Market Talk

They say things are getting better. I don't see it.

The stars are aligning for an improving economy — as long as you ignore the biggest star of them all.

Most of this week’s economic data continue to point to a recovery: the Philly Fed index increased and has remained positive for six straight months; industrial production rose again; NY Fed’s manufacturing survey showed improvement and the Conference Board’s index of leading indicators rose for 10th consecutive month.

“Perhaps the economy is approaching a point at which employers suddenly conclude that the recovery is for real and start hiring, generating new momentum for the expansion,” The Economist’s Free Exchange blog writes. “But it is strange to see recovery this persistent and this strong, with so little new job creation.”

That’s the one, big out-of-alignment star. And perhaps the gains in the other numbers aren’t so strange when considering the severely depressed levels from which most of them are recovering, which still leaves them well below levels considered “normal.”

The jobs market still isn’t pretty, and today’s weekly jobless claims data proves that point. Claims jumped 31,000 to 473,000 last week, much higher than economists were expecting. Not a good sign, especially since that number needs to get closer to 400,000 for the economy to start adding jobs again.

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My old Kentucy home looks better than expected.

Some positive news on the economic front this morning, with housing starts posting their strongest increase since July, import prices rising for sixth straight month and industrial production rising higher than economists expected.

Of course the data aren’t all rosy as there are several caveats to today’s reports. January housing starts rose 2.8% to 591,000 annual rate, the highest in six months and 24% from the all-time record low set in April 2009. However, economists were expecting a 5.9% increase. New building permits also dropped, a sign the housing sector is recovering at a slow pace.

And starts had rebounded to 590,000 in June, so they essentially haven’t gained or lost any ground throughout the last eight months. From Miller Tabak’s Dan Greenhaus:

We’ve gone nowhere. Starts, in comparison to other housing metrics, carry a significant amount of weight with respect to economic recovery. Upon starting a house, people must be hired to build it, to install the plumbing, to set up the electrics. Wood must be ordered, copper secured, etc. A housing start is quite important with respect to economic recovery and the lack of any sustainable and meaningful improvement on this measure is one reason we are less excited about the current recovery than some of our peers.

Paul Ashworth, senior economist at Capital Economics, also points out housing starts at a 591,000 annualized rate represents about a quarter of what they were back during the housing boom.

“This is disappointing given the much bigger rebound in home sales last year and the modest recovery in prices,” Ashworth says. “It appears builders fear that sales and prices will drop back once the Federal tax credit for homebuyers expires in April…In short, housing isn’t going to add much to the recovery.”

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Celebrating this guy isn't such a fiesta for the stock market.

US stocks slumping, reversing much of yesterday’s gains, as weak GDP growth in the euro zone combined with China’s central bank boosting reserve requirements for banks weighed on stocks.

Selloff comes just one day after the market rallied on optimistic comments that the EU would support debt-laden Greece.

“Just as one fire has been put out for now (Greece), the one that originally caused jitters in the markets in mid-January, China, now flares up again,” says Miller Tabak equity strategist Peter Boockvar. “This proactive step is a good thing longer term but rarely is a smooth process in the short term.”

Dow industrials, which fell as much as 160 in earlier trading, were recently off 50 at 10094. S&P 500 off 4 at 1075.

Keep in mind the S&P 500 has closed down 15 of the last 18 Fridays before Presidents Day weekend, Ticonderoga Securities technicians write, as investors tend to prefer holding cash over risky assets through the long weekend, “especially in the current climate.”

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Number of workers filing initial claims for jobless benefits unexpectedly rose for the second week in a row, which is a cause for concern, but still isn’t reason to panic.

Jobless claims rose 8,000 to 480,000 for the week ended Jan. 30, while economists surveyed by Dow Jones Newswires expected claims to decrease by 10,000. The gains come after last week’s results showed claims rose by 36,000. Data throughout last two weeks present a stark contrast to the downward trend of declining claims since they peaked in March.

“We’re bumping up against the thin line of statistical noise vs. a turn for the worse in the generally improving trend of initial jobless claims,” James Picerno writes at The Capital Spectator. “Exactly where and when one gives way to the other is debatable and inherently speculative in real time.”

Job growth in tomorrow’s monthly employment report could ease some concerns. But it’s possible the decline in initial jobless claims is stalling, he notes. “It’s too soon to say for sure, of course, but the possibility is suddenly no longer beyond the pale.”

To make matters worse, the number of people filing for emergency unemployment compensation – essentially folks who’ve exhausted their standard initial jobless benefits – took another big jump, with 281,000 people claiming the extended benefits in the week ended Jan. 16. These numbers are reported within the weekly claims report, but with a two-week lag.

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C'mon, bears, 5.7%! 5.7%!

Don’t get too jazzed about this morning’s GDP report. The better-than-expected reading, fueled by slower inventory liquidation rather than consumer spending, likely isn’t sustainable.

The headline 5.7% jump looks good on paper. But there are reasons for concern. For all of 2009 GDP fell 2.4%, marking the biggest drop for an entire year since the 10.9% slide in 1946.

And as Calculated Risk points out, residential investment and personal consumption expenditures, the leading sectors for GDP, both slowed in 4Q. The declines aren’t surprising, especially since the personal savings rate rose and will likely continue increasing in next year or two, blog says. Also don’t expect residential investment to start rising until excess housing inventory is absorbed.

“The transitory boost from inventory changes is frequently a great kick start to the economy at the beginning of a recovery – as long as the leading sectors (PCE and RI) are also picking up,” Calculated Risk says. But this report is concerning as “underlying growth remained weak.”

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This market's looking better every day.

New home construction in December fell 4% to a seasonally adjusted 557,000 annual rate from a month earlier, far more than economists had expected.

The sharp decline shows there was less residential investment in 4Q than analysts had previously estimated.

Starts are now up 16% from their all-time low hit in April. But they have essentially been moving sideways for seven months, according to Calculated Risk.

“This is both good news and bad news. The good news is the low level of starts means the excess housing inventory is being absorbed – a necessary step for housing (and the economy) to recover,” blog says. “The bad news is economic growth will probably be sluggish – and unemployment elevated – until residential investment picks up.”

Nevertheless, even as housing starts fall more than expected, new building permits jumped 8.3%. And there’s “a fresh glimmer of hope” that the housing market may be bouncing along the bottom, James Picerno writes at The Capital Spectator.

“It’s starting to look like the end of the great housing collapse has arrived,” he says.

To be sure, just because the worst is over doesn’t mean a powerful rebound is expected, he adds, as the housing market could stumble along the bottom for a significant period of time.

“Echoing the trend in the labor market and the economy overall, a aperiod of treading water may be in store, and for an unusually lengthy run relative to post-recession revivals in the past,” Picerno says.

Which one of these gets this thing started again?

Nothing in this morning’s jobless claims data to suggest the labor market will start generating job growth any time soon, although the trends for initial and continuing claims continue to improve.

The downward trend in weekly claims is still intact despite the slight rise in today’s data. But initial claims at 444,000 suggests more job losses are ahead.

On the bright side, folks filing for emergency unemployment compensation fell for the first time in a while. One important caveat, though – the reading came during the Christmas week. Labor Department said states reported a little more than 5 million people claiming emergency unemployment compensation ending Dec. 26, a decrease of 141,279 from the prior week. By comparison there were only 1.66 million people claiming emergency unemployment compensation in the comparable week a year earlier.

Whether this datapoint is statistical noise or the beginning of a new trend is something to keep an eye on.

Regardless, many post-recession periods have showcased a abor market that came roaring back. That’s not expected now as layoffs are finally diminishing, but job creation remains another story, James Picerno writes at The Capital Spectator.

“The big test is still ahead of us,” Picerno says. “The transition this time from an economic climate that’s no longer destroying jobs to one that’s generating new positions of some magnitude is likely to be rocky. It’s not yet clear how much job-minting capacity is coming, but we’ll find out soon.”

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Good thing we stocked up on produce.

There’s a lot to like about the unexpected surge in today’s retail sales report.

Retail sales rose 1.3% last month, nearly twice as much as economists were expecting. The gains were broad based, as furniture and clothing makers were the only categories that reported declines.

“Headline retail sales are making a steady comeback after collapsing towards the end of 2008,” Miller Tabak’s Dan Greenhaus says.

Some of the factors, like rising gas prices, were expected, he says. But building materials stores bounced off several months of declines and electronics stores’ sales were up sharply.

“While we continue to believe consumers can continue spending during the deleveraging process, the difficulties in the labor market and the desire to reduce the tightening of lending standards of all kinds should serve to cap the pace at which spending will rebound in 2010,” Greenhaus says.

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Is this guy getting tired?

Financial and commodity markets ended November with a bang and wasted no time getting off to a good start in December.

Asset classes rose across the board in November, and barring a wave of selling this month, 2009 will be one of the best calandar years on record, James Picerno points out at The Capital Spectator.

“The Federal Reserve has engineered the party and so far everyone’s enjoying themselves,” he says, referring to near-zero interest rates.

But there’s a good chance 2010 won’t look nearly as good as this year, as the economic recovery faces many challenges.

“The Phoenix rising from the ashes is destined for the hard work and complications of navigating the new landscape of subpar growth, debt, higher interest rates and inflation and the general hassles that accompany rebuilding what’s been lost over the past two years,” Picerno cautions.

The Dow’s currently up 122 at 10467, has risen more than 60% off the early-March lows and is up almost 20% year-to-date. But as we previously detailed, stocks are set to fall for the decade, and some remain pessimistic that another “lost decade” could be on the horizon.

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Recovery's around the corner. Don't get stuck in the mud.

Is it just me, or is anyone else’s head spinning trying to figure out where the economy stands on this long and winding road to recovery?

Let’s recap this week’s data:

Conference Board reported Tuesday that consumer confidence fell for a second straight month, signaling folks are still worried as unemployment creeps closer to 10%. But Case-Shiller said housing prices rose for the third straight month, signaling some flickers of hope in the depressed housing market.

Of course don’t get too excited about housing. New-home sales unexpectedly fell in September following five consecutive increases. And orders for durable goods rose for fourth time in the last six months, but still remain down 24% year-to-date.

Then came yesterday’s all-mighty GDP report, which posted a better-than-expected 3.5% rise in 3Q, and prompted some folks to say the recession’s over. Consumer spending, believe it or not, fueled growth, as spending jumped 3.4% for the quarter on the heels of government stimulus.

“Housing is finally making a positive rather than a negative contribution, and nonresidential fixed investment was a smaller drag than I had been expecting,” UC San Diego economics professor James Hamilton writes at Econbrowser.

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