Good, Bad, Ugly and Uncertain:

MIXED REPORTS KEEP THE ECONOMIC PICTURE BLURRED 

Private sector economists, trade associations, and government agencies are generating mounds of economic data, some of it positive, some of it negative, and much of it, in the aggregate, contradictory and confusing.  With investors responding viscerally and instantly to every report, the stock market has been whipsawed for weeks.  It is easy to understand why, though the Thomson Reuters/University of Michigan Consumer Confidence Index reached its highest level in two years in June, the Conference Board’s confidence index, released just two weeks later, suggested a collective need for Zoloft.   

“Increasing uncertainty and apprehension about the future state of the economy and labor market” is how Lyn Franco, director of the Conference Board Consumer Research Center, explained the unexpected decline in that index from 62.7 in May to 52.9 in June.

Unambiguous economic indicators are hard to find, as recent economic reports reflect a recovery that has gained some traction but not very much momentum.    

·         The International Monetary Fund (IMF) recently revised its growth forecast for this year upward to 4.6 percent from 4.2 percent in April.  But at the same time, the organization warned that the risks threatening the global economic recovery have “risen sharply” because of renewed turbulence in the financial markets. 

·         The Commerce Department reported that the economy grew at a 2.7 percent annual rate in the first quarter, down from the preliminary estimate of 3 percent.

·         New orders for durable goods declined by 1.1 percent in May after increasing by 3 percent in April.  Inventories, meanwhile, increased by 0.8 percent – the fifth consecutive monthly increase – suggesting to some economists that economic growth is being driven more by re-stocking of goods than by consumer and business demand for them.

·         The Institute of Supply Management’s (ISM’s) manufacturing gauge fell from 59.7 in May to 56.2 in June, still well above the 50 reading indicating continued growth.  The ISM’s production index (a measure of new orders) also declined, from 66.6 to 61.4 and the association’s employment gauge dropped to 57.8 from 59.8 in May. 

Encouraged but Worried

Encouraged by continuing signs of recovery, but worried about its fragility, the Federal Open Market Committee left the Federal Reserve’s interest rate target unchanged at its June meeting, explaining in a post-meeting statement:  “Information received since…April suggests that the economic recovery is proceeding and that the labor market in improving gradually.  Household spending is increasing,” the committee added, “but [it] remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.” 

The primary concerns for the Fed and most economists are job creation and the housing market, which is dependent on it.  There hasn’t been much good news of late in either sector.

In the housing market, despite near-record low interest rates, sales of new and existing homes plunged in May as the homebuyer tax credit expired, ending what has been a major prop for home sales.  Existing sales fell to an annual rate of 5.66 million units ¾ a 2.2 percent decline that was more severe than analysts had expected. 

The National Association of Realtors’ pending sales index – an indicator of future sales - plunged by nearly 30 percent in May and new home sales followed the same downward path, falling to an annual rate of 300,000 units – 32.7 percent below the April pace and a new low for the industry.  The May new home sales rate also fell 100,000 units short of the consensus forecast for the month.

“We would be lying if we said the size of the drop was not shocking,” Dan Greeenhaus, chief economic strategist for Miller Tabak, wrote in a research note.   

Although the foreclosure rate has shown some recent signs of slowing, newly initiated foreclosures increased by 18.6 percent in the first quarter, increasing inventories of unsold homes and continuing the downward pressure on home prices.  (Banks had 1.13 million foreclosed homes in their real estate owned inventories in May, 21.2 percent more than they held a year ago.) 

The Case-Shiller Index of home prices managed to eke out a 3.8 percent increase in April compared with March, but analysts attributed that gain almost entirely to the tax credit, suggesting, they said, that prices are likely to remain flat, at best, for the remainder of the year, and could fall further.  Despite the April increase, prices remain 30 percent lower than at their peak. 

Employment Cure Elusive

The best medicine for what ails the housing market, most agree, is solid job growth, but that cure remains elusive.  Hopes that the labor market was digging its way out of the recessionary ditch, buoyed by positive reports earlier this year, were dashed in June, when the end of the Census slashed 225,000 workers from US payrolls.  The private sector added only 83,000 employees for the month - well below the 110,000 analysts had expected  - for a net loss of 125,000 jobs.  The unemployment rate fell to 9.5 percent, the lowest level this year, but that was because 625,000 workers who had been looking for jobs abandoned the search, eliminating themselves from the unemployment rate, but not from the ranks of the unemployed.

Economists say the labor market needs to generate about 200,000 jobs per month to make a meaningful dent in the still painfully high unemployment rate.  By that measure, Heidi Shierholz, a labor economist at the Economic Policy Institute, told CNNMoney, “Things are very, very weak and they aren’t expected to strength anytime soon.  It’s going to be a long slog,” she predicted.

Reading between the lines of the labor market reports, however, it is possible to fashion a somewhat less pessimistic forecast.  Among other factors worth noting:   A recent significant decline in the number of announced and planned layoffs and indications that more employers are planning to add workers between now and the end of the year.  On that point, 39 percent of the chief executive officers responding to the Business Round Table’s second quarter survey said they intend to expand their payrolls, up from 10 percent in the first quarter survey, and the highest positive response to this question since the second quarter of 2007. 

Also encouraging in the Round Table survey = the number of employers planning to scale back their hiring plans fell to 17 percent from 21 percent in the first quarter.  A separate survey found that for the first time in the past 15 months, more employees left their jobs voluntarily than were laid off.  Some left because they had found new jobs, others because they were confident they would be able to do so. Either way, some analysts say, the survey results indicate that the labor market is improving more than recent employment reports suggest.  “There is a century’s worth of evidence that bears out this view that quits rise and layoffs fall as the job market improves,” Steven Davis, an economist at the University of Chicago, told the Associated Press.