Economic Notes – November 11, 2013


Written by: Jon McGraw

All things considered economic numbers came in fairly well last week – and the stock markets followed suit.

(+/0) The advance GDP figure for the third quarter came in at +2.8%, which dramatically surpassed consensus expectations of +2.0% or so. However, much of the positive impact (0.8% of that 2.8%) came from larger inventory accumulation coupled with a smaller decline in federal government spending than many expected. Also, there was a 0.3% contribution from improvement in the trade deficit, strong housing figures and some positive contribution from state/local government spending which has been in turnaround mode and in an encouraging trend relative to federal spending. In the consumer spending component, higher growth in goods consumption countered weaker services growth. Personal consumption expenditures (‘PCE’) overall rose an annualized +1.5% for the quarter, which was a tick below expectations, and the core PCE number rising +1.4%. The GDP price index rose an annualized +1.9%, which surpassed forecast by about a half-percent, running a bit higher than other inflation numbers we covered in depth last week. Of course, the first/advance estimate remains subject to a few further revisions as data is sorted and clarified in coming months. While the inventory build created some ‘artificial’ growth in the third quarter, there is sometimes some ‘give-back’ of this growth component in following quarters, which makes sense intuitively. Estimates for the 4th quarter are running at 1.5-2.0% considering these factors, with 2014 estimates solidly in the 2.5-3.0% range.

(+) The ISM Non-manufacturing survey came in a little better than expected, rising from September’s 54.4 to 55.4 for October—compared to a forecasted 54.0 and roughly near its average over the past twelve months. Business activity and employment both rose by 3-5 points while new orders declined a few points. From the included commentary, it didn’t appear that services were impacted hugely from the government shutdown issues during the quarter, but there was some negative feedback from industries like hotels and food services.

(0) Factory orders for both August and September were released jointly, due to the government shutdown. August orders fell -0.1% for the month, relative to an expected +0.3% gain, while September orders recovered to a +1.7% gain—but falling short of forecast by a tenth of a percent. In September’s report, manufacturing inventories (focused in durable goods) rose almost a half-percent, which is a faster rate than seen in recent months.

(+) The Fed’s Senior Loan Officer Opinion Survey for the third quarter showed a continuation of looser credit standards for a variety of lending activities, including commercial/industrial business loans as well as commercial real estate. At the same time, though, a smaller net number of banks reported looser standards than last quarter. It also appeared that higher mortgage rates put a damper on demand somewhat, and refinancing activity also slowed a bit.

(-) The preliminary Univ. of Michigan consumer sentiment survey fell from October’s 73.2 to 72.0 in November, which underwhelmed the forecasted 74.5 level. Unsurprisingly, consumer assessments of current conditions dropped a few points, while future expectations were largely unchanged. Per the survey administrators, much of the current pessimism is government policy-related, which has been the story for much of the past year (and several years) with these surveys. Month-to-month, the level of frustration seems to wax and wane with media noise, however. Inflation expectations for the 1- and 5-year look-ahead periods ticked up a tenth of a percent but hovered around the long-term average of 3%.

(0) Initial jobless claims for the Nov. 2 week fell to 336k from the previous week’s 345k (revised up), but exceeded expectations by 1k or so. For the first time in a while, no unusual factors, computer changeovers or processing backlogs were present to convolute the data. Continuing claims for the Oct. 26 week came in at 2,868k, which was virtually unchanged from the week prior and lower than the 2,875k expected.

Finally, even though it seems we just had one, the October government employment situation report was released. It was the best one in a while, and seemed to shrug off fears of shutdown carryover. The nonfarm payrolls component featured a gain of +204k jobs, which almost doubled the consensus estimate of +120k (however, we don’t have to remind you about the monthly error factor of +/- 100k jobs embedded in this survey data, in addition to the usual later revisions). Leisure/hospitality and professional services were the leading categories, with additions of +53k and +44k, respectively. Government employment declined by -12k, but that was in keeping with trend (think sequestration effects as opposed to temporary shutdown). Additionally, August and September total payrolls were revised upward by 60k, which added some credibility to the strength of job growth.

The unemployment rate came in line with expectations at 7.3%. However, again, there was underlying weakness with the labor participation rate, which dropped almost a half percent to 62.8%; this was explained largely by the fact that 450k furloughed workers were counted as ‘temporarily laid off,’ so this is really an anomaly. At the same time, there have been continual concerns about the size of the labor pool from a demographic and structural standpoint that we have often discussed. Household employment declined by 735k for the month.

In some of the other peripheral data, average weekly hours fell a tenth to 34.4, which could be related to private sector effects of the shutdown (the shutdown effect doesn’t seem to be excessive, but byproducts are passed on elsewhere). Otherwise, average hourly earnings rose +0.1% for the month (half the increase forecast), bringing the year-over-year earnings change to +2.2%. Personal income for September rose +0.5% on the month, which surpassed forecasts by a few tenths and were broad-based in nature. The PCE and core PCE price indexes rose +0.1% for Sept., which were in line with forecast—these expenditure inflation measures remain in general agreement with CPI and others—and the savings rate rose to 4.9%, which is the highest level so far this year.

Market Notes

U.S. large-cap stocks gained for the 5th week in a row, and outperformed small caps on the week after a major dip on Thursday (brought on a better GDP and claims numbers that sparked fears of a Fed exit) was followed by a market recovery brought on by the good payrolls report on Friday, ironically. Cyclical materials and financials gained over 1%, while telecom and consumer discretionary lagged, with losses of about a half-percent.

Third-quarter reporting results for stocks in the S&P 500 have been generally steady. With over three-quarters of firms now reporting, just over 50% have met/exceeded revenue expectations, while over 75% have met/exceeded earnings estimates (for historical context, the average from the last two decades is about half of firms beating and half missing for both revenues and earnings). Again this quarter, a race to who can downgrade expectations the fastest. In terms of qualitative trends, poor results from China tended to permeate the commentary from several S&P firms who are now garnering a much larger percentage of revenue from foreign sources.

Twitter’s IPO was no doubt the biggest news of the week, coming out of the gate with an opening price of $26/share and jumping to over $45 right away, before falling a bit Friday. The most interesting part about these IPO’s is not the stock story necessarily, but the investor sentiment behind these types of offerings. From what’s occurred so far, the results are bullish.

European markets were higher on some signs of growth, which reversed fears of a month ago—this included German factory orders, UK industrial production and Eurozone retail sales. Additionally, the ECB supported the effort by lowering rates from 0.50% to 0.25% this week, perhaps in response to the 3-month inflation measure falling into the negative. This didn’t do enough to cause European stocks to get beyond a loss on the week. The worst results were in EM nations Brazil and India, which lost over -5% on, ironically, improved U.S. economic prospects, which raised the likelihood of tapering. This has been a negative for emerging market assets, which depend on continued easy month in search of global opportunities; at the same time, though, stronger U.S. growth and consumerism boosts prospects for these nations as well.

Stronger economic news pushed rates up, so naturally it was a poor week for bonds, with the BarCap Agg losing about 50 b.p. High yield and floating rate earned a few basis points of positive return, which was a relative strong showing. On the weaker side, long treasuries and foreign debt lost—the latter due to a stronger U.S. dollar. Emerging markets fared worse than developed markets.

Commodity returns were generally lower on the week on a weak dollar. Natural gas and platinum gained, while gold lost several percent on the week due to better U.S. GDP growth and the ECB rate cut. The rationale is that an increased probability for removing stimulus and lessened chance of global uncertainty diminishes the need for this gold ‘insurance.’ This has been generally the trend all year—affecting precious metals prices quite negatively. Soybean oil also took a hit on preliminary US FDA plans to ban trans fats from foods, notably partially hydrogenated vegetable oil. Without going into the chemistry, this may reduce the demand for these affected oils.

Gasoline prices have also been falling steadily, which has served to be a modest stimulus to consumer behavior—albeit in an indirect way. Usually, we see a pop in prices from January through spring (normally a +25% increase, based on the last decade), then prices level off at high levels through the summer and fall again in the autumn months. This year, the spring price increase was only about half of normal and the price reversion was more than usual—prices are actually lower than they were at the beginning of the year. As we’ve discussed in the past, gas prices act as a regressive tax on consumers and are especially punitive on the lower income groups…removing this headwind allows for greater spending elsewhere.

Have a great week!