Evidence is mounting that we may be very close to the low point in the economy. The cyclical recovery is likely to be more muted than earlier expected, but it looks doubtful that we will see a full-scale retreat. Six reductions in the overnight bank-lending rate by the Federal Reserve and government mailings of advance tax refund checks should provide consumers with reason to keep spending.
World leaders appear to be moving in the right direction as the Bank of England reduced rates yesterday. Many expect the European Union to follow suit. In addition, a growing number of American business leaders are calling upon the Administration to adopt a weaker dollar policy to improve their offshore earnings potential.
The chart below demonstrates that world trade versus world GDP growth rates are close to recession levels. But you can also see how quickly the recoveries occurred in all but the 1998 timeframe – a period of global financial crisis. Arguably, the world economy is on much sounder economic footing now than in 1998 when several major countries were feared to be near collapse.
The market will begin its advance in anticipation of economic recovery when company earnings begin to show improvement. The forecast of these improvements will likely come from company managers and analysts becoming more upbeat about their prospects as they make their third quarter projections in September. We expect improvement similar to the rate of improvement in the second quarter. The real improvement, suggesting strong recovery, should come in the November-December timeframe.
Economic Releases this week:
US National Association of Purchasing Managers index declined from 44.7 in June to 43.6 in July. The leading indicator in the report – the new orders index – declined to 46.3 from 48.6. An optimistic interpretation is to accept the drop as a small setback within an improving underlying trend, but we are watching closely. A positive sign is that inventories are being reduced aggressively as demonstrated by the 18-year low in the NAPM inventory index in July (next page).
The Chicago division of NAPM said its monthly index of regional manufacturing fell to 38 this month, the lowest since March, from 44.4 in June. A reading below 50 means business declined — as it has done every month starting with October. The current decline is the longest manufacturing slowdown for the region since a 12-month slide that began in August 1990.
The Conference Board’s consumer confidence index declined to 116.5 this month from 118.9 in June. Analysts had expected an index reading of 118 after a June reading that was the highest since December’s 128.6. Consumers were less upbeat about current economic conditions and the outlook for the next six months. However, July’s confidence index is well above February’s reading of 109.2, which was the lowest since October 1996.
Such developments follow the slowest year of economic growth since the 1990-1991 recession. Growth slowed to a 0.7% annual pace in the second quarter, the weakest in almost eight years. The quarter was the fourth in a row with growth of less than 2%, which last happened during the 1990-1991 recession.
General Motors said Wednesday that U.S. sales of cars and light trucks built in North America fell 8.8% to 354,023 new vehicles last month from July 2000. Ford Motor Co. reported a 14% sales decline to 286,205 units. Sales at DaimlerChrysler AG’s Chrysler unit fell 3.1% to 185,598. Incentives in June caused an increase that month at the expense of July sales, analysts said. Also, overseas-based rivals gained market share.
Second-quarter profit fell more than 16%, based on the 424 companies in the Standard & Poor’s 500 Index that have reported, according to Thomson Financial/First Call. That was the biggest decline since an 18% drop in the third quarter of 1991. Profits decreased 6.1% in this year’s first quarter. JDS Uniphase Corp., the largest maker of fiber-optics equipment, had a fiscal-year loss of $50.6 billion, the largest in U.S. history. Intel Corp., the biggest chipmaker, said quarterly profit fell 94%. Sun Microsystems Inc. had a loss in the latest quarter on its first sales decline since at least 1992.
On the Bright Side
Consumer spending rose a greater than expected 0.4% in June after a 0.3% May rise, according to the Commerce Department. The June increase was led by a rise in spending on durable goods, such as automobiles and appliances.
Incomes increased 0.3% in June after a 0.2% rise. June’s increase in consumer spending was driven by increased spending on durable goods (items meant to last more than three years).
Initial jobless claims fell by 23,000 to 346,000 last week, well below the consensus forecast for 390,000. The Labor Department cites seasonal adjustment problems with auto sector turnover as a reason for the decline. However, initial claims in the last three weeks have fallen 103,000, more than double the 45,000 increase in claims in the first week of July and may reflect some slowdown in job cuts. Another sign the bottom is near is the drop in the insured unemployment rate from 2.4% to 2.3%, the first time that has dropped since a blip down in March.
The U.S. unemployment rate stayed at 4.5% in July, better than the 4.7% expected.
Job holders in the U.S. rose from 63.7% in June to 63.9% in July.
Average weekly hours worked were unchanged in July at 34.2.
The Labor Department said that 45 states and territories reported a decrease in new claims during the week ended July 21, while seven states and territories reported an increase.
Manufacturing overtime was unchanged at 3.9 hours in July.
Average weekly earnings rose to $490.77 during July from $489.40 in June.
The share of consumers planning to buy a home increased to 3.8% from 3.4%. The percentage planning to buy an automobile rose to 9.4% from 6.7%. The share planning to buy a major appliance also increased.
The government has begun mailing advance tax refund checks to taxpayers for as much as $300, giving consumers money to spend, save, or pay down debt. What’s more, natural gas costs half what it did at the start of 2001 and gasoline prices have fallen to an average of $1.44 a gallon, the lowest since February 2000, according to Department of Energy statistics.
The inventories index fell to 35.8, the lowest since December 1982, from 40.8. The index of production rose to the highest since November. The index of orders for export rose to 48.2, the highest since 50.6 in March. The backlog of orders index increased. The employment index rose to 37.2 from 36.3, a sign the pace of job losses was slowing. Slower demand has reduced the price of copper to its lowest in more than two years.
The report showed no significant inflationary pressures in June as the price index for personal-consumption expenditures, excluding food and energy, advanced just 0.2%.
General Motors, the largest automaker, had 61 days worth’ of autos for sale at the end of June, within the 60 days to 70 days that automakers consider reasonable. “We think the inventory correction is behind us,” Chief Financial Officer John Devine said on a conference call in July.
Motorola Inc. said yesterday it received more orders for semiconductors than revenue in July, a sign the business may be reversing its decline this year.
Verizon Wireless Inc., the biggest U.S. mobile-phone operator, announced Tuesday that it plans to add 480 jobs by early next year and almost 300 more positions in the next few years.
Trade Barriers Now? Hope not . . .
You have heard me say many times before that the greatest enemy of economic expansion is bad government policy. Our administration is on the right track regarding free trade. However, there is talk in the global press of increasing trade barriers abroad. Rich Karlgaard of Forbes Magazine writes a compelling treatise against the notion.
“The utter stupidity of erecting trade barriers during a recession is well known (Smoot-Hawley, etc.). [Many now argue this tariff act caused the Great Depression] But I’d rather debunk this folly from the standpoint of human freedom. What gives Brussels or Washington-BOW-the right to halt a producer of cheap steel from selling to a buyer who simply wants it cheap? Who wins when BOW attempts to insert itself between buyer and seller? Not American consumers. They’ll pay more for their Suburbans and barbecue grills. The seller? BOW punishes them for their talent of selling steel cheap. Ah, it must be American steel manufacturers! No, again. BOW is turning them into welfare queens.
But dumping! – that’s different, you say. No, again. Dumping is the best deal around. When the Japanese dumped DRAM chips onto the American market in the mid-1980s, the U.S. won hugely. PCs got cheaper, so Dell and Compaq sold more PCs and became successful. Software got more robust, so Microsoft and Lotus sold more software and became successful. American companies bought cheap PCs and software by the truckload. They boosted their productivity and became more successful. In the end we clobbered a Japan Inc., foolish enough to supply us with cheap DRAMs!
“Intel, assumed at first to be a victim of this Japanese DRAM dump, won biggest of all. Cheap DRAMs forced Intel out of this lousy commodity business and into high-margin microprocessors. The rest is glorious Intel history. Dump a good company like Intel into that briar patch anytime! Free trade is a human right. And human rights are good for business.”