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Another 25 Basis Points, How Many Left?

After several months of lackluster labor markets the US economy finally added a significant number of jobs. According to the October employment situation report, 337,000 workers gained employment during the month, the highest number of new workers since March this year and only the third month in the last four years that payrolls have increased by more than 250,000. Additionally, September's gain was revised up to 139,000 from the 96,000 gain previously reported. Most of the jobs added continued to be in the business services, adding 97,000 jobs with temporary help accounting for half the gain. Notable increases were also in goods-producing, construction, and education & heath sectors. Looking at year-over-year changes in the number of workers employed in sectors shows that the areas of the economy we have been discussing as strong have also been adding workers. Mining has increased payrolls by 5.1% since last October, and construction has added 3.9%. The retail sector has only added 0.8% over the past year, but there are dramatic differences between the different types of retailers. Automotive dealers have reduced their workforce by 0.6%, but building materials have increased by 4.7%. Grocery stores have pared workers by 0.1%, but apparel retailers have added 4.0% over the past year. Perhaps a bit of good news was that the central banks reduced payrolls by 4% since last year. I'm not sure if that includes Robert McTeer, the president of the Dallas Fed who is leaving to become the Chancellor of Texas A&M. As a former student of Texas A&M, I'll refrain from any other comments, but will republish two of my favorite McTeer quotes. The first was from a speech he gave a business group in February 2001, "If we all join hands and go buy a new SUV, everything will be all right." In September of the same year, McTeer admitted that the economy was being suspended by consumer debt. "They've [consumers] been doing something that's probably irrational from the point of view of the individual consumer because they all need to be saving more: saving for retirement, saving for college and all that. But we'd be in bad trouble if they started doing that rational thing all of a sudden. We're happy that they're spending. We wish that they didn't have to run up a lot of debt to do it. But it's not something we're terribly worried about right now because their assets are high."

That was when consumer debt totaled 1,598.0 billion; it now stands almost 30% higher at $2,055.8 billion. Consumer credit jumped $9.8 billion in September, much higher than the $7.0 billion economists predicted. Additionally, August's consumer credit was revised to an increase of $2.2 billion, it was previously reported as a decline of $2.4 billion. Last week, retailers reported that October same store sales increased by 4.05% according to the International Council of Shopping Centers. With savings rates near zero, future strength of the consumer depends on the appetite for additional debt.

Part of the appetite for debt has been fed by the low interest rate environment that has been sponsored by the Federal Reserve. While the Fed increased rates this week by 25 basis points, the 2.0% Fed Funds target continues to be "accommodative." In fact, during the recovery in the mid-1990s, rates were already back up to the level of nominal GDP growth. The stronger than expected employment report caused economists to expect that the Fed will hike rates upward again in December. Previously, most economists thought that the Fed would pause at the December meeting.

This week, real estate investment trust, Vornado Realty Trust, announced it had purchased a 4.3% stake in Sears. This sparked a 24% jump in Sears' stock. Several investors believe that Sears, among several other retailers, have value in their real estate holdings that is not reflected in the current stock price. The purchase by Vornado added to the debate and several retail stocks that own some of their stores experienced a jump in stock price. On Wednesday, the Wall Street Journal questioned the logic behind valuing retailers based on their real estate. The article points out that many of Sears' locations are in malls and would not be able to be converted to other types of properties that are more highly valued, such as condos or nursing homes. If investors are valuing the company for their real estate than as a retailer, investors must not have much faith on the company's ability to function as a retailer. Furthermore, a research report from UBS this week also asked the question, who needs that much retail space? Sears has about 20% of the mall anchor space in the country.

This week, the Census Bureau reported that that trade balance narrowed to $51.6 billion in September from a revised $53.5 billion in August. Before getting too excited and declaring the end of the import binge, the deficit remained $10 billion higher than last year. The more noteworthy data point was that import prices increased 9.7% from last year. This was the fastest growth in import prices since 1987. While the increases in fuel and metal prices have been discussed on numerous occasions, other areas are experiencing significant increases as well. Food and beverage prices are up 6.0% from last year and paper & stocks saw a 7.2% increase.

These higher prices are causing companies to raise prices to customers. This week, FedEx announced that it will increase rates on ground and air shipments by 2.9% and 4.6% respectively. This is slightly higher than the 2.9% increase for air shipments that was announced by competitor UPS. Both delivery companies continue to report strong business conditions. In an interview with Bloomberg, Michael Eskew, President of UPS, said that they have not seen any evidence of higher oil prices slowing holiday spending. During its conference call last week, Whirlpool announced it would be raising prices at the beginning of the year. This week, Maytag announced it to would institute a 5% to 8% price increase starting January 3. The company cited the same factors as Whirlpool, namely higher steel and energy prices.

Sometimes truth is stranger than fiction. GM announced that not only can you get low interest financing on your current purchase, but your next purchase as well. Its new "Lock 'n' Roll" programs allows buyers to lock in low interest rate financing on two vehicles over the next ten years. Will mortgage companies follow?

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