Higher US personal income and spending, but sentiment weakening

There were more economic data coming out of the US yesterday.

The US Commerce Department yesterday released its data on personal income and outlays for March, showing a rise of 0.5 percent in personal income and a rise of 0.6 percent in personal consumption expenditure. Personal saving as a percentage of disposable personal income was 0.4 percent in March, falling from 0.5 percent in February.

The personal consumption expenditures, or PCE, price index, rose 0.5 percent in March after climbing 0.3 percent in February. Excluding food and energy, the core PCE index rose 0.3 percent, higher than the 0.2 percent rise in February.

In other news yesterday, consumer confidence turned down, with the University of Michigan's measure of consumer sentiment falling in April to 87.7 from 92.6 in March, while the National Association of Purchasing Management-Chicago's manufacturing index slipped in April to 65.6 from 69.2.

In the wake of the economic reports of the past few of days, Kash at Angry Bear wonders what the rise in inventories in the first quarter means -- "my guess is that firms will probably try to slow production to reduce their inventories next quarter" -- and then asks how low can the savings rate go.

Weaker economy and monetary policy

The US Commerce Department reported that first quarter GDP grew at a 3.1 percent annual rate, down from 3.8 percent in the fourth quarter and the slowest in two years. Analysis and reactions from economists can be found at the macroblog. Barry Ritholtz also posted some reactions from economists reported at WSJ.com, as well as his own.

My own short take: It's not too bad a number, provided you ignore the rising prices and slowing business investment. Not that I recommend anyone ignore the latter.

Earlier yesterday, there had been some mixed news out of Asia.

In Japan, the Ministry of Economy, Trade and Industry (METI) reported yesterday that industrial production unexpectedly fell 0.3 percent on a seasonally-adjusted basis in March from the previous month, bringing the quarterly rise for January-March to 1.7 percent. However, the manufacturers surveyed by the METI forecast a strong rebound of 3.5 percent in April. And earlier, the NTC Research/Nomura/JMMA Purchasing Managers Index (PMI) was reported to have risen to a seasonally-adjusted 53.3, its highest reading in seven months and up from 52.7 in March.

A separate METI report showed that retail sales rose 0.6 percent in March from a year earlier, although it was down 0.9 percent on a seasonally-adjusted basis compared to February.

Not surprisingly, the Bank of Japan decided to leave its monetary policy unchanged yesterday.

South Korea saw some economic improvement, with the National Statistics Office (NSO) reporting yesterday that South Korean industrial output in March rose 4.8 percent year-on-year to give a 3.8 percent increase for the first quarter. Industrial output in March rose 3.8 percent month-on-month on a seasonally-adjusted basis, reversing the 4.6 percent fall in the previous month. In addition, the March index of leading indicators was up 1.6 percent from a year earlier compared with a gain of 1.4 percent in February.

Today, Singapore's unemployment rate was reported by the Ministry of Manpower to have gone up by 0.2 percent to hit 3.9 percent in the first quarter of this year. This figure takes added significance in the light of an International Monetary Fund report released yesterday that warned the Monetary Authority of Singapore that it might have to review its tightening policy.

Singapore may have to cap its currency's rise to support an economic expansion this year amid weaker overseas demand for its exports, the International Monetary Fund said. "Monetary policy might need to become more supportive" if overseas demand weakens more, the Washington-based lender said in a report released yesterday. It predicted Singapore's economy will grow by 4 per cent this year, less than half the pace in 2004.

The IMF's concern is understandable. Tightening in the face of not just a slowing economy but a contracting economy is not quite the conventional way of running monetary policy.

In contrast, the Federal Reserve has been inclined towards a more accomodative policy, a policy which has led to asset bubbles and a record current-account deficit, at least as charged by Stephen Roach of Morgan Stanley. It is a charge, however, that David Altig has been trying in recent days to defend against (see this, this, this and this). And in his latest post, he highlights the fact that the Fed itself had not always been unanimous.

Personally, I tend to think that the Fed has indeed overstimulated. It is an unfortunate but understandable mistake. Like the unemployment rate, the calculation of neutral interest rates has been thrown out of kilter by the entry of 2 billion poor people into the global economy.

March US durable goods orders reinforces negative outlook

The weakness in the economy is getting clearer.

Yesterday, the US Commerce Department reported that new orders for US durable goods plunged by 2.8 percent in March, the biggest drop since September 2002. Excluding the volatile transportation category, orders for durable goods fell 1.0 percent. Durable goods orders excluding defense fell 3 percent, also the biggest drop since September 2002.

To make things worse, February durable goods orders were revised down to a 0.2 percent decline from a 0.5 percent increase, while durable goods orders aside from transportation for that month were revised lower to a 0.2 percent fall from unchanged.

The Prudent Investor looks at the durable goods data in the context of other recent figures -- consumer confidence, housing starts and the Philly Fed Index -- and concludes: "Growth finally retreats to the bear's cave". Bill Cara expresses similar sentiments:

Improvement in new durable goods orders is essential in boosting industrial production growth. This report is a significant negative for the equity market, as it follows on several other reports of a rapidly slowing economy in the U.S.

US stocks, however, shrugged off the bad news and managed to end marginally up yesterday on the back of a sharp fall in oil prices after the US Energy Information Administration reported that US crude stocks rose 5.5 million barrels last week to 324.4 million.

Speaking of oil, Barry Ritholtz devoted most of yesterday's postings to oil -- see "All about Oil", "China Syndrome", "Oil Demand versus Capacity", "Wal-Mart versus Oil Prices", "China's Thirst for Oil (and Cancer treatments)", "Capital Spectator", "Oil's Lesser Role? Its all Relative", "But what of the SPR?".

Meanwhile, Brad Setser takes over Stephen Roach's role and worries about global rebalancing.

In the long-run, the more resources (capital and labor) that flow into housing and other non-tradables sector, the harder it will be to move resources out of those sectors and into the tradables sector when the US eventually is forced to adjust. DeLong's model gets this right. Shifts across sectors are not frictionless.

Current growth by and large is coming from the sectors of the US economy (and sectors of the Chinese economy) that would need to slow in an orderly rebalancing story. My worry: the more dependent the US economy becomes on housing, and the more dependent the Chinese economy becomes on exports, the higher the risk the "landing" will be hard rather than soft.

And a landing in the global economy may be closer at hand than many people think. On the back of whiffs of deflation from Japan and Singapore earlier this week comes the report yesterday of Australia's unexpectedly low inflation rate of 0.7 percent in the March quarter, vindicating the Reserve Bank of Australia's decision not to raise interest rates earlier this month.

Record new home sales in US but economic outlook moderating

Yesterday's news suggests that the US consumer remains resilient, but for how much longer remains -- as ever -- a big question mark.

The Census Bureau yesterday reported record new home sales in March: up 12.2 percent from February. However, the Conference Board's Consumer Confidence Index declined in April to 97.7 from 103.0 in March. Lynn Franco, Director of The Conference Board’s Consumer Research Center, was quoted as saying:

Despite the decline, the Present Situation Index remains at levels indicative of a healthy economy. However, the Expectations Index is now at its lowest level since July 2003 when it registered 86.3. Looking ahead, consumers do not anticipate an improvement in economic growth nor in their incomes. And, they expect an even tighter job market over the summer months.

Today, the World Bank says that it expects East Asia's economies excluding Japan to grow 6 percent in 2005 after last year's 7.2 percent growth. China is expected to slow down to just over 8 percent growth this year and 7.5 percent in 2006.

That I guess, would qualify as a soft landing. And such a soft landing would surely be appreciated by Singapore.

Yesterday, the Economic Development Board reported that Singapore's manufacturing output contracted 1.7 percent in March on a seasonally-adjusted month-on-month basis, the third straight monthly decline, while the Department of Statistics reported that the consumer price index in March declined by 0.1 percent over the previous month and rose 0.4 percent over March 2004.

Falling consumer prices in the midst of rising oil prices look strange. The Monetary Authority of Singapore's underlying inflation measure is almost certainly higher, though. And the latest figures are consistent with the MAS's forecast of 0-1 percent headline inflation for 2005 made in its policy statement a fortnight ago.

Economic news mixed but risks clear

The news on the economic front continues to be mixed.

In Germany, business confidence fell to a 19-month low in April, according to Ifo, the Munich-based research group, yesterday. The institute said its business climate index fell to 93.3, the third drop in a row, from 94 in March. Ifo said that three consecutive declines signal slowing economic growth.

Elsewhere, the news is a little better.

In the US, sales of existing homes rose 1.0 percent in March to a seasonally-adjusted annual rate of 6.89 million units as an increase in single-family sales offset a dip in sales of condominiums, the National Association of Realtors said yesterday. The national median home price rose 11.4 percent from the same month a year ago, the biggest price increase since December 1980.

Japan also saw some relatively rare good news. Its unemployment rate in March fell to 4.5 per cent from 4.7 per cent the previous month, lower than market expectations, the Ministry of Internal Affairs and Communications reported today. In addition, the ministry reported that salaried household spending in March expanded a real 1.7 per cent from a year earlier, reversing a 3.8 percent fall in February. The rise in March spending came despite a real 1.0 per cent year-on-year decline in overall income of households headed by salaried workers.

Deflation in Japan also seems contained. Core consumer prices fell 0.3 percent in March from a year earlier, the government said today, but month-on-month the core consumer price index (CPI) rose 0.3 per cent, the first rise in three months. Meanwhile, core consumer prices in Tokyo, a leading indicator of nationwide trends, rose 0.2 percent in April from March.

Brad Setser, however, identifies three risks to the global economy: the US trade deficit, US consumer debt and China's investment bubble.

Meanwhile, Morgan Stanley's chief economist Stephen Roach lays much of the blame for today's precarious economic situation on the Federal Reserve.

The day is close at hand when US monetary policy must get real. At a minimum, that will require a normalization of real interest rates... Fedspeak has taken us into the greatest moral hazard dilemma of all -- how to wean an asset-dependent system from unsustainably low real interest rates without bringing the entire House of Cards down. The longer the Fed waits, the more perilous the exit strategy.

As if it is not already perilous enough.

Time to buy technology?

Are tech stocks about to lose the blues?. Norm Alster finds several analysts who think so.

Wall Street has been bearish on technology for so long that it has been easy to overlook the few stubborn bulls who have challenged the consensus. For them, the pummeling of tech shares--which even after last week's modest net gains are down roughly 11 percent for the year, and more than 60 percent since they peaked in March 2000--had gone too far, creating attractive investment opportunities. Walter C. Price Jr., co-manager of the Wells Fargo Specialized Technology fund, predicts a spectacular run-up. "My target for the Nasdaq for two years is 3,500," Price said. The Nasdaq closed on Friday at 1,932.19.

Larry J. Puglia, portfolio manager of the T. Rowe Price Global Technology fund, says he has underweighted tech investments for the last five years but has been a buyer of late. "Looking at valuation relative to growth in earnings and free cash flow, tech stands out for the first time as one of the more attractive sectors," he said.

And Brian Belski, market strategist at Piper Jaffray, argues that investors who have forgotten about tech stocks should start paying attention again. "We think tech stocks will outperform the market," he said.

Read the detailed reasons in the article.

While there doesn't seem to be anything particularly wrong about the reasoning given in the article, I remain wary about the technology sector. My views of Singapore's electronics sector that I stated in "Electronics stocks still underperforming" I think applies to the overall technology sector as well:

[E]ven where the outlook for electronics companies may be improving, the outlook for their stock prices may be a different matter. Investors apparently never quite gave up on the sector, looking forward to the eventual turnaround. When it comes, stock prices may not react correspondingly.

And for a contrarian's view on technology, read Bill Fleckenstein's commentary "Technology: Use the gadgets, avoid the stocks".

MarketWatch looks at bulls, bears and a bottom in gold and bonds

After the market gyrations of the past few weeks, what does MarketWatch have to say?

Peter Brimelow in "Veteran bulls and bears nurse wounds":

Don Hays of Hays Advisory...wrote on Wednesday...: "...a significant bottom is being forged, probably the low of the year for the S&P 500..."

Dan Sullivan of The Chartist...said on Wednesday...: "...still more downside appears to be in the cards before the selling pressure lifts... Nevertheless... thus far, the correction appears to be a normal pullback within the confines of an ongoing bull market."

A veteran bear, Michael Burke of Investors Intelligence, recently complained that "we have not seen a big number of selling climaxes. That is something we look for at bottoms."...

Another veteran bear, Richard Russell of Dow Theory Letters last night repeated his long-held view that the final phase of the bull market is still to come and that gold shares and bullion are in an uptrend...

Walter Rouleau in Growth Fund Guide and Joe Granville in the Granville Market Letter are talking...about a retreat to somewhere around Dow 7000.

Charles Allmon of Growth Stock Outlook has been 80 percent in cash forever... [I]n his latest issue [he] offers this cheerful thought: "Deflation, anyone? If the import bubble implodes simultaneously with the real estate bubble, guess how those banks will fare that were financing risky home loans right up to the final day of reckoning."

Mark Hulbert in "Bottom for both gold and bonds?":

An extraordinary thing happened earlier this month among the gold and bond market timing newsletters monitored by the Hulbert Financial Digest. The average adviser in both camps became extremely bearish. On the contrarian grounds that the markets rarely accommodate the majority, this should be bullish for both gold and bonds...

The most straightforward interpretation, it seems to me, is that a crisis is imminent in which the viability of the financial markets is called into question -- one in which there is a flight to quality (such as government bonds) as well to hard assets (such as gold).

And guess where that leaves equities?

Leading index and the stock market

Yesterday, the Conference Board announced that the US leading index decreased 0.4 percent to 115.1 in March. It had increased 0.1 percent in February and decreased 0.3 percent in January. During the six-month span through March, the leading index decreased 0.3 percent.

The leading index declined in March following a small increase in February. The leading index has been essentially flat since October 2004 following a small decline over the previous five months. In addition, there have been more weaknesses than strengths among the components of the leading index in recent months.

... The recent flatness of the leading index (compared to its long-term trend of 1.5 percent growth) is consistent with the economy continuing to expand in the near term, but more slowly than its long-term average rate.

Barry Ritholtz gives his take at The Big Picture.

This is not an economy hitting a soft patch; rather, it is a choppy expansion with fading momentum. Higher energy prices, commodity costs, interest rates and taxes are not helping; Consumer confidence has faded and Business spending and hiring is (mostly) MIA.

Lastly, earnings have been very good -- but that's very much expected. Yesterday's CNBC poll had 3/4s of viewers expecting earnings to help the market. That suggests that good earnings are already factored into the market. Note that the year-over-year earnings gains for the S&P500 -- earnings momentum -- has been steadily fading since Q3 2003 (almost 30%) to Q1 2005 (12%). That ain't good either.

Talking about leading indicators, Calculated Risk puts the common wisdom that the stock market predicts recessions into perspective.

We might see a recession in 2006, but the markets are not a good predicting tool... The best that can be said for the market is that it is a solid coincident indicator of a recession... [In] the 1990's recession...[the] SP500 rallied into the recession and only sold-off after the recession started.

I would add, though, that Calculated Risk's own chart shows that the market flattens out a few months before the recession. Some would take that as an indication too.

US March CPI up 0.6 percent, China's Q1 GDP up 9.5 percent

So maybe inflation is rising in the US after all. Yesterday's March CPI report by the Labor Department shows that consumer prices rose 0.6 percent in March from February. Higher energy cost is the main culprit, but even the core rate that excludes food and energy was 0.4 percent, up from 0.3 percent in February.

David Altig at the macroblog points out that the median CPI rose only 0.2 percent from the previous month. Citing Mike Bryan at the Cleveland Fed, he said that "the dispersion in individual prices (excepting food and energy) was unusually large in the March data... With the rock-steady median CPI statistic, I'm going to suggest that maybe it's premature to be jumping to conclusions about whether or not the trend is getting away from us".

Altig also looked at the latest Beige Book report on regional conditions and finds indications of rising prices. However, he also noted that "the tone of the report regarding general economic conditions was almost cheery in light of the string of less-than-stellar reports we've been getting lately".

If things look hot in the US, they look positively hot in China. The National Bureau of Statistics announced yesterday that China's economy grew 9.5 percent in the first quarter, the same rate as for all of 2004.

Fixed asset investment increased 22.8 percent in the first quarter, just slightly slower than the 25.8 percent growth rate for 2004. "The total size of investment is too large," NBS spokesman Zheng Jingpin said

Expect to see more tightening in both the US and China.

I look at investor sentiment in the context of some of these recent economic indicators in my latest commentary "Economies stay hot but investor sentiment turning down".

References:

Weitz, Dodge, FPA -- Scary How Wary Top Funds Are

Fund managers turn pessimistic

US March PPI and housing starts

Producer prices in the US rose 0.7 percent in March, the Labor Department reported yesterday. However, core prices, which exclude food and energy, increased only 0.1 in March.

At the same time, the Commerce Department reported that housing starts fell 17.6 percent in March to a seasonally adjusted 1.837 million annualized units.

Some reactions on economics blogs:

Bill Cara: Economic data is a downer
PPI data was higher than expected, but on trend, and housing starts were at a record low since 1991, down 17.6 pct. What this means to investors is that manufacturers are passing costs through to buyers, which will result in higher CPI numbers, and also a continuation of rising interest rates.

The lower housing starts reflects an unwillingness by homebuilders in America to build on spec, as they fear that buyers are running out of financial resources, and may in fact be afraid that rising interest rates will soon be reflected in higher mortgage costs, which would finally pop the bubble in some housing markets.

What remains to be seen is the period of time home sellers need to sell. If and as that required sales period stretches out, home prices will start to decline, as some homeowners panic that future mortgage costs will exceed their ability to pay.

That, in certain regional markets, will be the proof that the housing bubble has popped. All of which (i.e., liquidity concerns) presages lower equity prices to come. I’m a little surprised that pre-open equity futures (Dow +32; Nasdaq +10) remain strong.

Macroblog: The PPI Report: Headline Bad, Core Good
A funny thing happened on the way to a pretty bad March PPI report -- the experts shrugged. Why?... [E]veryone was expecting the big push from energy prices. That the effects on prices did not extend much beyond that sector has made some people positively giddy... I think there is a reason that the market has chosen to look through the headline figure to the ex energy statistic: Fed credibility...

Macroblog: If You Were Looking For The Housing Market To Cool -- Congratulations!
... But don't despair -- or do despair, depending on your perspective: "... housing starts remained at a high level, and within the 1.6m-2.3m range of the past two years..." Nonetheless, the folks at Briefing.com say yeah, but: "The starts decline may have been exaggerated by weather condition, but the housing market is clearly leveling off (at best)."

Calculated Risk: Housing Starts
... Usually sales are a better indicator than starts, so look for the New Home Sales announcement next week... I believe speculation is the key to any bubble... [S]peculation removes the asset from the supply...the price increases... [W]hen the speculator sells, the supply increases...future price will fall... [I]f the price does not rise, the speculator must either hold onto the asset or sell for a loss. If the speculator chooses to sell, this will add to the supply and put additional downward pressure on the price.

The PPI reading doesn't surprise me too much. Low core inflation and high energy prices are consistent with globalisation and the emergence of low-cost producers in China and India. In other words, there is upward price pressures in some areas but downward price pressures in others.

As for housing starts, it does look like the housing market is about to cool, but it is still at a high level and it cannot be assumed yet that prices will necessarily fall and not merely level off.

Singapore exports and stock prices fall, casinos approved

Singapore’s non-oil domestic exports contracted by 6.7 per cent in March 2005 on a month-on-month seasonally-adjusted basis, reversing the 7.9 per cent increase in February 2005. Non-oil retained imports of intermediate goods (NORI), on the other hand, posted a 3.9 per cent increase on a month-on-month seasonally-adjusted basis in March 2005, reversing the 3.9 per cent contraction in February 2005.

This news, however, was largely overshadowed yesterday by the announcement by the Singapore government that it will build two integrated resorts incorporating casinos. The government expects the resorts to be ready around 2009 and hopes they will attract investments in the order of S$5 billion and help create some 35,000 jobs.

The other big news yesterday was the huge drubbing that stocks in Singapore took -- the Straits Times Index falling 2 percent -- along with the rest of Asia. The losses are being partially reversed this morning as I write, but the size of the falls -- not just in Singapore but around the world over the past few sessions -- shows just how nervous investors really are.

Equity investors disturbed by last week's fall

Inspir3d reads a 1999 BusinessWeek article and decides that he is not Warren Buffett, so there may be no reason to sit on cash just because the billionaire investor does.

Buffett not Investing, but we're not Buffett
There has been lots of talk regarding Buffett sitting on a huge pile of cash and not being able to find bargains. But the following interview should dispel any thoughts that this should apply to the rest of us value investors who handle a much smaller amount of capital.

Keep in mind this interview was conducted in '99, when the bull market was nearly at its peak, and prices were soaring.

Warren Buffett On the size of his stock portfolio:
"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."

"The universe I can't play in [i.e., small companies] has become more attractive than the universe I can play in [that of large companies]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."

Some context is probably helpful. Since the publication of that interview on 25 June 1999, the US stock market as represented by the large-cap S&P 500 is down 13 percent. Small-cap US stocks as represented by the S&P 600, on the other hand, is up 69 percent.

If larger companies are overvalued today, unlike in 1999, small companies may not be good places to hide. And after last week's market action, Wall Street may be starting to look for places to hide.

Wall Street Eagerly Awaiting New Earnings
First-quarter earnings season can't arrive soon enough for Wall Street. Besieged by disturbing data on the economy and inflation -- and hurt by disappointing earnings in the technology sector -- the markets saw their worst week since August, with Friday marking the Dow Jones industrial average's biggest drop since May 19, 2003.

As a result, investors are desperate for good news, and plenty of it. It will take a nearly unbroken string of positive earnings reports and forecasts to get the market out of last week's funk.

Even then, however, any move higher could be relatively short lived. The economy is still expected to slow considerably going into the summer, and it will be more difficult for corporate America to keep up earnings growth if people end up spending less due to oil, inflation or a combination of both...

The macroblog looked at some of the economic indicators released at the end of last week and asks whether they are more signs of a cooling economy. No wonder that even Roger Nusbaum, who generally does not believe in getting spooked by short-term market action, decided to turn defensive at the end of last week.

When US dollar psychology changes

The Treasury International Capital data for February looks good for the US dollar, with the US getting US$84.5 billion in financing from overseas, enough for it to cover its current account deficit.

But with inflation fears and Federal Reserve rate hikes in the air, I thought this passage from James Picerno at the Capital Spectator is also pertinent to the outlook for the US dollar:

Perhaps there's a logic to a stronger dollar even inflation were to accelerate. The fear of higher inflation and a Fed that reacts by tightening the monetary strings makes the greenback more attractive, say some analysts. But this notion assumes the Fed's committed to fighting inflation at the expense of letting Joe's shopping sprees of late fade into history. But the assumption could be over baked, which is to say that the old dual mandate of protecting the currency and maximizing national employment at the same time may come back to haunt the central bank once again.

Peter Schiff of Euro Pacific Capital is about as pessimistic as one can get on the speculation as to how the Fed will decide which is the bigger priority. The central bank, he opines, "can not bring down the inflation tree, without simultaneously bringing down the entire U.S. economy, which at present is comfortably resting in its extended branches." Once forex traders see the light, he reckons, "bad news on inflation will once again be reacted to as being bad news for the dollar."

Brad DeLong looked at how a change in trading psychology might unfold.

The long run in which the dollar falls and U.S. long-term interest rates rise may come like a thief in the night as a very sudden shock. If it comes as a sudden shock rather than as a long, slow, gradual realization, it will come on that day when the gestalt of the players on Wall Street and elsewhere changes, and when they collectively regard holding dollars as the more risky rather than the less risky strategy in the short run, when they collectivley regard being long long-term U.S. Treasuries as the more risky rather than the less risky strategy in the short run. On that day the long run future will be, as football coach George Allen used to say, now.

Somehow, my commentaries three years ago -- "New paradigm for the US dollar?" and "Analysts risk overestimating the value of the US dollar" -- still seem relevant today.

Analysts' views on equities

My latest commentary, "Analysts slightly bearish towards equities", looks at the views of several analysts featured in The Edge Singapore and Peter Brimelow's latest commentary at MarketWatch.

Analysts slightly bearish towards equities
A wide diversity of views on the outlook for equities is normal. However, there seems to have been some convergence of views lately, mostly towards the bearish side. Nothing extreme enough, however, to provide a reliable indicator, contrary or otherwise.

Read more...

Weak US retail sales in March

Retail sales in the US in March were weaker than expected.

March Retail Sales Weaker Than Expected
Weak March U.S. retail sales dimmed confidence on Wednesday in the strength of the economy, prompting investors to bet the Federal Reserve may not have to raise interest rates as sharply as some feared. The Commerce Department said retail sales rose 0.3 percent last month, less than half of the 0.7 percent predicted by Wall Street, after a sharp downturn in department store and clothing sales...

Excluding autos, which can swing sharply from month to month, retail sales advanced just 0.1 percent -- the weakest reading since April 2004 -- compared with forecasts for a 0.5 percent gain... Stripping out both gasoline and motor vehicle sales, retail sales actually shrank 0.1 percent, suggesting households indeed felt the pinch of soaring gasoline prices as crude oil costs advanced toward record highs.

Are we finally approaching the end of the US consumer boom?

US trade deficit in February hits record

The US trade deficit for February hit a record US$61 billion. As usual, Brad Setser has some interesting insights.

I would not be surprised if the March deficit exceeded $65 billion.

Seasonally adjusted Petroleum imports were only $18 billion in February... The raw number in February was around $15 billion. The raw number could easily be $20 billion for March.

And the Chinese new year fell in February this year, keeping this month's bilateral deficit with China down. Expect the bilateral deficit with China to widen by $2 billion or so in March...

Simple extrapolation of current y/y growth rates for exports and non-oil imports -- combined with oil in the vicinity of $55 a barrel for the remainder of the year -- produces an absolutely enormous estimated trade deficit. $807 billion...

That kind of trade deficit would easily push the current account deficit over $900 billion. I still think that is a bit too high, because I suspect non-oil import growth will slow...

The bilateral deficit with China is on track to absolutely explode... Incidentally, US imports from the overall Asian Pacific region rose by 19.6% (y/y)... Non-Chinese imports from the Pacific rim rose by around 9% y/y. Imports from China are not displacing imports from the rest of Asia.

But lest any one think the US trade deficit is made in China, or just the product of an undervalued renminbi, consider this: the US trade deficit with the Eurozone also continues to grow... And no one can accuse sclerotic old Europe of having an unfair cost advantage because of an undervalued currency ...

This is just more evidence that US demand is being met to a very large extent by foreign producers. No wonder American workers don't seem to be benefiting from US economic growth, as this New York Times report quoted by Brad DeLong says:

Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade...

[M]any...economists argue that the increasing exposure of the American economy to globalization, along with other forces - including soaring health insurance costs that leave less money for raises - is putting pressure on wages that could leave millions of workers worse off.

... Richard B. Freeman, a Harvard economist, predicted that new competition in the form of millions of skilled Chinese, Indian and other Asian workers entering the global labor market will increasingly pull down American wages...

For some of my previous commentaries relating trade -- particularly with China -- to jobs and wages in the US, see "The impact of China on the world economy" and "US demand and Chinese production".

Oil consumption and gas prices above 1973 peak

Calculated Risk takes another look at oil, but posts it at Angry Bear.

Comparing the current oil and gasoline prices to those in the 1970s, he says:

Both the '73 and '79 oil price shocks preceded recessions in the US. After the '79 oil crisis, unemployment peaked at 10.8% in 1982. After the '73 price shock, unemployment only reached 9%. It is not comforting that the real price for gasoline is above the peak of the '73 crisis.

Then he looks at oil consumption:

After peaking in the late '70s, US oil consumption declined for several years... The industrial sector has never returned to the 1979 consumption levels (due to a combination of efficiencies and substitutes) and "other uses" has also declined significantly, primarily because electricity generation has moved away from oil. This leaves motor fuel and "other transportation" as the major growth sectors for oil consumption.

This indicates that any reduction in oil consumption will have to come mainly from transportation...

On oil as a percentage of US GDP:

For $40 oil, consumption will be almost 2.5% of GDP. For $60 oil, consumption will be 3.7% of GDP - substantially higher than during the 1973 oil crisis... At $60 per barrel, imported oil alone will be 2.1% of GDP in 2005.

His conclusion:

In summary, both oil consumption as a % of GDP and real gas prices, will probably be higher in 2005 than after the 1973 gas crisis, but lower than after the 1979 oil shock. Economist's predictions on what price of crude would push the economy into recession have been moving higher... I think a sustained contract price of over $50 (or WTI price close to $60) would probably trigger a consumer recession in the US.

Yesterday, oil prices rose, ending several days of falls. US light crude rose 39 US cents to US$53.71 a barrel; it had hit a record $58.28 last week. London Brent crude rose 20 US cents to US$53.21. US gasoline rose 1.32 US cents to US$1.5498 a gallon.

Singapore economy shrank in first quarter

Singapore's Ministry of Trade and Industry reported today that the economy shrank 5.8 percent in the first quarter on a quarter-on-quarter seasonally-adjusted annualised basis. Compared to the first quarter of 2004, the economy grew 2.4 percent.

This is a sharp reversal of the annualised 7.9 percent in the fourth quarter of 2004, and was mainly due to the slowdown in manufacturing.

The outlook for the coming months is not good. As I mentioned earlier, Singapore's purchasing managers' index slipped in February. And last Friday, the OECD said that the outlook for economic growth in the OECD area has worsened, with falls in its leading indicators for the US, the euro zone and Japan, although economists polled for the April issue of Blue Chip Economic Indicators put US economic growth at 3.7 percent this year, unchanged from last month.

However, Morgan Stanley economists have recently suggested that the slowdowns in Europeand the US may be temporary.

Blogs on oil

Oil is back in the limelight in the economics blogosphere.

Calculated Risk looks at the Department of Energy's Short-Term Energy Outlook, which projects monthly average gas prices to peak at about US$2.35 per gallon in May and WTI prices to remain above US$50 per barrel for the rest of 2005 and 2006. He also looks at US oil imports as a percentage of GDP and notes that for 2004, oil imports were 1.13 percent of GDP, the highest level since 1982.

Barry Ritholtz reviews the forecasts of economists reported in the Wall Street Journal:

None feel that $50 oil will trigger a recession. Thirty-one percent said they feel oil would have to be sustained at $80-89 a barrel to snuff out growth, while 48% believe crude would have to top $90.

Ritholtz himself thinks that "$80 oil grinds the global economy to a dead halt. $50 oil merely slows it down, although it exerts enough drag to eventually cause major problems". He also thinks that "a contraction may be more likely to take place in 2006 than in 2005".

The macroblog also looks at the same WSJ report, as well as a commentary by Caroline Baum at Bloomberg, and -- while concerned about the impact of higher energy prices on the economy -- essentially agrees with her conclusion regarding the appropriate Federal Reserve response to the oil price increase:

If OPEC stopped pumping oil tomorrow, and prices soared to $105 a barrel, does that mean the Fed should lower the funds rate to 1 percent, increase the money supply and put its imprimatur on what would surely be the next stagflation?

Hardly. That would be the outcome if the Fed eased in the face of supply constraints.

How about looser monetary policy in the face of demand- driven higher oil prices? That wouldn't make much sense either, since cutting the funds rate would stimulate already strong demand.

Brad Setser looks at oil from an international finance perspective. He highlights the fact that the increase in oil prices represents "an absolutely enormous transfer of revenue toward the world's oil exporting states". He also says that the increase in oil prices "makes China's growing current account surplus all the more remarkable... If oil fell back somewhat, barring a surge in non-oil imports, China's overall current account surplus would surge".

Setser's readers also leave some interesting comments on his post regarding the potential supply crunch facing the world. One of those comments led me to The Oil Drum, a blog dedicated to -- what else? -- oil issues.

Property bubble and global demand

In his recent commentary, Andy Xie of Morgan Stanley says that the global economic expansion will last until property prices fall.

The main engine for demand creation is property. In China, profit optimism originates from the booming property market in terms of price and volume, which is supporting the fixed investment boom. Surging property prices support the spending power of the US consumer despite relatively weak income.

The boom or burst due to a property bubble tends to be long-lasting...

Unless the US suffers an inflation shock from either a sustained surge in oil prices or a dollar crash, it is hard to envisage a collapse in global demand. This is why I do not want to turn bearish on demand until there are sufficient signs of property prices declining.

Calculated Risk sees some signs that the property market is at risk of a decline. In a recent post, he quotes Robert Schiller, author of Irrational Exuberance, as saying:

We looked at ratios of median home price to per capita personal income. We find that in many places in the US that is only about 2, the median home is only like 2 years income or 3 years income. But in other cities it is 10 years income. So -- I think that is getting a little -- more than a little high.

In another post, he points to a report that foreclosures are up, especially in the so-called "non-bubble" states. "But I think the real problem will start when the bubble states see a slowdown and a drop in transaction volumes," he says.

Andy Xie would probably agree.

Taking the loss

In his recent post, Roger Nusbaum says that taking a loss quickly -- as suggested by Jim Cramer -- is not always a good idea.

Nusbaum says that much depends on whether the investor has a short term or a long term orientation. Here, I would add that studies show that while stocks display momentum over a period of up to about one year, they tend to reverse over longer periods.

Nusbaum also says that the need to stay diversified also means that an investor may have to remain in sectors that are not performing, as is the case currently with technology.

"I think the article justifies a short term approach for anyone who reads it but not every investor is short term," Nusbaum writes. "This will cause the average person to end up chasing heat and over trading their account. This is unlikely to result in better returns."

I can't agree more with Nusbaum.

Weak Japanese economic indicators but economists ambivalent about global economy

Japan's economy remains weak.

Japanese household spending fell 3.7 percent in February from a year earlier, the fifth decline in six months, the Ministry of Internal Affairs and Communications reported yesterday. Compared with the previous month, overall household spending fell a seasonally-adjusted 1.8 percent, also the fifth decline in six months.

Yesterday, the Conference Board reported that its leading index for Japan was unchanged in February. Today, the Cabinet Office reported that its index of leading economic indicators fell to 20 percent in February from 54.5 percent in January, its lowest reading since November 2001.

Other recent indicators have been mixed, as mentioned in recent posts. As a result, in general, economists remain ambivalent over the outlook for the global economy. For example, this week's issue of The Edge Singapore carried two opposing views on the outlook for the global economy.

Credit Suisse First Boston economist Sailesh Jha thinks that global gross domestic product growth will accelerate to 4.3-4.5 percent year-on-year in the second half of 2005 from 4.2 percent in the first half on the back of strong domestic demand conditions in China and the US. This should help the Singapore economy to re-accelerate in the second half of the year as well.

Manu Bhaskaran of Centennial Group, however, thinks that the first quarter may "turn out to be uninspiring" for Asian economies, and "further deceleration could occur in coming months". Citing a wide range of factors — including recent poor economic indicators, bad weather and avian flu — he thinks that "risks to growth are rising and only China and South Korea are likely to be able to avoid the worst of the regional slowdown".

There are contradictory indications from Europe too. Even as the European Commission cuts its eurozone growth forecast for this year to just 1.6 percent in the wake of rising oil prices, a strong euro and weak European economic data, a Morgan Stanley survey of its European equity and credit analysts found that an anticipated slowdown in the second quarter is likely to be temporary, with capital spending plans by European companies seen increasing (although, as the report points out, the spending may not necessarily be done in Europe itself).

As the market saying goes: Bull markets climb a wall of worry. If that is true, these uncertainties may not mean very much to investors.

But I am not so sure the current uncertainty is so benign.

Singapore manufacturing slows further in March

There is more confirmation of the slowdown trend in Asia and Singapore in particular.

Singapore's purchasing managers' index fell for a second consecutive month in March, to 50.8 from 51.5 in February.

"The dip of the overall PMI was attributed to lower new orders and new export orders, as well as lower levels of production output," the Singapore Institute of Purchasing & Materials Management said on its survey findings.

The electronics sector sub-index fell only slightly to 53.5 points from 53.9 points in February, lending weight to forecasts that the sector's slowdown may be coming to an end (see also "Electronics stocks still underperforming").

Valuations in Asian equities attractive, but economic outlook also matter

Fundsupermart recently published an article that concluded as follows:

Within the regional markets that we cover, Asian markets currently have the most attractive valuations and strongest earnings growth. Fundamentals in Asian markets still seem generally sound despite the fears of higher inflation rates and higher oil prices. In addition, export growth and domestic spending will continue to be the two main drivers of overall Asian economic growth. In fact, ADB estimates that the economic growth of Asia excluding Japan will reach 6.2% in 2005. That is healthy growth. We are optimistic that Asia markets will continue to rally in 2005... For investors interested in single country investments, Korea, Thailand and China are currently some of the most attractively valued markets.

The low valuations of Asian stock markets are no secret. It is one of the reasons many fund managers like the region (and Europe for that matter). They would be aware of the fact that at current levels of P/E ratios, stock markets often do well, a fact pointed out by the Fundsupermart article.

The Fundsupermart article, however, also shows that P/E ratios were at around current levels too back in 1997. P/E ratios subsequently went up, but markets went down. The problem? Earnings plunged in the aftermath of the Asian Financial Crisis.

Low valuations are no guarantee of a rise to follow. Economic outlook is important too.

Currently, that outlook does not look too good. Growth in US employment in March was low, and consumer sentiment is declining. It is a similar story in Europe, and Asia -- which depends on the West for markets -- is also affected (see recent posts).

The purchasing managers' index for March gave mixed indications as far as equity investors are concerned. US PMI was relatively resilient at 55.2, slightly down from 55.3 in February. The prices sub-index, however, surged to 73.0 from 65.5 in February, indicating a worrying rise in inflation.

The global PMI tells a similar story. The March figure dipped to 52.7 from 52.8 in February. The acceleration in prices was marginal, though, with the sub-index for input prices rising to 64.8 from 63.5 in February.

The global new orders PMI held steady at 53.6, up slightly from 53.5 in February. It reflected positive trends in the respective sub-indices for the US and Japan but offset by a weaker one in Europe, once again underlining the disparity in economic outlook for different regions.

US spending and factory orders up but weakness elsewhere as usual

The US economy continued to hum along in February, but not for the first time, the news from the rest of the world is not as good.

Yesterday, the Commerce Department reported that personal consumption expenditures rose 0.5 percent in February, while personal income increased 0.3 percent.

Separately, the US Census Bureau reported that new orders for manufactured goods rose 0.2 percent in February. New orders for manufactured durable goods rose a revised 0.5 percent, higher than the previously-published 0.3 percent increase. New orders for manufactured nondurable goods decreased 0.2 percent, though.

More ominously, the housing market continues to unwind in Britain. House prices fell a seasonally-adjusted 0.6 percent last month, according to a report by building society Nationwide. Separately, data from the Bank of England showed that equity withdrawal fell to £6.9 billion in the fourth quarter of 2004, down from £11.29 billion in the third quarter and less than half the £16.8 billion in the final three months of 2003.

These reports followed the release of figures on Wednesday showing the first fall in average incomes for more than a decade and weak retail conditions.

In Japan, business confidence at large manufacturers worsened sharply in the three months to March, the Bank of Japan said in its quarterly Tankan survey. The index for large manufacturers stood at plus 14, down from plus 22 three months ago. The index for large non-manufacturers was at plus 11, unchanged from the previous survey three months ago.

So what is the outlook for the world economy? Well, this question has been much debated recently in the economics blogosphere, mainly framed around the likelihood of a hard or soft landing and the actions of Asian central banks in directing capital flows. The discussion has been driven to a large extent by the macroblog.

Like Kash at Angry Bear, though, I find the answer elusive.