Current Reports - A weekly review of the implication of current and expected economic data.
Trendlines - Periodic perspective on the outlook for economic growth, inflation and interest rates.
Federal Reserve - These reports will analyze current and upcoming Federal Reserve policy.

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Current Reports

Stimulus Plan #2

Wall Street’s holiday-shortened week generally brought disappointing updates for the A-List data reports. Several weeks ago, Wall Street began a tentative whispering campaign, suggesting [hoping?] that the official recession ended this June or will end this summer. However, this week we learned that:

These continued weak updates are prompting increased Washington talk that a Stimulus Plan #2 is needed, as initially expected. Policy makers’ and the American voters’ impatience with labor conditions is increasing. Meanwhile, the very largest part of the spending in Stimulus Plan #1 has not occurred yet. While this growing concern about unemployment is understandable, a second stimulative package, if implemented, would likely add to the already-large risk down the road of increased inflation and higher market interest rates.

 

June		Prior	Med. Est.*	Actual
30	Case-Shiller 20-Metro Home Price Index	-18.7% Mar.	-18.6% Apr.	-18.1% Apr.	Continues in a trough at an exceptionally negative pace.
	Consumer Confidence -- Conf. Board	54.8 May	55.3 June	49.3 June	Very low. "Depression avoided". But stimulus spending "faucet" is just a trickle so far. Election euphoria fading. Unemployment outlook still negative. Gas prices up.
July 1	ISM -- Mfg	42.8 May	44.9 June	44.8 June	Continues the "Less Worse" pattern, reaching toward the 50 mfg. recession threshold.
	Auto Sales	9.9m May	9.8m June	9.7m June	Continues at historic lows as historical structural changes in auto industry evolve.
2	Non Farm Payrolls	-322k May	-365k June	-467k June	Key measures deteriorated in June, destroying very tentative, "whispered" Street hopes that official recession ended in June 2009 or next few months.
	Unemployment Rate	9.4% May	9.6% June	9.5% June	A 1.5% increase before rounding. History: lags business cycle. Likely peak in 2010 but uncertain  timing of Stimulus Plan spending is very influential.
	Factory Orders	0.5% R 0.7% Apr.	0.9% May	1.2% May	Continues basically very weak. April & May gains [linked] follow sharp, - 1.9% April decrease. May down -23% y/y, similar prior months. May [linked] strength: commercial aircraft orders, machinery, petroleum [price?].
6	ISM Nonmfg.	44.0 May	46.0 June	June	Expecting the "less worse" trend will continue.
9	Weekly Initial Jobless Claims	614k June 27	610k July 4	July 4	Very negative pace likely to continue. Usually lags the business cycle.
	Continuing Jobless Claims	6702k June 20	NA June 27	June 27	No improvement expected.
10	Trade Balance	-$30.0b Apr.	-$29.3b May	May	Smaller versus recent years but just the net difference between exports and imports as world economies decline together. Likely to deteriorate as the US economy improves faster initially than trading partners.
	Consumer Confidence – U. Mich.	70.8 June	71.0 July	July	Low. No reason for sustained improvement at this time.
	Index of Lead. Econ. Ind.	1.0% April	0.9% May	May	Reflects economy’s less worse momentum of recent months but not "better" yet.

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Trendlines

Good News / Bad News
The "Less Worse" Outlook

A few long years ago, we were living in an economic boom that was driven by the availability and use of easy credit. This provided a feeling of wealth that encouraged robust spending on choices as varied as vacations [Disneyworld, cruise lines], designer clothes, and home entertainment rooms. Today, we are in a credit hangover which likely points to an historically slow economic recovery.

The Consumer Financial Obligations Ratio is one of this economist’s most closely studied indices. It shows the ratio of: 1] required monthly payments on consumer debt and other obligations such as homeowners insurance and property taxes to 2] personal income after tax. This index has stayed close to the all-time high, roughly 19%, for the past four years. Today, many consumers are in debt up to their ears.

When consumers were paying with plastic at record rates, the relative amount of income that was dedicated to savings decreased. For much of this decade, the US savings rate was virtually 0%. In contrast, in January and February 2009, the savings rate jumped sharply to about 4% and is likely headed much higher. A good sign, hopefully?

Saving – generally – can be a good thing. Something that consumers should have been doing anyway. But the problem is that income that is added to savings is income that is not being spent. This is known as the "paradox of thrift", or, what is good for the individual may be bad for the entire economy. Income that is saved is, at the same time, income that is not spent on new clothes, furniture, or other goods that are not essential in the short-term. Or, if this income is spent, it is spent on cheaper, often lower quality goods or services.

Globally or locally, the decline in credit and the increase in savings is squeezing what small amount of after-tax income that consumers have. To stretch this "residual income", consumers have become thriftier about how they spend. For example, consumers still buy coffee [of course!] but many more get it at a grocery store or McDonalds instead of Starbucks. More broadly, many more now go to Wal-Mart, instead of traditional department stores. And, thrift stores report a surge in middle-income buyers.

Real GDP [the overall output of good and services adjusted for inflation] is experiencing the sharpest decline since the early 1980s, when computers became widely used throughout the manufacturing / business sector. In contrast with its long-term average 3% growth rate, real GDP declined at about a -6% annual rate in the fourth quarter of 2008. New orders are low and inventories are high. Housing remains under great pressure. Unemployment is high and will likely go higher.  Consumer confidence is historically low. But this is not another Great Depression.

While the 8.5% March Unemployment Rate was much higher than the 4.4% recent low of October 2006, it is light-years below the peak 25% of the 1930s. However, this is not just another recession. In the current recession, real GDP has already dropped at twice the deepest rate of decline since the early 1980s and has lasted twice as long as each of the past two recessions. Not the Great Depression but not just another recession. Possibly, history will label the current recession as the "Great Recession".

Analyzing the momentum of current data and widespread anecdotal information, it is likely that overall growth and unemployment will remain weak in 2009. As long as consumers are unable or unwilling to spend, real GDP growth will remain weak. Look for the economy to be "less worse" in 2009 and then, in 2010, get better at a below-average pace.              

One early sign of improvement may be market interest rates on US Treasury Bills. A sustainable sizable rise in these interest rates may indicate that the flight to safety – the collapse in overall confidence – is easing. On a first-hand basis, reliable indicators of favorable change will likely include, among others, increased revenues at: 1] department stores versus big-box discount retailers; 2] casual, sit-down restaurants versus take-out, quick-food restaurants; and 3] vacation resorts.

The outlook: "less worse" and then gradually better at a sustainable, below-average pace.

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Federal Reserve
April 30, 2009

• Maintain the Fed Funds Target Rate at 0.00% to 0.25%.
• Continue to emphasize the use of "all available tools".
• Continue to support financial markets.
• "Less worse" economic growth outlook.
• Continue to monitor economic and financial developments carefully.

	March 18, 2009	April 29, 2009	Change
Fed Funds Action	Continue Target Rate at 0.00% to 0.25%.	Continue Target Rate at 0.00% to 0.25%.
Open Market Guidelines	Will purchase: short-term & long-term UST, US agencies, mortgage – backed securities.	Same.
Growth	Near-term outlook is weak.	"The pace of contraction appears to be somewhat slower." "Outlook has improved modestly." "Likely to remain weak."	"Less worse."
Inflation	Inflation "will remain subdued". Some risk of deflation.	Same.
Vote	Unanimous.	Unanimous.

As universally expected, the FOMC maintained the Fed Funds Target Rate at 0.00% to 0.25% and continued to pledge the use of "all available tools" to support overall economic growth and the financial system. These tools continue to include, among others, purchasing short-term and long-term US Treasuries, agency mortgage-backed securities, and agency debt.

The next meeting is scheduled for June 23 and 24, following which virtually the same announcement is expected.

 

RC Allsbrook, CFA
Chief Economist
Regions Financial Corp.

Information contained herein is based on data obtained from recognized sources believed to be reliable. This information has not been verified by us and we do not make any representations about accuracy, completeness or reliability. Any opinions expressed are solely those of the author and are subject to change without notice.