USA. Economy Surviving Turbulence?

2011-10-25 15:28:13

Domestic economic data released in recent weeks have firmly pointed at a less hostile economic environment, which have been improving in modest steps. The results of the Philadelphia Federal Reserve's manufacturing survey for October, recent weekly jobless claims data and resilient consumer spending trends are vouching for the fact. With input price inflation slowing and the negative impact of the Japanese earthquake-induced hit to the auto industry playing out almost completely, the economy can breath a lot more easier now.

Therefore, economists very little cause for undue concern right now. The U.S. economy is expected to have expanded at a fairly robust clip in the third quarter. This could keep the Federal Reserve on the sidelines and prevent them from offering more stimuli in the near term. Danske Bank believes that only if growth deteriorates in 2012, the Fed may come back into the picture to boost growth.

Across the Atlantic, the weekend European Council meeting, which was touted to arrive at a solution that has so far proved elusive, ended without any agreement on core issues such as bank recapitalization, boosting the size and powers of the EFSF and the extent of involvement of the private sector in the Greek bailout. However, the markets have been trading up in anticipation of a comprehensive package being rolled out following the second meeting on Wednesday.

Danske Bank is of the view that even if a comprehensive package is announced on Wednesday, it will not make the end of the crisis. The firm is of the view that peripheral nations should regain fiscal sustainability by structural reforms and spending cuts for the crisis to end.

Domestic manufacturing readings released last week showed a mixed trend. The New York Fed's survey showed that its headline business conditions index remained in contraction zone for the fifth straight month. The index remained almost unchanged at -8.5 in October. The new orders index rose 8 points, while the backlog orders index moved up 3 points to -4.5.

The employment indexes were mixed, with the number of employees index rising to 3.4 from -5.4, while the average workweek index slipped 2 points and remained negative. Additionally, the 6-month outlook index fell 6.3 points to 6.7, marking the weakest level since February 2009.

Meanwhile, the results of the Philadelphia Federal Reserve's manufacturing survey showed that its manufacturing index rose to 8.7 in October from -17.5 in September. Economists had expected a more modest improvement. The new orders index soared 19 points to 7.8 and the order backlogs index surged up by 13 points to 3.4, while the shipments index jumped 36.4 points to 13.6. The employment indexes were mixed, with the number of employees index falling to 1.4 from 5.8, while the average workweek index rose to 3.1 from -13.7. Additionally, the 6-month outlook index improved to 27.2 from 21.4 in September.

The Federal Reserve's industrial production report showed an in line 0.2 percent month-over-month increase in output for September. However, the previous month's 0.2 percent growth was revised downwards to show no growth. Capacity utilization edged up 0.1 points to 77.4 percent, the highest level since mid-2008. Manufacturing production was up a solid 0.4 percent, with gains spread across the segments.

Housing readings were mostly positive. The National Association of Home Builders reported that its index of builder sentiment leapt 4 points to 18 in October, an 18-month high and the first improvement since July. The current sales conditions index rose 4 points to 18 compared to a 3 point-increase by the index measuring prospective buyer traffic to 14, while the sales expectations index climbed 7 points to 24.

Housing starts jumped 15 percent to 658,000 in September from 572,000 in August, coming in notably higher than expectations for a reading of 590,000. The increase was mainly concentrated in the volatile multi-family starts, which rose by 79,000, while single-family starts were up only 7,000. Meanwhile, building permits, an indicator of future housing activity, fell by 30,000 to a six-month low of 594,000.

On the other hand, a report released by the National Association of Realtors showed that existing home sales fell to 4.91 million units in September from an upwardly revised reading of 5.06 million for August. Single-family home sales fell by 3.6 percent compared to a 1.8 percent increase in condominium/co-ops sales. Distressed home sales accounted for 30 percent of the total sales compared to 31 percent in August. The median sales price of an existing home fell 3.5 percent year-over-year. Inventories as measured by the months of supply rose to 8.5 months in September from 8.4 in August.

Inflationary pressure is picking up. The producer price index surged up 0.8 percent month-over-month in September compared to expectations of a mere 0.2 percent increase. The increase was abetted by a 4.2 percent jump in gasoline and a 2.3 percent climb in heating oil prices. Food prices also rose a solid 0.6 percent. Excluding food and energy, the core producer price index was up a bigger than expected 0.2 percent.

Additionally, the consumer price index for September rose 0.3 percent month-over-month and the core rate was up a more modest 0.1 percent, tamer than the 0.2 percent growth expected by economists. The core rate was held low by a mere 0.1 percent increase in owners' equivalent rent. Energy prices climbed 2.2 percent compared to a 0.4 percent increase in food prices.

The Conference Board said its leading economic indicators index rose for the fifth straight month, advancing 0.2 percent month-over-month in September. The treasury yield curve was the biggest positive contributor, while building permits, stock prices, capital goods orders and jobless claims served as drags. The coincident indicators index edged up 0.1 percent and the lagging indicators index rose 0.2 percent.

The Beige Book released last week showed that many of the 12 Federal Reserve districts described the pace of economic growth as "modest" or "slight", with the outlook for business conditions weaker or less certain. Consumer spending was seen rising, while business spending also increased somewhat.

Residential and commercial real estate activity remained weak and loan demand also slackened. Cost pressures were reported to have eased, while wage pressures remained subdued.

Housing and consumer readings are likely to take the center stage in the unfolding week, as traders seek more clarity on the domestic as well as global economic outlook. The Conference Board's consumer confidence index and the preliminary reading of the Reuters/University of Michigan's consumer sentiment index, both for October, the first reading of third quarter GDP, the September personal income and spending report, the weekly jobless claims report and the durable goods orders report for September are among the key market moving reports scheduled to be released during the week.

Also in the spotlight are the National Association of Realtors' pending home sales index for September and the new home sales report for September. The S&P Case-Shiller and the Federal Home Finance Agency's house price indexes for August, the Labor Department's employment cost index for the third quarter and the results of the Treasury auctions of 2-year, 5-year and 7-year notes round up the economic data of the week.

The consumer confidence readings of the week may show that confidence saw a small bounce, as equity markets fared fairly well in October. Nevertheless, there isn't likely to be a significant improvement, given the still shaky economic fundamentals and the systemic problems faced by the global economy.

Durable goods orders may have seen a retreat in September after they declined slightly in August. Boeing (BA) reported orders for 59 commercial aircrafts in September compared to 127 in August. Meanwhile, core capital good orders, excluding aircrafts and parts, may see some strength, thanks to strong order growth from the auto and business equipment industry.

New home sales are also expected to tick up in September, although remaining in the recent depressed range, aided in part by post-hurricane rebuilding activity. According to BMO Capital Markets, new home sales, which hit an all time low of 162,000 in August, faces competition from the oversupplied resale market.