Economic Notes 10-1-2012


Written by: Jon McGraw

One of the more closely-watched reports, durable goods, or items that are expected to last at least three years once purchased, dropped by -13.2% in August, which was much weaker than the expected -5.0% result. While most of this decline was due to the usually sporadic results from the transportation portion (aircraft orders were down), core goods orders were up a bit, but after the effects of a downward revision to July, it was, net-net, a weaker report that was taken as more negative than positive. Shipments were also quite a bit softer in the month.

The Conference Board’s consumer confidence indicator was better than anticipated in September, registering a gain over the month from 61.3 to 70.3. The ‘expectations’ component of the index was the biggest contributor on the week, which has been shown to be fairly correlated to consumer consumption—so a positive sign. The ‘current’ conditions and ‘employment’ components were also higher, but to a lesser degree.

Personal income for August increased by +0.1% for the month, which was below the +0.2% expected. Consumer spending came in on track at +0.5% growth month-over-month in August, but 80% of this was due to higher prices (per the PCE index), so a net real spending gain of only +0.1% or so. Net-net, these are relatively flat results and fall in line with slow growth in the economy overall.

The Chicago purchasing managers’ index fell from 53.0 in August to 49.7 in September, which was largely due to a drop in new orders, although production and employment also slipped. The Richmond Fed index rose by +4 for Sept., which was the first positive result in several months and a bit better than expected. Shipments and new orders were sharply higher, while employment remained unchanged. Service-sector activity also gained ground. These differing results are largely in line with similar mixed readings over the past few months from other regional indexes.

The Reuters/Univ. of Michigan consumer confidence survey for September came in at 78.3, which was slightly weaker than an expected 79.0 reading. The current conditions component of the survey was down a bit from the preliminary reading, while the expectations component remained unchanged. Consumer expectations for shorter-term and 5-10 year inflation remained relatively steady at 3.3% and 2.8%, respectively. These tend to remain fairly steady and hover around the longer-term CPI average of 3.0%.

The S&P/Case-Shiller housing numbers were up again, up +0.4% for July and +1.2% year-over-year. Although it wasn’t up to par with expectations of +0.8%, prices were higher in 19 of the 20 cities surveyed, although the results were divergent—Phoenix, Detroit and Atlanta gained the most, with increases of over 1% on the month. The July FHFA house price index (for those with agency-conforming loans), was up +0.2% for the month on a seasonally-adjusted basis. August new home sales fell by -0.3%, which countered expectations for a small gain of +2% or so (in line with stronger housing metrics last week); the decline was entirely due to the South region, as other regions were up a bit.

August pending home sales fell by -2.6%, which was a surprise relative to the +0.3% gain expected. Pending sales in the Western U.S. fell the most, by -7.2%, while results in the rest of the country were far less dramatic. As this measure leads existing home sales figures, expect those to drop in the next few months in line with this result.

On the employment front, initial jobless claims fell by -26k to 359k for the Sept. 22 week, which was far better than the expected 375k figure. The four-week moving average (more closely watched than any individual weeks) fell to 374k, so an improvement here as well. Continuing claims for the Sept. 15 week fell to 3,271k, which was lower than the consensus estimate of 3,288k. All-in-all, a positive story.

The government’s revised estimate of 2nd Quarter GDP was taken down further from 1.7% to 1.3%, which is old news now, but offers better snapshot as to the poor results and doldrums from mid-year. Guesses for this quarter’s number fall in the 2.0-2.5% range.

As we come upon the end of the third quarter, what does the fourth quarter of 2012 have in store in terms of GDP growth? Consensus seems to be in the same range of 2.0-2.5%. Not largely different from other quarters this year, but perhaps slightly improved from where we are right now.

There are several reasons why this is so, including better housing market numbers (which, as we’ve discussed before, leads to more spending on not only house purchases directly, but also general construction activities, home furnishings like carpet, furniture, fixtures, etc.). Also, financial conditions (as measured by customized metrics from firms like Goldman Sachs and Morgan Stanley, not to mention ‘real’ actions by the Federal Reserve) continue to be ‘easy’ and accommodative, and the absence of tightening alone is helpful. On the more negative side, the ‘fiscal cliff’ risk remains an uncertainty, as do ongoing conditions in Europe and a tempering of growth in larger emerging markets like China, especially.

However, in regard to the fiscal cliff, most reports we have digested in recent months/weeks continue to point toward some type of ‘deal’ that will alleviate the most severe and damaging aspects of the cliff—whether that be in late 2012 or done retroactively in early 2013. Several legislators have publicly acknowledged the body’s inability to reach deals before the 11th hour, as well as an underestimation of the reputational damage caused by last year’s debt limit debacle, which indirectly resulted in the downgrade of the U.S. debt credit rating. Much more to come on this topic in coming weeks.

 Market Notes:

The market this week was generally down on lackluster economic data and perhaps a bit of profit-taking. From a U.S. sector standpoint, utilities and health care led on the week, while tech and telecom lagged. U.S. large cap stocks outperformed smaller-cap issues, while domestic stocks generally held up a bit better than foreign stocks, with the exception of emerging markets (primarily due to good weeks from India and Mexico). Spain passed stress test.

With treasury rates lower, government bonds led on the week, with all other spread products, including corporates, high yield and foreign bond indexes were lower. Emerging market bonds, however, were higher.

Real estate returns were led by positive returns in Asian REITs, while North American and European issues were weaker generally. Commodity returns were led by small positive moves in the energy and agricultural sectors, while both industrial and precious metals lost ground. A fairly lackluster week compared to some we’ve recently had.


In doing some routine screening recently, we noticed that the universe of mutual funds and ETF’s in Morningstar’s database has grown to 28,906 (as of 8/31/12). Taking out the 1,466 ETF’s leaves us with 27,440 actual funds, which, of course, includes all share classes, we can pare it down further into ‘distinct’ mutual fund portfolios—the screen gets us to 7,187… which includes everything from $100,000 start-up funds up through the behemoth PIMCO Total Return and its $273 billion in total assets. In fact, the top 10 funds in terms of total asset size equate to $1.2 trillion. The top 50, almost $3 trillion.

Remarkably, this large number of funds isn’t radically different from the number of publicly traded stocks one could access, considering you include the conventional large-, mid- and small-cap worlds as well as a significant number of micro-cap and ‘pink sheet’ issues. If you think this is starting to look unwieldy, you’d probably be right.

This makes the process of finding attractive investments in the fund world all the more challenging. On one hand, size can be an attribute, to a certain extent when scale and efficiency is important—from the perspective of market access to attractive issues and lower trading costs. On the other hand, asset bloat can result in an inability to make much of an impact on the ‘edges’ and perhaps eventual mediocrity in terms of performance.

There are a number of investment options to choose from, and a select group of managers do a decent, consistent job, not taking on too much risk, providing good return relative to benchmarks and peer groups, as well as charging reasonable fees. When looking at simply the “asset management’ role of what we do as Family CFO, our job is to strike the balance of these variable and find these firms and management teams.