Why are Americans Down?

What’s going on with the American consumer? Most economists thought that the plunge in energy prices would eventually show up in a little extra spending elsewhere in the economy. So far, that has not been the case. Retail sales in April were flat and excluding gasoline, they were up just 0.1 percent from March. People are not spending, because they are not buying that the economic recovery is for real. The University of Michigan’s consumer sentiment index dropped sharply, with respondents’ saying that they are still concerned about losing their jobs. In fact, they reported the highest probability of losing their jobs since 2009. The sour mood coincides with data showing that new jobless claims remain at 15-year lows.

And it’s not just in the U.S., says Capital Economics “consumers in advanced economies [US, euro zone, UK and Japan] have so far opted to save, rather than spend, their oil windfall.” All is not lost, because there is hope that as labor markets strengthen, confidence and spending should follow. Additionally Joel Naroff of Naroff Economic Advisors reminds us that the retail sales report does “not include services, which is two-thirds of spending, so we really cannot count the consumer out just yet.”

In addition to consumer spending, which is expected to spring back in the coming months, hopes are high for continued housing market gains. For much of the recovery, potential first time homebuyers were opting for rentals due to a combination of outstanding student loan debt, difficulty in obtaining mortgages and a generalized fear of owning a home. The later two issues appear to be dissipating (home purchase mortgage applications increased to a two-year high in April), especially as rents rise in many of the cities where young, first time buyers live.

Unfortunately, outstanding student loans could continue to partially impede progress in the housing market. Just in time for college graduation season, the New York Federal Reserve reported that total outstanding student loan debt increased to 1.2 trillion in the first quarter, up $78 billion from a year ago. Additionally, the college class of 2015 holds a dubious distinction: its graduates are the most indebted ever. The average graduate, with a student-loan, owes just over $35,000, according to Edvisors. Adjusted for inflation, that’s more than double the amount borrowers had two decades ago.

MARKETS: Consumer confidence may be down, but that hasn't stopped investors from pushing up stocks at or near record levels.

• DJIA: 18,272, up 0.5% on week, up 2.5% YTD (16 points from all-time high)
• S&P 500: 2122, up 0.3% on week, up 3.1% YTD (8th record close of the year)
• NASDAQ: 5,048 down 0.9% on week, up 6.6% YTD
• Russell 2000: 1244, up 0.7% on week, up 3.3% YTD
• 10-Year Treasury yield: 2.14% (from 2.15% a week ago)
• June Crude: $59.96, up 0.5% on week
• June Gold: $1225.30, up 3.1% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.70 (from $2.66 wk ago, $3.65 a year ago)

THE WEEK AHEAD: Traders are eagerly awaiting a long weekend-most will focus on minutes from the last Fed policy meeting and earnings reports from some of the nation’s largest retailers.

Mon 5/18:

Urban Outfitters

10:00 Housing Market Index

Tues 5/19:

Home Depot, TJX, Wal-Mart

8:30 Housing Starts

Weds 5/20:

Lowes, Sears, Staples, Target

2:00 FOMC Minutes

Thurs 5/21:

Aeropostale, Best Buy, Dollar Tree, Gap

10:00 Philly Fed

10:00 Existing Home Sales

Fri 5/22:

Ann Taylor, Foot Locker

8:30 Consumer Price Index

Week ahead: Debt Deal Done, Data Dump Due

After three weeks of political wrangling, the federal government is open and the debt ceiling has been increased. The good news/bad news is that there’s a 90-day grace period before the next potential round of budget/debt ceiling debates recurs. So, now the fun begins: parsing the deluge of delayed economic reports and trying to figure where the economy stands. Global/US Growth: Before the shutdown, there was ample evidence that the global economy was picking up steam. The rebound in China helped alleviate worries over a “hard landing”, the euro zone finally emerged from recession, Japan remains relatively strong and the slow down in emerging markets is picking up as worldwide demand increases.

In the U.S., the recovery was gaining momentum, until the two-headed monster of the government shut down and debt ceiling debate reared its ugly head. Moody's Analytics estimates that the whole fiasco cost $22 billion dollars and Standard and Poor’s estimates that the closure has shaved 0.6 percent from fourth quarter growth. As a result, Q4 should expand by just 2 percent, though analysts are hopeful that the hit to growth will be a blip and 2014 will make up for the short-term damage. That said, if Congressional fighting recurs in January and February, there could be more “blips” on the radar screen. Additionally, if the next round of sequester cuts go into effect, U.S. growth could be hampered in 2014.

Jobs: There will be two employment reports released within a short period of time: September will be released this Tuesday, with expectations that 180,000 jobs were created and the unemployment rate will remain at 7.3 percent. Then just 2 ½ weeks later on November 8th, the October report will be available. Over the first eight months of the year, the economy has added an average of 180,000 non-farm positions per month, but the August and July numbers were weaker than expected. The economy has added 6.8 million total jobs (7.5 million private sector jobs) since employment bottomed in February 2010.There are still 1.4 million fewer private sector jobs now than when the recession started in 2007.

Housing: The increase in mortgage rates combined with rising inventories will likely slow down the sizzling pace of the housing recovery, but should not snuff it out. Housing should continue to be a positive force in the economy.

Consumers: It was hard to hit the stores with gusto when the government was shut down and the U.S. was on the verge of defaulting on its obligations. ShopperTrak said that total retail store shopper traffic during the week of Sept. 29-Oct. 5 decreased 7.5 percent compared to the same time period last year. During the week of Oct. 6-12, foot traffic decreased 7.1 percent compared to 2012. But consumers are a mercurial bunch - visions of sugarplums may help them forget about Washington and engage in a bit of retail therapy during the holiday season.

Federal Reserve: Remember way back in September when Ben Bernanke raised the concern over “fiscal uncertainty”? (See: Congress is the biggest near-term risk to the U.S. economy) Well, that fear was well founded and probably the main reason that the central bank kept its current policies in place, including the $85 billion worth of monthly bond purchases. There are two more policy meetings before the end of the year, in October and December. It is almost a certainty that the Fed will do nothing in October, but if the economy were to pick up substantially, there is a chance of a small pull back in bond purchases at the December meeting. It is more likely that Bernanke would use his last FOMC meeting in January to change course, unless fiscal uncertainty returns to the fore. If things heat up in Congress, Janet Yellen may use her first FOMC meeting to announce the reduction in bond purchases.

Congress: Are we in for déjà vu all over again (h/t Yogi)? The agreed upon three-month time horizon has invoked a chorus of “kick the can down the road”, but wait - it could last even longer! The debt ceiling date of February 7^th could be extended when Treasury Secretary Jack Lew invokes extraordinary measures.

MARKETS: Investors typically do not like uncertainty. Except last week, when they brushed aside worries over the debt ceiling and then celebrated when the deal was sealed. With indexes up sharply on the year, optimists are touting a resurgent economy,  decent earnings and a Fed policy that will remain market-friendly. Pessimists argue that the bulls are confusing the avoidance of disaster with real economic progress...it is October, after all!

• DJIA: 15,399 up 1% on week, up 17.5% on year
• S&P 500: 1744, up 2.4% on week, up 22.3% on year (new all-time closing high)
• NASDAQ: 3914, up 3.2% on week, up 29.6% on year
• 10-Year Treasury yield: 2.59% (from 2.68% a week ago)
• Nov Crude Oil: $100.83, down 1.2% on week
• Dec Gold: $1314.60 up 3.6% on week
• AAA Nat'l average price for gallon of regular Gas: $3.36

THE WEEK AHEAD: Get ready for a “Jobs Tuesday”! Reports in BOLD are rescheduled releases of reports that were on hold until the government reopened. It is possible additional data will be released later this week by other government entities.

Mon 10/21:

Halliburton, McDonald’s, Netflix, Texas Instruments

8:30 Chicago Fed Nat’l Activity Index

10:00 Existing Home Sales

Tues 10/22:

Coach, DuPont, Kimberly Clark,

8:30 September Jobs Report

10:00 Richmond Fed Manufacturing Index

Weds 10/23:

AT&T, Boeing, eTrade

8:30 Import/Export Prices

9:00 FHFA Housing Price Index

Thurs 10/24:

3M, Altria, Amazon, Ford, Colgate, Palmolive Microsoft, Zynga

8:30 Jobless claims

10:00 Job Opening and Labor Turnover (JOLTS)

10:00 New Home Sales

Fri 10/25:

P&G, UPS

8:30 Durable goods orders

9:55 Consumer Sentiment

Week ahead: Debt Ceiling Thaw Warms Traders’ Hearts

Traders seemed convinced that Congress will come to an agreement on the debt ceiling, which propelled stocks higher on Thursday and Friday, and saved what was starting to look like an ugly week. Presuming that the collective wisdom is correct, then fears of financial catastrophe and recession will recede and everyone can start chewing on the boring old stuff: the pace of economic growth and corporate earnings. Of course it’s difficult to analyze the economy while the government is shut down. Menzie Chinn of EconBrowser notes that even the Fed is forced to conduct “macroeconomic policymaking with increasingly sparse or mis-measured data. If one doesn’t believe in expertise and information, then this is not a problem. If one believes that knowledge should inform decision-making, it is.” (You can almost hear Larry Summers saying, “Good luck with the new gig, Janet Yellen!”)

While Wall Street was instantly soothed by the thaw in Congressional relations, Main Street was not yet convinced. Beyond the massive reputational damage lawmakers have inflicted on themselves, many Americans are now worried that the economy will be harmed. Consumer sentiment fell in October to its weakest level in nine months, according to the Thomson Reuters/University of Michigan preliminary sentiment index.

Additionally, a recent Wall Street Journal poll showed that 42 percent of Americans think the economy will worsen over the next year, which is double the amount observed in September, and the number of those surveyed who think the country is on the right track has fallen by half. The WSJ results jibes with Gallup, which showed that consumer confidence now measures at the same low levels as that of the 2008 economic collapse.

Suffice it to say, if political gridlock goes on too long, then consumer confidence could drop, which could lead to slower than expected spending during the holiday shopping season. To underscore the risk of sliding consumer confidence, the Leaders of the National Retail Federation sent a letter to Congress, warning:

“For retailers – who represent the sector of the American economy most closely tied to consumer attitudes – these numbers are deeply disturbing…Moreover, since the very modest growth the U.S. economy has experienced following the 2008 recession has been attributed to the willingness of the American consumer to keep shopping, a lasting decline in consumer confidence is likely to translate into increased unemployment and slower growth in coming months.” The NRF also detailed practical problems the shutdown has created for retailers – from the lack of economic data and reports to concerns over processing of imported merchandise.

If the economy were to slow, it would be bad news for companies, which were at the precipice of doing something that have not done in a while: spending some of the piles of cash they have accumulated. As a reminder, non-financial companies held a record $1.78 trillion in cash and other liquid assets as of the first quarter of the year. Many analysts thought that the companies would start to spend money in order to expand their businesses and drive more sales. If Congressional bickering drags on too long, some companies may rethink those plans.

MARKETS:

• DJIA: 15,237 up 1.1% on week, up 16.3% on year
• S&P 500: 1703, up .7% on week, up 19.4% on year
• NASDAQ: 3791, down 0.4% on week, up 25.6% on year
• 10-Year Treasury yield: 2.68% (from 2.65% a week ago)
• Nov Crude Oil: $102.02, down 1.7% on week
• Dec Gold: $1268.20, down 3.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.34

THE WEEK AHEAD: Government reports in italics are due to be released, subject to the status of the shutdown. Reports that were delayed over the past two weeks, including the all-important jobs report, could be released this week, if a deal is reached. Q3 earnings season gets into full swing, with a slew of S&P 500 companies reporting this week.

Mon 10/14: Columbus Day: US stock markets open, bond markets and banks closed

Tues 10/15:

Citigroup, Intel, Johnson & Johnson, Coca Cola, Yahoo, Schwab

8:30 Empire State Manufacturing Index

Weds 10/16:

AMEX, Bank of America, BNY Mellon, Pepsi, IBM, eBay

8:30 CPI

10:00 Housing Market Index

2:00 Fed Beige Book

Thurs 10/17: DEBT CEILING D-DAY

Capital One, Goldman Sachs, Verizon, Google

8:30 Jobless claims

8:30 Housing Starts

9:15 Industrial Production

10:00 Philadelphia Fed Survey

Fri 10/18:

GE, Honeywell, Morgan Stanley, Schlumberger

10:00 Leading Indicators