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Jon Markman's Speculations
June 23, 2010, 12:01 a.m. EDT · Recommend (7) · Post:
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Economic predictor set to turn negative
First Take "?
The Fed isn't panicking, but still getting worried
By Jon Markman
SEATTLE (MarketWatch) -- The killer virus that is stalking the economies of the United States and Western Europe got its start in the aisles of Best Buy Co. It will die there too eventually, but not yet -- not even close.
Shares of the electronics retailing powerhouse topped well before the broad markets in 2006, bottomed well before the rest of the market in November 2008, and topped again back in April this year. Then a week ago Best Buy /quotes/comstock/13*!bby/quotes/nls/bby (BBY 36.73, +0.12, +0.33%) was electrocuted -- aborting a nice recovery from May lows -- after reporting decent second-quarter sales of productivity-focused items like notebook computers but terrible sales of discretionary items like music, movies and TVs.
Ever since then, fellow retailers of discretionary goods -- things that people don't really need and are paid for with money people really don't have -- have also begun to turn pale. Why? All because the public appears to have stealthily gone on strike as job growth and wage expansion have quietly faltered.
Retail stocks drop after existing-home sales saw a surprise drop in May. Among the decliners, Big Lots is downgraded at J.P. Morgan while Walgreen's profit falls short of expectations. MarketWatch's Andria Cheng reports in New York.
I know it seems impossible that the economy is slipping a gear already, only a year into its recovery from the severe 2008 recession. But raw data, market action and cycle work all appear to confirm it.
Take a look around the market and you will see the shares of former retail juggernauts like Limited Brands Inc. /quotes/comstock/13*!ltd/quotes/nls/ltd (LTD 23.66, +0.47, +2.03%) , AnnTaylor Stores Corp. /quotes/comstock/13*!ann/quotes/nls/ann (ANN 18.56, +0.15, +0.81%) , Guess Inc. /quotes/comstock/13*!ges/quotes/nls/ges (GES 33.23, +0.56, +1.71%) which were up 200% to 350% from March 2009 lows, are all now quietly enduring a slow-motion crash -- down 20% to 30% from April highs. So much so that, with barely a word of warning, it's a bear market for retail even if a lot of industrials like Caterpillar Inc. /quotes/comstock/13*!cat/quotes/nls/cat (CAT 64.69, +0.58, +0.90%) , Dupont /quotes/comstock/13*!dd/quotes/nls/dd (DD 37.45, 0.00, 0.00%) and ConocoPhilips /quotes/comstock/13*!cop/quotes/nls/cop (COP 53.84, -0.62, -1.14%) are still relatively buoyant.
Very few analysts seem to be onto this phenomenon, as most are distracted by the Chinese currency fake-out, the Gulf of Mexico oil spill and World Cup officiating. But by the time it's too late, in August, it is likely to become clear that officials should have been more worried about shoring up the finances of the middle class than complaining about the BP chief's vacation preferences.
ISI Group, one of the most reliable economic research teams in the country, is calling the current circumstances a "soft patch," which is a nicer term than other words we could use, like slowdown, pothole or abyss. Its analysts have been arguing that the soft patch started in early April just as the equity markets were peaking, and won't be over until its retailer surveys perk back up.
On Monday, ISI further reported that its homebuilder surveys and count of housing starts, down 10% in May and June, "suggest the soft patch is intensifying." Put together with the sharp drop in the ECRI weekly leading index, which I described last week, and ISI contends the soft patch is also "broadening." Read "Economic predictor set to turn negative."
It points to a decline in the Philadelphia Fed's manufacturing index; increasing odds that unemployment claims are about to start rising; a slowdown in semiconductor equipment orders to +1% in May from +13.3% on average in the prior five months; a sharp slowdown in trucking business; a sharp decline in the Baltic Dry Freight index; a sharp decline in the prices of copper, lead, and zinc; and a plunge in the M1 measure of U.S. money supply.
To be sure, there are countervailing positives.
General Motors last week said it would shun its usual July factory shutdowns and make an additional 56,000 vehicles, giving thousands of temporary workers a job; industrial production in May rose 1.2% month over month and 8.9% annualized, the strongest increase since 1997; machine tool orders in April are up 152% annualized in the past six months; credit card delinquencies are down significantly in the past seven months; apartment rents are up; mortgage rates are down to 4.8%; and inflation is down, increasing consumer buying power.
Moreover, it's notoriously difficult to call for renewed recession, as virtually all recoveries look weak even though few actually fail. ISI points out that in 1991 GDP slowed to 1.7% in the second and third quarters of recovery, and the media was rife with articles forecasting a second recession to follow the one that occurred in 1990, just ahead of the Persian Gulf War. And in 2002, following the 2000-2001 recession, growth in the fourth and fifth quarters of recovery slowed to 0.1% and 1.6%. Yet, in both cases, growth ultimately roared back to +4.3% in 1993 and +4.1% in 2003.
Well, it's nice to be hopeful. Yet if you look overseas the picture darkens enough to wipe that smile off your face. ISI reports that euro zone unemployment in April rose to 10.1%, versus the 2008 low of 7.1%; euro zone auto sales fell to 9.8 million from 11.6 million seven months ago; Caterpillar sales are coming in well below expectations; and tax hikes and government spending cuts are coming. Compress it all together, and ISI forecasts a negative 1% setback in GDP for the euro zone this year, and the same in 2011.
The Federal Reserve isn't panicking about the recovery, but it's not very happy about the pace of growth.
10 min ago2:45 p.m. June 23, 2010 | Comments: 10
- Labouringsword | 11:12 p.m. June 22, 2010
"A strong #resume isn't enough. #Job hunters must pull out all the stops to get noticed RT @MWRadio : http://bit.ly/cCIiXx" 1:41 p.m. EDT, June 23, 2010 from MarketWatch
"FOMC maintains low rates, downgrades assessment of economy http://on.mktw.net/aA0W3Z" 1:18 p.m. EDT, June 23, 2010 from MarketWatch
"Caution's the word as #Fed wraps up meeting. Rates to remain low http://bit.ly/bX6dTg" 1:03 p.m. EDT, June 23, 2010 from MarketWatch
"President Obama to relieve Gen. Stanley McChrystal of command: reports http://on.mktw.net/aUMRzO" 12:32 p.m. EDT, June 23, 2010 from MarketWatch
"How to save money on #life-insurance costs http://bit.ly/bhlpzH" 12:21 p.m. EDT, June 23, 2010 from MarketWatch
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