Economic comments, week ending March 3

By John W. Davidson | Mar 04, 2012
This week the U.S. Commerce Department revised its fourth quarter GDP estimate up two ticks to 3.0 percent quarter over quarter seasonally adjusted at an annual rate (Q/Q SAAR). This most recent 3-handle report compares favorably to the modest 1.8 percent growth in the previous quarter. But, the chart below shows a longer term view, using year over year measures of GDP, which ticked up to 1.6 percent in the fourth quarter of 2011. Note that the severity of the Great Recession trough of -5 percent is worse than any of the other 11 post-World War II contractions. Note that the most recent expansion of 1+percent - 2+percent has been less robust than prior expansions.

Economic news was mostly positive again this week, but many remain skeptical about the durability of the recovery. Some will wait till next week to see if the U.S. economy was robust enough to generate a third month in a row of 200,000-plus jobs. Concern about the European sovereign debt crisis has moved to the back-burner. Most equity and bond markets were modestly higher. Credit spreads narrowed. The U.S. dollar was stronger against the European and Asian currencies. Energy and commodity prices fell.

 

Perspective

This past week I returned to Amherst College to attend a program of the American Presidency Today. I also sat in on a couple of undergraduate courses on public and health policies. I was reinvigorated and inspired by the discussion, a refreshing break from the partisan banter from cable networks. I shared time with a close friend and renewed contact with several others I had not seen since graduation. One of my former professors spoke in the program; I ran into another professor, who had retired seven years ago, in the college exercise room.

The campus is as vibrant as ever, but it has changed its complexion.This year's freshmen class was the first class in which white Americans were not in the majority; 8 percent were non-U.S. and 43 percent were students of color. The world is flat, even at Amherst College.

One significant concern that I have about the U.S. economy is that the Congress has become so partisan that it has not been able to agree on policies that effectively address the issues of the budget deficit and tax code. The Amherst Today program helped me gain a better understanding of the bases for the partisan divide and solutions that may be necessary to repair.

For instance, the gerrymandering of the voting districts has become so extreme that most of the seats are controlled by one party. Since there is no need to compromise with the other party to retain the seat, the representative naturally moves to cover the base. A solution being tried in one state is to have a primary ballot where all vote and the top two meet in the general election. A second contributing factor is the emergence of PACs where unlimited money now comes from individuals with specific issues. The campaign reform laws have had some unintended consequences. The funding process has been taken away from the parties and put into the hands of special interests. One obstacle to correcting these problems is that Congress will need to "heal thyself."

 

Economic Releases

Changes in bond spreads, as reported in the tables below, are a measure on the changes in what people will pay for assuming credit risk in the high yield, corporate and bond markets. Spreads are both a measure of risk tolerance, as well as a measure of changing valuations in those markets. Narrowing spreads increase the value of bonds relative to comparable duration treasuries. Widening spreads decrease the value of the bonds relative to treasuries.

The government bond table below shows that spreads have narrowed this year. What did that mean for the corresponding bond markets? The chart below shows that the value of those bond markets, as represented by the Bank of America/Merrill Lynch indices, have increased this year. Had investors invested $100 as of Dec. 30, 2011 their holdings would have been worth over $105 in high yield (blue), $105 in emerging markets (green), and less than $103 in US corporate bonds (red).


This week the U.S. Commerce Department revised its fourth quarter GDP estimate up two ticks to 3.0 percent quarter over quarter seasonally adjusted at an annual rate (Q/Q SAAR). This most recent 3-handle report compares favorably to the modest 1.8 percent growth in the previous quarter. But, the chart below shows a longer term view, using year over year measures of GDP, which ticked up to 1.6 percent in the fourth quarter of 2011. Note that the severity of the Great Recession trough of -5 percent is worse than any of the other 11 post-World War II contractions. Note that the most recent expansion of 1+percent - 2+percent has been less robust than prior expansions.

 


 

Chart Source & URL: Federal Reserve Bank of St. Louis FRED database

 

 

Other Economic Releases

 

In February, the U.S. Purchasing Managers Index (PMI) for manufacturing dropped a couple of points to 52.4, but remained in the expansion zone, above 50. China's PMI for manufacturing rose a point to 49.7, on the cusp of the demarcation of expansion. The EU's PMI gained two ticks to 49.0. Germany's PMI dropped 8 ticks to 50.2. UK's PMI dropped similarly to 51.2.

In January, U.S. Personal Income rose +0.3 percent while spending rose +0.2 percent, on the low end of expectations. Durable Goods Orders fell -4.0 percent in January; ex-transportation, orders were still down -3.2 v. The National Association of Realtors' Pending Home Sales Index rose 2.0 percent in January. Meanwhile, the Case/Shiller Home Price Index for December fell -0.5 percent from November and -4.0 percent from the previous year. January Construction Spending fell -0.1 percent, well below the range of expectations. Nonetheless, the Conference Board's Consumer Confidence for February spurted almost 10 points to 70.8.

Canada's fourth quarter GDP rose 1.8 percent while its third quarter GDP was revised upward to 4.2 percent.

Economic Sentiment in the EU, including both Consumer and Industrial measures, showed improvement in February. EU Unemployment inched higher to 10.7 percent and the PPI increased +0.7 percent in January. Germany's Unemployment rate of 6.8 percent in February matched the upward revised January rate. Germany's Retail Sales fell -1.6 percent in January. Germany's CPI rose to +0.7 percent in February.

 

 

Equities Markets

Equity markets were modestly higher in most markets, but not so in the Canadian, UK, and Swiss markets.


 

Bond Markets

 

Most government bond markets were higher on the week, with the European bond markets leading the way. Credit spreads narrowed.


 

 

Currencies and Commodities

 

The U.S. dollar gained against the European and Asian currencies this week, but slipped against the Looney. Commodity prices fell across the board.


 

 

 

 

 

 

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