With Doug Noland just waking up as the markets close here (Doug has moved to Sydney, see the latest Credit Bubble Bulletin for details), I will be writing the Mid-Week Analysis most of the time. I have assisted in the past so the style should not change dramatically, however, I am open for comments and suggestions. The only major change is I will not be writing a summary about the markets. Lance Lewis does a great job providing "color" on the market and will defer to his Market Summary. I am planning on writing a more detailed analysis every once in a while similar to the Chips and Dips analysis last September.
With that said, lets see what has happened so far this week.
Many economists and analysts are bewildered by the conflicting economic data. The manufacturing sector continues to be the only significant drag on the economy. The Commerce Department released January factory orders yesterday, which dropped 3.8% in January. This was the lowest point for factory orders in 14 months. There was one glimmer of hope in the report. Industrial machine orders rose 5.3%, the largest increase in a year. The National Association of Managers survey also reflects a slowdown. Its survey of 14,000 companies showed that 44% of the respondents believed their industry would be in a recession during the first half of 2001, with another 40 percent looking for growth under 2%.
Box shipments are commonly used an indicator of the strength of the economy. We certainly agree that the number of boxes shipped would indicate the strength of the manufacturing sector, but we are hesitant to give much credence to its significance regarding the overall health of the economy. Just look at the trade deficit, which we have discussed on numerous occasions, and then you can see why the manufacturing sector is not a player in today's "new economy." And I doubt boxes are one of our leading exports! In any event, in Monday's Reality Check column Market News International discussed box shipments. "We certainly think a weaker dollar would substantially help U.S. manufactures compete with foreign producers," said Richard Storat of Gaylord Container Corp. He also commented on the ongoing inventory reduction that is widely touted as the primary reason for the slowdown. "Our crystal ball has never been cloudier, it is difficult to sort out how much of the slowdown is inventory adjustment that will be short in duration, and how much is the reduction in underlying demand, that is the $64 question." Timothy McKenna of Smurfit-Stone Container is hoping "if the dollar weakens, and tax cuts have a stimulus effect, and interest rates cuts have a stimulus effect, we would expect the second half of the year to improve."
One important aspect of a weaker dollar that seems to be missed by these two gentlemen is the prospect of inflation. In fact, the strong dollar has allowed the U.S. economy to grow as rapidly without perceived inflation. If the dollar does strengthen the Fed will be in a tighter corner, as inflation would certainly rear its ugly head.
On the other side of the economy, just about every other sector is humming along just fine. True tech stocks have their share of problems, but most of that is based on missing lofty expectations investors were bidding the stocks up on. After seeing the latest consumer credit data, it is no wonder that retailers have been able to post good sales growth this year. Consumer credit increased over $16 billion in January, far eclipsing the estimate of $6.5 billion. In dollar terms, this was the second largest monthly increase since November 1995 (November 2000 was the only higher month). Additionally, December's credit was dramatically revised upward to $7.1 billion up from the $3 billion originally reported.
It turns out the existing home sales are much stronger then reported last week, due to what might be a y2.001k computer glitch. Last week, The National Association of Realtors reported a decline of 6.6% of existing home sales. Today, the NAR announced that existing home sales have in fact increased 3.8% to 5.13 million units. This fits more in line with the recent explosion in new and refinancing mortgages. On the same note, several of the homebuilders announced February sales. CSFB issued a research report on the homebuilders today and mentioned that the industry orders for February were up 18%, which was on top of January's 20% surge. Beazer Homes stated that its 1,064 orders for February was "an all-time Company record for monthly orders." In reporting its first quarter results Toll Brothers stated "For the moment we appear to be bulletproof to what otherwise would seem to be a nasty gathering storm and a drop in the consumers' willingness to buy large ticket items."
So what is a Federal Bank supposed to do with all this conflicting data? How about devise a new indicator.
The Chicago Fed reported the new gauge of the economy Monday saying that the economy is growing slower than its long-term average. We must say, this is a brilliant piece of analysis. The report continued by indicating that the economy picked-up it's pace in January over the lackluster a December.
Challenger & Gray released its monthly employment report Monday announcing the number of layoffs in February slowed to 101,731 from January's 142,208. However, February's layoffs almost tripled from February last year. In light of such woeful conditions we have to commend Leigh Strope (sorry if this ends your career) of AP. Strope poured through the details of the announced layoffs and picked up something that is essentially going unreported. In the story, Layoff numbers aren't as bad as they appear, Strope concludes "that many cuts will occur overseas or will come through attrition and retirement -- even over several years." Whirlpool and DaimlerChryler were mentioned as examples. Whirlpool announced layoffs of 6,000 employees of which, only 300 will be in the U.S. and those will be made through voluntary retirement. DaimlerChrysler's mammoth announcement releasing 26,000 workers will occur over the next three years and most coming from retirement and attrition. This is not the common perception that the media is portraying. Much of the focus has included quotes such as John Challenger's, CEO of the firm that tracks layoffs, proclaiming "The extraordinary three-month job cutting binge is hard evidence that a slowdown is occurring. Even during the heavy 1990s corporate downsizing, we did not see monthly figures like this."
Additionally, most of the announced layoffs are in the manufacturing sector, which everyone agrees is experiencing severe weakness. Unfortunately, these headlines are being used to paint the overall strength of the whole economy. Could it be that industry chiefs were forcing the hand of the Greenspan and Bush to get rate cuts and tax cuts?
All eyes are on the employment number that is released Friday. With all the hullabaloo in the media about the record number of layoffs, we would not be surprised if the estimate of 75,000 new jobs proves to be quite conservative.
In an interview with Dow Jones Newswires Monday, Minneapolis Fed president Gary Stern also noted this "gap between behavior and some of these attitude surveys." Stern continued by weighing in that he "tends to put more emphasis on behavior than anything else." By concentrating on consumer behavior instead of attitudes, Stern concludes, "the economy has more or less stabilized." Our own regional Fed president, Robert McTeer, echoed the same thought a little more poetically, "consumers may be singing the blues, but they're still shopping." Stern could not miss an opportunity to trumpet the role of productivity has in raising the speed limit of the economy. Since productivity has risen to about 2.5%-3% and the labor force grows at 1%. We wonder how the 9% growth in M3 last year is accounted for in that equation?
Today, Dow Jones continued a long string of print media companies to disclose that the advertising climate has cooled, and ad volume for the Wall Street Journal is down over 30% compared to last year. Yesterday, it was New York Times iterating the same sentiment. Today, New York Times announced that it is raising newspaper prices to help make up the advertising revenue shortfall. For all the data nuts out there, advertising sales for the year 2000 were up 5.1% to $48.7 billion according to Newspaper Association of America. It predicts ad sales will increase 5.1% in 2001.