Mel's Blog

June 9, 2010 Market News

June 9th, 2010 10:57 AM by Mel Samick

In the meantime, it seems that economists have struggled to spell out their own accurate employment predictions. Friday's weaker-than-expected jobs number combined with worries that Hungary may be the next country to default on its debt, triggered a sharp sell-off in equities. Volatility is back in the market and days of nice and tight range moves seems to be history . During three out of the last four trading days, intra-day changes in the Dow were in three figures. By the end of the holiday-shortened week, the S&P 500 closed lower by 2.3%. On Friday, default fears in Hungary caused investors to dump riskier assets and looked to the safer haven of Treasuries. The 10-Year Treasury yield dropped from 3.37% to 3.20%. The debt fears also sent the euro to fresh 4-year lows, falling below the 1.20 support level. On the positive side, tourists headed to Europe and home-loan borrowers taking advantage of low U.S. rates are definitely not complaining. Despite some gloomy news and double dip talks, few economists, including one at Goldman Sachs, are not throwing in their towels yet. They are still believers of 3% GDP growth later in this year. According to their reports, slower U.S. growth is expected in the second half of 2010. However, the May employment report is most likely not a sign that this slowdown has already started. There is no doubt that the report was weak, with May ex-census payrolls growing just 20,000 after a gain of 223,000 in April. A more optimistic outlook, may be warranted with another sharp increase in the manufacturing work week, and a decent gain in hourly wages. In addition, other indicators of economic activity, which include the May ISM indexes, are still consistent with healthy growth in the near to short- term. Factory Orders for April brought another hopeful signal for this positive trend. New Orders for manufactured goods rose 1.2% last month, somewhat less than expected, but it helps to demonstrate that manufacturing is indeed on firm ground. Durable-Goods inventories rose again and signaled that demand is expected to rise in the near future. Some additional production gains can come from a pickup seen in Construction Spending in April. While the pickup in the manufacturing portion of the economy is encouraging, the services sector counts for far more activity, and it is also improving. The ISM Non- Manufacturing Index, the Institute's service-business report, held steady at 55.4 in May; which was unchanged from April and marked the fifth straight month of growth. While rising output per worker is a usually a healthy signal for the economy, it can have a converse effect in that it reduces the need for new hiring. That, in turn, can keep the economy from building up much needed traction. But those who have jobs can be paid more without any undue effect on inflation and ultimately interest rates. It's natural to see output per hour worked rise sharply at the end of a recession, but we've certainly seen that, as huge gains in the last three quarters of 2009 gave way to more typical figures in the first quarter of 2010. Once a given worker reaches capacity, another worker needs to be hired to meet production goals. It will help employment, but it also can be interpreted that the cost of labor per unit produced has to rise, which thereby contributes to inflation concerns. As of now it's not an issue, according to the final first-quarter Productivity figures, as per-unit labor costs were revised to a 1.3% drop from 1.6%. In addition, worker output was revised downward to 2.8% from 3.6%, according to the Bureau of Labor Statistics. Taken together, these signs point to still-strong but slowing productivity, suggesting that businesses may soon need to start some hiring activity. Home prices have stabilized since early 2009 after their sharp decline earlier, and valuations have returned to "normal" levels. But at the same time, temporary boosts from government housing policies are fading and the housing market remains plagued by excess supply and high delinquencies. How serious a threat is a renewed home price downturn? Both the financial system and the economy are much less vulnerable than they were in 2006-2008, as many of the lowest-quality loans have already defaulted. U.S. banks have already recognized about $700 billion in credit losses (based on IMF data), financial sector leverage has fallen sharply, and consumption is no longer dependent on mortgage equity withdrawal. Nevertheless, lower prices negatively impact the economy, both via an increase in the number of delinquent borrowers who might end up defaulting and via the associated loss of household wealth. According to economists at Goldman Sachs, at the current level of housing wealth, each 1% home price decline lowers household wealth by $170 billion. Meanwhile, a fairly standard estimate is that each $1 in lost housing wealth lowers consumption by 5 cents. So if house prices fall at an average pace of 2% over the next two years, and if we evaluate this fall relative to a "normal" rate of nominal home price increases of 3% per year, the hit to consumption growth relative to trend would be about $40 billion, or 0.4% of consumer spending. That is one reason why some economists expect consumption to grow at only a moderate pace in 2010 and 2011, despite the upside surprises to spending in the last two quarters. Few economists see no rate hikes for as long as 2012, as both inflation and employment are likely to remain far below the Fed's "dual mandate" targets. Mel Information provided by Amtrust Bank Capital Markets
Posted in:General
Posted by Mel Samick on June 9th, 2010 10:57 AM



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