FOREX TRADING

U.S. Review

Some Good and Not So Good Data This Week

• The panic that gripped global markets over the past two weeks appears to be easing a bit. It helps that the economic data coming out of the United States suggest a sustainable recovery is now well underway. On the positive side, consumer confidence rose more than expected in May. The April durable goods orders and the May Richmond Fed survey confirmed that the U.S. manufacturing expansion continues to gain traction.
• Less good was the slight and unexpected downward revision in Q1 U.S. GDP growth, and U.S. home price data that reveal home prices beginning to roll over again.

Two-Speed Recovery Continues

The U.S. economic recovery continues to show its Dr. Jekyll and Mr. Hyde sides. Perhaps that is a factor behind the schizophrenic stock market behavior of late. An “unbalanced” or “two-speed” recovery remains the current state of affairs. This is disappointing to the bulls that have been rampaging on Wall Street since March 2009, trumpeting the strong return of corporate earnings, while whispering the recovery is looking stronger than the consensus had expected. There were plenty of reminders this week that the bulls’ case for a normal or robust recovery from deep recession remains a long shot.

On the labor market front, initial jobless claims refuse to drop to levels that would suggest a swift return of a normal private sector payroll growth during an economic recovery. The four-week moving average of initial jobless claims, a more stable indicator of job trends than the weekly number, has risen for two consecutive weeks now, even though initial claims dropped by 14,000 to 460,000 in the latest week. Initial claims have clearly been trending around the 450,000 level for months now, when we would like to see them slip back to the 350,000-400,000 level that often characterizes a normal labor market during economic expansion. Thankfully, other employment indicators are not quite as scary. The monthly payroll data have indicated positive job growth for four consecutive months now. The household survey data are indicating an even stronger return of job creation, although one third of those new jobs are part-time. Indeed, we expect the May jobs report that is to be released next week will reveal even more job gains than in April, though much of the strength will likely be from temporary census hiring.

We also got confirmation that despite Herculean efforts to support the housing market through homebuyer tax credits, mortgage modifications and record low mortgage rates, the ability to stabilize home prices at current levels appears fragile. The Office of Federal Housing Enterprise Oversight (OFHEO) released its monthly purchase-only home price index report for March, showing an increase of 0.3 percent from February after a string of three consecutive monthly declines. However, this home price index is still down 1.9 percent from a year ago. By contrast, the seasonally-adjusted national Case-Shiller index revealed renewed weakness in home prices in the first quarter. The Case-Shiller index plunged at an annualized 5.05 percent rate in the first quarter, even though the year-over-year figure improved to a 2.13 percent home price gain. In the wake of the homebuyers’ tax credit expiration and the rise in the U.S. foreclosure rate, further declines in national home prices can be expected. (more…)

U.S. Review

Growth & Credit: On the Road to Singapore (Recovery)

• Economic growth and finance are both in recovery mode as evidenced by the gradual upturn in jobs and the gains in leveraged loan issuance. Yet, like Bing Crosby and Bob Hope, the economy never seems to be able to reach the happy land of Singapore.
• This recovery is still subpar for housing and the consumer as the pace of recovery still leaves many homeowners underwater in certain areas and many workers underemployed or unemployed. Skies are getting clearer but we remain far away from a sunny day.

On the Road to Singapore

In their most famous “road picture,” Bing Crosby and Bob Hope vow never again to repeat past mistakes and head off to Singapore. Of course, they do repeat their past mistakes and never do get to Singapore. For the U.S. economy the pace of improvement appears maddeningly slow and yet there is improvement.

Employment losses have steadily declined over the past six months. In fact, private sector jobs (ex-construction) have risen over the past two months. There is a cyclical recovery in private sector jobs while the structural problems in real estate limit the recovery. Job gains have also appeared in manufacturing sectors such as machinery, primary metals and electrical equipment. Meanwhile the index of hours worked has risen over the last three months, consistent with sustained economic growth. Combining hours worked and average hourly earnings, our income proxy has broken into positive growth territory. This suggests positive income and therefore spending gains in the months ahead.

Structural – Not Cyclical – Challenges to Employment

While the employment data suggest cyclical recovery, there are also suggestions of structural challenges that will limit our progress on the road to Singapore. We see this clearly in the unemployment rate by education and the duration of unemployment data. The stark reality of the unemployment situation is that higher education levels are associated with lower unemployment – and vice versa unfortunately. Unemployment for college graduates is 5 percent – for high school drop outs the rate is 15 percent. Meanwhile, the average duration of unemployment remains high at 30 weeks. There is a significant skills mismatch in the U.S. economy. It is not as though there are no jobs. More precisely, there are no jobs for many willing workers who do not have the skills to compete in the 21st century workplace.

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