Last week's WrapUp looked at the corporate sector as the possible pillar underpinning the U.S. economy. The data presented showed businesses retiring stock and slowing capital investment domestically, while some corporations are actually increasing foreign capital investment. The data presented showed the corporate sector is clearly not holding the economy afloat on a rate of change basis.
Looking at the corporate and employee segments reveals a possible shift in trend, with corporate profits as a percentage of national income at the highest levels in over 50 years, clearly closer to a top then a bottom. Conversely, employee compensation as a percent of national income is at its lowest level in more than three decades and appears to be turning up at the same time the corporate share appears to be peaking.
Figure 1
Source: Moody's Economy.com
When looking at both corporate and employee compensation on a rate of change basis (year-over-year, YOY), corporate profits are also seen to be near cyclical highs of 30% while employee compensation is still playing catch-up, displaying a rising trend, though far from the cyclical peak typically seen near a 12% YOY rate.
Figure 2
Source: Moody's Economy.com
The slowing in corporate profits are being translated into reduced corporate investment, a drag on GDP rather than a support. Figure 2 above shows that the trend in employee compensation is still up, but are rising employee incomes translating into increasing retail sales, and is it enough to offset the negative housing slump?
The answer to the question as to whether rising employee incomes are translating into rising retail sales is answered by the figure below, which shows falling retail sales with employee compensation possible falling suit instead of inching higher.
Figure 3
Source: Moody's Economy.com
This indicates that the rising income level of employees has not been enough to compensate for the negative wealth affect from the housing market to prop up retail sales. Retail sales and home appreciation display close directional similarity as seen by the figure below. The sharp drop in housing prices as seen by the median sales price for single-family homes is clearly having a delayed spill over effect in retail sales as consumers are extracting less equity from their homes, leading to less money funneling into the economy.
Figure 4
Source: Moody's Economy.com
Figure 5
Source: Moody's Economy.com
The negative trend in housing and its related negative impact on retail sales is likely to continue based on recent economic data. The National Association of Home Builders (NABH) Housing Market Index (HMI) was released last week and came in at the lowest level on record for the month of April, with all three components of the index coming in at their lowest levels ever for April. Moreover, each component recorded one of the lowest scores for optimism for any month in the 22-year history of the index. The data sends a strong and clear signal that the housing recession is not over and that housing will continue to negatively affect the economy through spring and probably summer as well.
Banks are tightening lending standards, and delinquency rates are continuing to climb upwards with the greatest increase in delinquency rates coming from Southern California and Florida.
Figure 6
Source: Moody's Economy.com
Figure 7
Source: Dismal Scientist
Figure 8
Source: Dismal Scientist
The trend in rising delinquency rates is likely to get worse over the coming year as billions in adjustable rate mortgages (ARMs) reset to higher rates that reduce discretionary incomes, with resets peaking late this year with levels not tapering off until mid to late 2008.
Figure 9
Source: Dismal Scientist
In summary, the corporate sector is finding better use of its cash by repurchasing its own stock rather than expand capacity to meet future growth which it sees as being absent. Corporations see the U.S. consumer decelerating spending habits as their housing ATM spending spree is over and housing conditions continue to erode. As both corporations and consumers are reigning in spending habits, it appears neither are presently supporting the economy with economic growth in the U.S. likely to decelerate in the first quarter and beyond. For the economy to regain traction it will need a friendly lift from the Fed via lower interest rates to help the surging number of ARM resets in the months ahead to cushion the housing fall out. The Fed, however, will be hard pressed to lower interest rates while inflation remains at elevated levels, crude oil presses /barrel, and gold pounding the door of 0/oz. The Fed is hard pressed indeed, between proverbial rock and a hard place.
TODAY'S MARKET - Economic Reports
MBA Mortgage Applications Survey--Week of 04/20/07
Mortgage demand fell 2.5% last week led by a 4.2% decline in purchase applications and a 0.3% decline in refinance applications. The decline in refinance activity was likely the result of rising mortgage rates as the contract rate on the 30-year FRM increased 6 basis points to 6.12% while the 1-year ARM remained at 5.89%. The FRM is 16 basis points higher than four weeks ago, and the ARM is one basis point higher than four weeks ago.
Source: Moody's Economy.com
Oil & Gas Inventories--Week of 04/20/07
Crude oil inventories rose 2.1 million barrels last week, in contrast to expectations of a 1.0 million barrel decline. Gasoline inventories continued their slide for the eleventh straight week, falling 2.8 million barrels, well above expectations calling for a more modest 0.4 million barrel decline. This puts gasoline inventories well below the average range for this time of year (see figure below). Distillate inventories were unchanged while expectations were for a 0.4 million barrel drawdown. Both gasoline and crude oil inventories are below last year's levels, with gasoline inventories down the greatest (-6.7%) followed by crude (-3.2%).
Source: Energy Information Agency (EIA)
Source: Moody's Economy.com
Source: EIA, This Week In Petroleum
Durable Goods (Advance)--March
March new durable goods orders rose 3.4%, though down 2.12% over last year's levels, and recording its largest yearly decline since August of 2003. A positive development in the report was a 4.7% gain in core capital goods for the month, seen as a proxy for business investment in equipment and software.
Source: Moody's Economy.com
New Home Sales--March
March home sales rose 2.6% to 858,000 annualized units from February's 836,000, though less than the expected 900,000 units. The housing downturn is far from over as sales were down 24% from last year's levels and the months supply of inventory remains elevated at 7.8 months.
Source: Moody's Economy.com
The Markets
The Dow Jones Industrial Average finally broke the 13,000 milestone for the first time, helped by companies beating analyst first quarter forecasts and a positive durable goods report. PepsiCo's (PEP) first quarter earnings came in 6.9% above analyst estimates and 8.3% higher than last year's earnings. Corning Inc.'s (GLW) first quarter earnings came in 7.3% above estimates and Boeing's (BA) first quarter earnings beat estimates by 9.4%. The positive earnings surprises propelled the Dow past 13,000 with triple-digit gains, up 135.95 to close at 13089.89 (+1.05%). A 37.6% positive earnings surprise from Amazon (AMZN) helped push the NASDAQ up 23.35 points to close at 2547.89 (+0.92%) and the S&P 500 was up as well, rising 15.01 points to close at 1495.42 (+1.01%).
Investors sold Treasuries today with the 10-year note yield at 4.646%, rising 2.4 basis points. The dollar index was down on the day and approaching a 15-year low, falling 0.13 points to close at 81.44. Advancing issues represented 67% and 56% for the NYSE and NASDAQ respectively, with up volume representing 82% and 62% of total volume on the NYSE and NASDAQ, reflecting a mixed trading day in the markets.
Energy prices were mostly up on the day after release of petroleum inventories. Gasoline inventories continue to plummet due to strong demand and lagging imports with one month gasoline futures rising 2.97%, and a 6.33% spike in refining margins (3-2-1 crack spread). Precious metals were up slightly on the day aided by a falling dollar with gold rising .60/oz to 5.05/oz (+0.20%) and silver up __spamspan_img_placeholder__.02/oz to close at .81/oz (+0.15%). Base metals were down with aluminum holding up the most (-1.01%), while nickel displayed the weakest performance (-3.75%) which saw the greatest rise in its London Metals Exchange stockpiles, which rose 5.89%.
Overseas markets were mixed with Brazil's Bovespa index putting in the strongest showing, up 1.23%, while Japan's Nikkei 225 index displayed the greatest weakness, down 1.24%.
The move in the markets was broad based as all ten of the S&P 500 sectors were up on the day, with energy (+2.03%), materials (+1.61%) and financials (+1.37%) putting in the strongest advances. The greatest weakness was seen in consumer staples (+0.25%) and telecommunications (+0.28%).
