Economic Notes for the Week of April 30th

Another mixed, but not bad week for economic news.

The first of several estimates for first quarter 2012 GDP came out at +2.2%, which was slightly weaker than the +2.5% growth rate expected by consensus.  The composition of the report was not especially robust, as inventory buildup contributed more to the growth number than expected, as compared to final sales, and business fixed investments and government expenditures (mostly defense spending) declined.  However, consumer spending as a component of the report was solid and was much better than first thought, and residential investment increased dramatically.  What does this mean?  Not a lot yet.  These numbers are early estimates, and subject to revision, but, at the same time, demonstrate that the economy is still in fragile footing but just plugging along fast enough to avoid the +2% ‘stall speed.’  The 2.0-3.0% is a wide but anticipated range for GDP for most of 2012 and we seem to be right within that band.

The Federal Reserve Open Market Committee meeting, which finished up on Wednesday, resulted in no changes to current policy or dramatic adjustments in language.  The FOMC is committed to keeping the Fed Funds target rate ‘exceptionally low’ through late 2014, and continuing ‘operation twist,’ which is the open market strategic purchases/sales of Treasury securities designed to adjust various rates along the yield curve (i.e. keeping long rates low and stimulative for as long as possible, since they can’t push short rates lower than zero for ‘conventional’ easing).  Their assessment of the economy alluded to a bit more strength, though, by subtle changes in wording here and there.  They appear to remain cautious, but a bit more optimistic.  However, the overhangs of housing and unemployment remain difficult to put any type of positive spin on.

Durable goods orders were mixed for March, as the total orders figure fell -4.2% month-over-month (compared to an expected -1.7% number).  This was largely led by weakness in aircraft orders, which is an extremely volatile component anyway.  Removing transports completely from the equation resulted in a -1.1% drop.  This was similar to the full core durable goods number of -0.8% (which is nondefense capital goods ex-aircraft)—still lower than expectations but not as dramatic considering February’s figures were revised higher.  Core durable goods shipments were higher, though, which was a positive takeaway.  In other more closely-followed but volatile Fed manufacturing surveys, the release from Richmond was dramatically higher, while the Empire State and Philadelphia versions were a bit weaker.

The Case-Shiller home price results for February came out this week and things were moderately positive, though still mixed on a regional basis.  The index rose +0.15% on a seasonally-adjusted basis (first gain in a year), although some earlier months were revised downward—tempering the good news somewhat.  The year-over-year number continued to lag, at -3.5% nationwide.  From a regional standpoint, Phoenix, Miami and Minneapolis were up 1-2%, while Atlanta suffered again with a -2.0% loss on the month.  Increases occurred in 12 of the 20 cities during the month.

New home sales for March were volatile again on the surface, but were affected by some revisions and unique regional differences.  The month-over-month number for March was down -7.1%—below consensus estimates that called for a slight gain, but the level of sales was affected by an upward revision the prior month.  Net-net, a wash to some extent.  The Western part of the U.S. caused a bulk of the monthly volatility.  The supply of new homes on the market remained in the 5 ½ months territory.

Pending home sales were up by +4.1% for March, which was much more than the +1.0% increase expected by analysts.  Additionally, a small February decline was revised upward.  Of course, the ‘pending’ part of pending sales reflects the ‘in process’ nature of this measure, so it leads existing home sales by a few months.  Most of the gains were in the South and West, while Midwest and Northeast dropped.

Consumer confidence for April declined a bit from 69.5 to 69.2, mostly from a drop in  the ‘expectations’ component… however, the ‘present’ conditions assessment improved.  Additionally, the ‘employment’ portion of the survey improved as respondents implied some improvement in labor conditions.  By contrast, the University of Michigan index of consumer sentiment moved upward for April from 75.7 to 76.4, again, mostly due to a more optimistic assessment of current conditions.  Inflation and ‘future’ conditions expectations were generally flat.

On the employment front, initial jobless claims came in at 388k for the April 21 week, which was above expectations for the fifth week in a row.  Some softening is happening here, and it will be telling in coming weeks to see how meaningful this is from a longer-term recovery standpoint.  Continuing claims, at 3,315k were also a bit higher than forecast, but not by a statistically meaningful amount.

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Stocks gained some ground back this week as Europe was a bit quieter from a news standpoint and U.S. earnings results continued to surprise to the upside and surpass expectations (which were low going into this quarter).  In fact, almost 80% of companies in the S&P reporting so far have beaten estimates and total earnings are up over 7% year-over-year.

From a sector perspective, consumer discretionary and energy stocks led on the week while more defensive consumer staples and healthcare lagged.  Small-cap outperformed large-cap and domestic outgained foreign.  Developed markets in Europe led by France, Italy and Spain carried EAFE returns higher (despite the news that several economies have now officially fallen into recession), while emerging markets underperformed due poor weeks from all four of the BRICs—Brazil, Russia, India and China.  The French election should make things interesting on the European front.

Bonds were slightly up with lower rates, and credit, such as high yield, outperformed governments.  Foreign government bonds performed a bit better than U.S. debt, despite the foreign bond market being highlighted by Spain’s S&P downgrade of two notches down to BBB+, with a negative outlook.  Rating agencies have been notoriously late to the party in terms of adjusting bond ratings to current conditions (most fixed income managers we speak to have either their own rating systems and/or anticipate metrics that might affect an agency rating well in advance of it actually happening).

Commodities were generally positive on the week overall, with biggest gains in the agricultural and industrial metals groups.

Have a good week.

Karl Schroeder, RFC, CSA, AACEP

Investment Advisor Representative

Schroeder Financial Services, Inc.


Sources:  FocusPoint Solutions, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Reuters, Schroder’s, Standard & Poor’s, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial Services, Inc. is a registered investment advisor.