companies to use for mergers and acquisitions, which I believe will continue to increase in the public sector.
Which means that corporations are still being conservative, maintaining their capital equipment but not expanding significantly. They still are holding on to their cash. Why? Because they have not seen enough improvement in the economy or significant demand to justify expansion and hiring. I would attribute a lot of this to "regime uncertainty" as the regulatory and legislative situation is still unresolved. The EU's problems aren't helping either.
This uncertainty is reflected in weak durable goods orders for October, down 3.3%.
GDP
The GDP for Q3 was revised upward from 2% to 2.5% in the revised report which came out on November 23. The adjustment was attributed to stronger consumer spending and exports:
The upward revision was primarily due to higher estimates for personal consumption, producers' durable equipment & software, exports, and federal government spending. Partial offsets were seen in a lower estimate for residential investment, nonresidential structures, inventories, and a higher figure for imports.
Real Estate
On a national basis, residential real estate is still falling in price and in sales.
Existing home sales fell 2.2 percent in October to a 4.43 million annual unit rate. Most of the indications in this report are weak including low to mid-single digit declines across regions and for both single-family homes and condos. Supply on the market is very heavy at 10.5 months. The median price fell for a fourth straight month, down six tenths to $170,500. The average price, likely reflecting firmness at the top-end of the market, edged two tenths higher to $218,700.
I barely look at new home sales because they are at all time lows and with excess and shadow inventory still overhanging the markets I don't see this improving any time soon.
With the shadow inventory still high and with prices still falling in many places in the country (but not all), this will constitute an anchor against any substantial improvement in economic growth as foreclosures and the dislocations it creates will have a continuing negative impact on the economy.
This is part of the deleveraging process which is ongoing in the economy. I believe that the large trusts and other investment vehicles, and to an extent the large banks, which hold residential mortgages, will continue to be impacted. These mortgage holders have largely reflected and discounted their losses. The weight of this decline will continue to fall on weak banks and homeowners which will continue to impact consumer credit until the deleveraging process is largely completed. I believe consumer credit is improving somewhat but don't expect substantial improvements.
I keep getting positive news from brokers and Moody's on CRE. Moody's latest data (September) shows a 4.3% gain in prices:
This is not new information since my last report on CRE, but I believe it reflects an improving trend in the commercial sector. I'm not suggesting things are rosy, but it is starting to show, that as banks dump REO, there is a market for this property and eager investors will set a floor for the market. This is a major cause of the credit freeze and the bank CRE deleveraging process is a positive sign.
