Tuesday, February 17, 2009
Several leading indicators offer rays of hope; specifically, there are signs that manufacturing, industrial output, retail sales, credit, and housing are contracting less quickly (yup, that's the ray of hope). Unfortunately, there are Jekyll indicators, too, showing that the pain has yet to hit other sectors in full, including nonresidential investment and state and local spending. So as there are some silver linings in the data, the bigger picture is more ominous. From the New York Times: Some negatives looked a little less negative. Consumer credit slid 3.1 percent in December, according to the Federal Reserve, a sign Americans were shunning their charge cards, but the drop was slightly less than November’s 5.1 percent slide.
And although the United States imported and exported 5.7 percent less in goods and services in December, the drop in trade volumes was a shade less breathtaking than November’s 9.4 percent.
Some have also seized on a recent upturn in the Baltic Dry Index, which measures the cost of shipping raw goods like copper, steel and iron. The index cratered last fall as global growth halted, and analysts smelled whiffs of renewed demand as the index more than doubled from its lows.
“It really suggests there’s some sort of supply-and-demand bounce that’s tightening up in commodities,” said James Paulsen, chief investment strategist at Wells Capital Management. “It could fade again, but it’s an encouraging sign.”
Credit markets are still fragile, but analysts say they have stepped back from the brink since October and November, when banks essentially stopped lending to each other and the financial system seemed on the verge of imploding.
Businesses with highly rated debt can again borrow on the bond market, and even companies with shakier ratings find lenders. The companies still have to pay high interest rates, but the premium over government debt has narrowed in recent weeks.
The three-month London interbank offered rate, which measures how much banks charge each other to borrow, has settled near 1.2 percent, down from 4.5 percent at the height of the crisis.
“There are some cracks that are beginning to appear that are allowing some sunlight to come in,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But whether this foreshadows a turning point in the economy, that’s something no one knows." It is important to understand that these indicators do not signal an imminent economic recovery. For example, the Institute for Supply Management (ISM) index for manufacturing bounced slightly to 35.6% in January (listed in article, but not quoted here); but since the index value remains below the 41.2% threshold level, the report suggests ongoing overall economic contraction. And furthermore, since the index value remains below 50%, manufacturing is still falling quickly.
Unfortunately, there should also be an article that states: Data hints that some pain has yet to come. Two inputs to GDP are expected to decline quickly: nonresidential construction and state and local spending.
The chart to the left illustrates the ABI spanning the years Nov. 1995 (its first point) to December 2008. The American Institute of Architects Architecture Billings Index (ABI), which is said to lead non-residential construction by roughly 9-12 months, has declined precipitously over the last year, 34% to 36.4 in December 2008. This suggests that a sharp decline in non-residential construction is on the horizon.
Second, state and local spending cuts have only just begun
State and local spending, which is roughly 12% of GDP, is expected to contract soon. Rising unemployment will drag down state tax revenue further and tight credit conditions will continue to inhibit spending. States are jointly experiencing record budget deficits, serving as the ultimate nemesis (offset) to the federal stimulus package.
The federal relief to states will help, but....
Va. Budget Shortfall Reaches $3.7 Billion: Virginia has begun eliminating thousands of jobs, slashing agency spending by 15 percent and trimming almost $1 billion from elementary and secondary education and Medicaid programs, which help cover medical needs for the indigent, elderly and disabled. With no budget, California to cut 20,000 state jobs:
California, which is on the brink of running out of cash, will notify 20,000 state workers on Tuesday their jobs may be eliminated, a spokesman for Governor Arnold Schwarzenegger said on Monday. RW: Yes, there is some less-bad news out there, and I certainly welcome good news in housing and manufacturing. But so far, the good news consists of temporary monthly bumps, which does not determine a trend; and unfortunately, a trend has not yet emerged. In fact, according to Wachovia's forecast, GDP is expected to decline through the third quarter of 2009.