Economic Notes – October 21, 2013


Written by: Jon McGraw

Global investors were relieved when President Obama signed H.R. 2775 into law last Thursday, effectively ending the government shutdown and funding it through Jan. 15, 2014. The law also extends the country’s debt limit through Feb. 7, 2014.

Due to the shutdown, several federal agencies were unable to release September economic reports on measurements such as CPI, housing starts, industrial production and capacity utilization. Therefore, we can only digest a shorter list of economic data for our note.

(-) The National Association of Home Builders Housing Market Index (NAHB HMI), which acts a leading indicator of housing starts going forward, fell two points in October to 55. Despite the decline, the index has increased 14 points year-over-year and remains around the post-recession peak.

(-) The New York Empire manufacturing index for October weakened five points to 1.5, missing the consensus forecast of 4.5. Even though it was a slightly weaker result, the general business conditions were still positive, particularly after four consecutive months of steady growth. Inflation pressures remained contained in most districts despite slight increases in commodity prices.

(+) The Philadelphia Fed manufacturing survey for October was better than expected. After being positive for four consecutive months, the survey’s broadest measure of manufacturing conditions continued to stay at the healthy level of 19.8, down slightly from September’s 22.3. October’s measurement exceeded the consensus’ index level at 15. Strengthening occurred in new orders, shipments and employment, signaling growth. A majority of the reporting manufacturers expect business to continue to expand over the next six months

(+) In the Fed’s October Beige Book, 12 Federal Reserve Districts reported an overall “modest to moderate” pace in national economic expansion from September through October 7th. Most districts experienced modest spending in both consumer and business segments. Despite modest overall employment growth in September, demand for skilled labor remained strong, particularly in the Richmond, Boston, New York and Dallas districts.

(-) Initial jobless claims for the week of Oct. 13th came in at 358k, which missed the consensus forecasted figure of 335k but was lower than the 373k for the previous week. California had the largest increase in initial claims with 33,654. The state had issues with its computer systems upgrade during September and accumulated a backlog in claims. The other major source of new claims was from federal government employees due to the government shutdown.

Continuing claims for the week of Oct. 5th came in at 2,859k, which was a bit lower than the 2,900k expected. To see how far the labor market recovery has gone, you just need to check the total number of people claiming benefits in all programs for the week ending Sept. 28 this year. There were 3.9 million people depending on government support, which was roughly 1 million lower than the 5 million in the comparable week in 2012.

Market Notes

Stocks rallied after lawmakers extended the debt-ceiling deadline and reopened the federal government. In addition, notably better earnings results were reported from Google, Morgan Stanley, BlackRock, Verizon and Bank of America. The S&P 500 index reached 1,745 on Friday, a new all-time high. Close to 100 companies in the S&P 500 index have released their 3Q13 results. 69% of the reported companies beat the Street’s earnings estimate with a blended earnings growth rate of 1.3%. 53% have reported exceeding sales estimates. The blended revenue growth rate has been 1.9% so far.

Several companies specifically cited the negative impact of the government shutdown on either actual Q3 earnings or projected earnings for Q4 and economists estimate that the shutdown will erode 25 to 30 bps from the Q4 GDP growth projection.

Eurozone industry production grew 1.0% in August, exceeding the 0.8% growth rate from economists’ forecasts. Four of the region’s five largest economics experienced growth in industrial output. Meanwhile, Chinese GDP growth expanded 7.8% in the third quarter from a year ago, which was an uptick from the 7.7% and 7.5% rate for the first and second quarter.

Bond prices rose during the week. Long government bonds and credit bonds performed the best. Emerging-market debt spreads were tighter on the positive news about averting U.S. debt default and on track with Chinese Q3 GDP growth.

U.S. REITs outperformed foreign REITs in the week and Commodities posted a modest positive return for the week as well.

Have a great week!


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