bizzXceleration: Performance, Value and Profit

Economic Situation

No Growth Yet, But the Worst is Over Real GDP contracted at annualized rates of 6.3% and 6.1%, respectively in Q4:2008 and Q1:2009. These rates of contraction would appear to be the largest that are likely to occur before real economic growth commences in Q4:2009. After having contracted in the second half of 2008, real personal consumption expenditures grew at an annual rate of 2.2% in Q1:2009. Although we expect that real consumption will resume its contraction in the second and third quarters of this year before posting growth again in the fourth quarter, the worst seems to be over for consumer spending. While overall nominal retail sales declined by 0.4% in April, total nominal chain store sales increased by 0.6%. With more autos and trucks being scrapped than new ones being produced, it is highly likely that the bottom of motor vehicle sales has been reached. Perhaps the best summarizing statistic for the economic outlook is the index of Leading Economic Indicators (LEI). The year-over-year percent change in this index does a good job of identifying turning points in the overall economy. As Chart 9 shows, the year-over-year change in the LEI appears to have reversed from a declining to a rising trend. Again, the message is that although an outright economic recovery still lies ahead, the worst of the recession is likely behind us.

CONSUMPTION

More on Consumption in April PCE declined sharply in Q3 and Q4 2008, and rebounded slightly in Q1 2009. Q2 2009 is off to a weak start, with PCE in April below the levels of Q1. Although it is possible that PCE will pick up in May and June, it seems likely that PCE will be negative in Q2 (although not the cliff diving of the 2nd half of 2008). Usually PCE and Residential Investment (RI) lead the economy out of recession, and right now both remain weak. As households increase their savings rate to repair their balance sheets, it seems unlikely that PCE will increase significantly any time soon. Just a reminder - the end to cliff diving is not the same thing as "green shoots".

• Personal Consumption Declining for Durable and Non-durables

• Graphs: Auto Sales in May May was the best month of 2009 (on seasonally adjusted basis), but sales are still on pace to be the worst since 1967. The second graph shows light vehicle sales since the BEA started keeping data in 1967. The small increase in May hardly shows up on the graph. In 1967 there were 103 million drivers; now there are about twice that many (205.7 million licensed drivers in 2007). Compared to the number of drivers, the current sales rate is the lowest since the BEA started tracking auto sales.
• U.S. Autos Rebound: Too Little, Too Late Edition
• ISM Manufacturing Shows Contraction in May As noted, any reading below 50 shows contraction, although the pace of contraction has slowed.
• Construction Spending in April Private residential construction spending is 63.2% below the peak of early 2006. Private non-residential construction spending is 4.4% below the peak of last September. Nonresidential spending is essentially flat on a year-over-year basis, and will turn strongly negative as projects are completed. Residential construction spending is still declining YoY, although the YoY change is starting to be less negative. As I've noted before, these will probably be two key stories for 2009: the collapse in private non-residential construction, and the probable bottom for residential construction spending. Both stories are just developing ...
• Many U.S. Retailers’ Sales Miss Expectations Shoppers searched for bargains and basics in May, leading many retailers to miss sales expectations on Thursday even though the bar was set pretty low for most chains. While there have been early signs of stabilization such as improving consumer confidence, issues such as unemployment and the troubled housing market have led many Americans to take on a thriftier attitude. Upscale department stores posted some of the steepest drops in sales at stores open at least a year, or same-store sales.

EMPLOYMENT

Job Losses in U.S. Slow More Than Estimated in Sign Recession Is Abating The U.S. lost fewer jobs than forecast in May, reinforcing signs that the deepest recession in half a century is starting to abate. Payrolls fell by 345,000, the least in eight months, after a revised 504,000 loss in April, the Labor Department said today in Washington. The jobless rate increased to 9.4 percent, the highest since 1983, in part as more people joined the labor force to look for work. “The recession is very close to an end,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, whose payrolls forecast matched the closest estimate in a Bloomberg News survey. “The labor market is still pretty awful, but vastly better than it was.” The dollar rallied and Treasuries fell as optimism grew that the economy’s slump will soon end. Still, figures showing a drop in hours worked and slowdown in earnings indicate any recovery will be muted. Americans are spending less and saving more as home values fall and companies from American Express Co. to General Motors Corp. continue to cut back workforces. Another report showed consumer borrowing dropped by $15.7 billion in April, the second-biggest decline on record, as unemployment surged and loans remained difficult to get. Consumer credit fell at a 7.4 percent annual rate to $2.52 trillion, the Federal Reserve reported. Revisions added 82,000 to payroll figures previously reported for April and March, the Labor report said.

• Employment Report: 345K Jobs Lost, 9.4% Unemployment Rate The unemployment rate rose to 9.4 percent; the highest level since 1983. Year over year employment is strongly negative (there were 5.4 million fewer Americans employed in May 2009 than in May 2008). For the current recession, employment peaked in December 2007, and this recession was a slow starter (in terms of job losses and declines in GDP). However job losses have really picked up over the last 8 months (4.6 million jobs lost, red line cliff diving on the graph), and the current recession is now one of the worst recessions since WWII in percentage terms - although not in terms of the unemployment rate. This is another weak employment report ... % Job Losses Since Peak in Post WW2 Recessions
• Unemployment Compared to Stress Test Scenarios, and Diffusion Index This graph shows the unemployment rate compared to the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks (no link). This is a quarterly forecast: in Q1 the unemployment rate was higher than the "more adverse" scenario. The Unemployment Rate in Q2 (only two months) is already higher than the "more adverse" scenario, and will probably rise further in June. Note also that the unemployment rate has already exceeded the peak of the "baseline scenario".
• Employment-Population Ratio and Part Time Workers This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. The general upward trend from the early '60s was mostly due to women entering the workforce. As an example, in 1964 women were about 32% of the workforce, today the percentage is close to 50%. This measure is at the lowest level since the early '80s and shows the weak recovery following the 2001 recession - and the current cliff diving! Not only has the unemployment rate risen sharply to 9.4%, but the number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is now at a record 9.1 million. Part-time for Economic Reasons

Recovery ???

Bernanke: Recovery Will Be Slow Data suggest the economic contraction may be slowing, but the economy is hardly out of the woods, Federal Reserve Chairman Ben Bernanke told lawmakers on Wednesday. "A number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions," Bernanke said. Bernanke said he still anticipates that the economy will start its recovery later this year, but cautioned that "recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring and the unemployment rate is likely to rise for a time, even after economic growth resumes." The Federal Reserve expects that the growth in inflation this year will be less than it was in 2008.

Krugman Says Global Economy Isn't Showing Any Sign of `V-Shaped' Recovery  Nobel Prize-winning economist Paul Krugman said the world’s economy is showing “not a hint” of a “V-shaped” recovery marked by a swift decline and revival. The economy is “stabilizing, not recovering,” Krugman, an economics professor at Princeton University in New Jersey, said today at a conference in Dublin. “Things are getting worse more slowly.”  Data this month showed that the contraction in Europe’s manufacturing and service industries is easing and confidence in the economic outlook is rising. The U.S. lost fewer jobs in May than forecast, a report today showed. The International Monetary Fund says its forecast for global growth of 1.9 percent next year is based on the premise of a healthy financial system. “We have made the transition from sheer panic to chronic anxiety,” Krugman said, adding he’s has a “hard time” seeing what might drive a “full” economic recovery. U.S. payrolls fell by 345,000 in May, the smallest decrease in eight months, after a revised 504,000 loss in April, the Labor Department said today in Washington. The U.S. policy response to the economic crisis has been “extraordinarily aggressive,” Krugman said. “Unfortunately, it hasn’t been enough.” The country will need “some form of new taxes” to bring down its deficit, he added. Service industries in the U.S. shrank at a slower pace in May while job losses mounted, indicating that any economic recovery will be slow to develop. “The euro zone, like the United States, I fear, could be facing kind of a lost decade,” Krugman said.

German central bank: economy to stagnate in 2010 Germany's economy will shrink by 6.2 percent this year and stagnate in 2010, the country's central bank said Friday, delivering a forecast more pessimistic than the government's. The Bundesbank said in its June monthly report that the new projection is "a reflection of the massive economic downturn" late last year and early this year. Gross domestic product shrank by 2.2 percent in last year's final quarter and by a massive 3.8 percent in this year's first quarter. "Downward pressure on the German economy is likely to ease during the course of 2009, although it does not look like there will be a significant upturn in the near future," the Bundesbank said in a summary of its monthly report. "With the gradual easing of tensions in the international financial markets, improved expectations, and with the support of extensive monetary and fiscal stimuli, the German economy could regain some ground in the third quarter," it added. The government forecast in late April that the country's economy, Europe's biggest, would contract by a post-World War II record of 6 percent this year but would return to growth -- albeit feeble -- of 0.5 percent next year. However, the Bundesbank, the national central bank, said it expects zero growth in 2010. "As things stand, economic activity is expected to remain at a subdued level in 2010, despite picking up slightly in the course of the year," the bank's report said. Germany's economy grew 1.3 percent in 2008, about half as much as the previous year. The country went into recession in last year's third quarter.

Credit and Policy Dilemmas

Fed's Yellen Says Treasuries May Reflect `Disconcerting' Inflation Worries  Federal Reserve Bank of San Francisco President Janet Yellen said that policy makers need to be prepared for “substantial shocks” and that rising Treasury yields may be a “disconcerting” signal of inflation fears. “Recent experience raises the possibility that the Great Moderation is behind us, so we must be prepared for substantial shocks,” Yellen said today during a panel discussion hosted by the Fed Board of Governors in Washington. “Great Moderation” is a term used to describe the comparative economic stability seen in the U.S. and other major industrial countries, except Japan, since the mid-1980s. Yellen’s comments on yields go beyond remarks made two days ago by Fed Chairman Ben S. Bernanke, who said in congressional testimony that the increases may reflect rising optimism about the economy and concerns about large federal deficits. Fed officials are starting to discuss how and when they will need to start tightening credit and pulling back the record injections of liquidity into the financial system. The central bank has more than doubled the assets on its balance sheet over the past year to $2.1 trillion to revive lending and end the recession. “We do not yet have good estimates of the quantitative impact of such interventions,” she said. “We simply must understand better, and ultimately develop reliable models of, the extraordinary financial and macro linkages that produced the current crisis.”  In addition, calculating the costs and benefits of leaving the benchmark U.S. interest rate near zero needs “to incorporate greater volatility than experienced over the past quarter century,” Yellen said. Yellen reiterated her view that she sees a stronger case for using Fed monetary policy to prick asset price bubbles that may lead to an economic crisis.

“Truly, we are sailing in uncharted waters, marking our maps with every bit of information along the way,” she said.

U.S. Consumer Credit Had Second-Biggest Drop on Record in April, Fed Says  Borrowing by U.S. consumers had the second-biggest drop on record in April as the jobless rate reached its highest in a quarter century and accessing loans remained difficult.