Capital Markets Analysis

Posted by Cooperative Finance Corporation - September 8th, 2010


Consumer Confidence Bounces Back

The Conference Board’s index of consumer confidence climbed more than expected to 53.5 in August following a five-month low of 51 in July. The latest data support the Federal Reserve’s view that an economic revival will occur in 2011. The expectations component, which measures how shoppers feel about the next six months, jumped to 72.5 from 67.5, but is still low compared to historical data.


Source: Conference Board.

While consumers are more optimistic about the future, their assessment of labor market conditions worsened during August, as the number of consumers who feel jobs are plentiful dropped to 3.8—the lowest level this year. Consumers who feel jobs are harder to get rose to 45.7—the highest level since March.

Although consumers’ overall outlook remains positive, lingering pessimism about the state of the economy will restrain spending. Unless a significant improvement in the job market takes place, confidence will remain low and consumers will continue to hold back on unnecessary expenses, which will hurt recovery efforts, since spending accounts for nearly 70 percent of the economy.

Q2 GDP Revised Lower

Economic growth during Q2 was much weaker than previously estimated, as real gross domestic product (GDP) slowed to a 1.6-percent pace compared to the initial 2.4-percent estimate. The economy has now expanded for four straight quarters, with real GDP rising 3 percent over the past year—the largest year-over-year gain since Q2 2006.

The downward revision to growth was driven by a wider trade deficit as a result of a pickup in imports and a drop in exports. An upward revision to consumer spending somewhat offset the negative effects of the wider trade deficit—but at just 1.4 percent, growth is still not strong enough to fuel economic recovery.

The 1.6-percent GDP growth rate is just barely enough to keep up with an expanding labor force and is not nearly strong enough to create new jobs for the millions of workers laid off since 2008. The boost the economy saw earlier in the year from fiscal stimulus is fading, and state and local governments will be a drag on growth over the next year as they cut spending and hiring, hurting job creation. For the economy to be in better shape a year or two from now, growth will need to come from business investment and consumer spending.

Home Prices Show Modest Gains

The S&P/Case-Shiller 20-City Composite Index of previously owned single-family homes rose a modest 1 percent in June over May, and was up 4.23 percent year over year. The 1-percent monthly rise is typical for existing house prices during the summer season. Prices rose in 17 of the 20 metropolitan areas tracked.

The stronger-than-expected numbers can be somewhat attributed to demand generated by the federal homebuyer tax credit, which now has expired. More recent indicators have shown weaker housing demand and could suggest falling prices in the future, despite historically low mortgage interest rates. Rising inventories of homes for sale and an increase in distressed sales indicate the housing market recovery will be slow.

Consumer Income and Spending Rise

Personal income and spending experienced modest growth in July after flat June readings. Income grew 0.2 percent and was driven by a 0.3-percent improvement in wage and salary income. Spending rose 0.4 percent—the fastest increase since March—as durable goods spending led the way with a 1.2-percent improvement.

The labor market has improved enough to support modest wage growth but will need to improve further to lead to consistent income growth. Given the 9.5-percent unemployment rate, there is minimal wage pressure that would lead to stronger wage growth. Consumption growth going forward is expected to be tame as consumers are unlikely to lead the economic recovery.

Manufacturing Sector Expands

The manufacturing sector showed improvement during August as the Institute for Supply Management’s (ISM) factory index increased to 56.3 from 55.5 in July. The stronger-than-expected reading indicates the manufacturing sector is continuing to do its part to keep the recovery alive.

Despite the top-line increase, new orders and unfilled orders activity slowed. The New Orders Index inched down 0.4 to 53.1, the lowest reading since Q2 2009, and unfilled orders slowed to 51.5. The August report also showed strength in exports and imports and an increase in prices paid, which affects demand for inputs.

Recent Economic Releases

Indicator Prior
Consumer Confidence (Aug.) 51.0 50.7 53.5
GDP (QoQ/Annualized) (Q2) 2.4% 1.4% 1.6%
S&P/Case-Shiller (YoY) (Aug.) 4.6% 3.5% 4.2%
Personal Income (July) 0.0% 0.3% 0.2%
Personal Spending (July) 0.0% 0.3% 0.4%
Core PCE (MoM) (July) 0.0% 0.1% 0.1%
ISM Manufacturing (Aug.) 55.5 52.8 56.3
Source: Bloomberg
Key Interest Rates Rate Forecast – Futures Market
8/23/10 8/30/10 Change Q3-10 Q4-10 Q1-11 Q2-11
Fed Funds 0.25% 0.25% - – - 0.25% 0.25% 0.25% 0.25%
3m Libor 0.31% 0.30% -0.01 0.31% 0.42% 0.48% 0.56%
2yr UST 0.47% 0.49% 0.02 1.07% 1.15% 1.25% 1.43%
5yr UST 1.33% 1.36% 0.03 1.59% 1.73% 1.97% 2.15%
10yr UST 2.50% 2.50% - – - 2.92% 3.01% 3.08% 3.23%
30yr UST 3.57% 3.55% -0.02 3.92% 3.98% 4.05% 4.05%
Source: Bloomberg Source:

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