Retail Sales Fall Less Than Forecast

U.S. Economy: Retail Sales Fall Less Than Forecast

Sales at U.S. retailers fell less than forecast in September after the Obama administration’s cash-for-clunkers program expired, signaling consumers are gaining confidence in the outlook for an economic recovery.

The 1.5 percent decrease followed a 2.2 percent gain the prior month, figures from the Commerce Department showed today in Washington. Sales excluding automobiles climbed 0.5 percent, more than projected. Gains in prices of goods imported into the U.S. slowed last month, a separate report showed.

Stocks climbed and Treasuries fell as the report eased concern that household purchases, which make up about 70 percent of the economy, would sag without government support. While gains in spending from food to furniture suggest consumers will help pull the nation out of recession, Federal Reserve policy makers say demand is likely to be curbed by further job losses.

How The Trade Deficit Got Better

According to a government report America's trade deficit narrowed down a bit, mainly driven by the drop in consumer spending on imports. Imports outstripped exports by $58.5 billion in April, down from the $62.4 billion in March.

To the surprize of analysts and economists the trade gap narrowed despite the rise in the price of oil imports. The 8% rise in the price of an oil price was partially balanced out by 3% drop in the consumption of it. Therefore the overall oil imports fell by more than $1 billion, helping the trade deficit.

Imports fell by 1.9%, due to slowdown in the U.S. economy and consumer spending. The weak dollar has made imported goods more expensive which lead to cut down of spending. The weak dollar has also made exports cheaper in other nations, making it more competitive. Another evident reason for slowdown in spending was that Walmart reported the worst sales comparison in its history in April.

In addition, exports edged up 0.2% to hit a record high once again. Export of services grew 0.5%, while export of goods was essentially flat, with food, feed and beverages being the category showing the best growth.

The government report also showed that America's trade gap with China continued to climb to $19.4 billion, up 12% from March and 13% from year-ago levels. The imbalance between the imports and exports with China now account for about a third of the overall trade deficit, and is nearly twice the size of the trade gap with oil producing nations.

(Source: CNN Money)

CFOs Take On The Economy

A survey indicated that Chief financial officers CFOs are taking a darker view on the U.S. economy. They have less confidence the growth rate this year.

The Duke University/CFO Magazine Business Outlook found that 30% of CFOs had become more pessimistic on the direction of the U.S. economy. Only 26% were more upbeat, which is near the 5-year low hit in September 2006. A total of 484 U.S. CFOs were surveyed.

The optimism index has dropped to a level that is low by historical standards. With pessimists outnumbering optimists, the prospects for the U.S. economy are poor.

Majority of the CFOs felt that the their main concerns were rising energy prices and slowing consumer demand, driven by the cooling U.S. housing market.

Wholesale Inventories See An Upward Movement

Inventories at U.S. wholesalers rose 0.3% recently as stocks of nondurable goods posted the biggest percentage increase in 5 months. Wholesale sales outpaced inventories in April, rising 1.3% after a 2.1% gain in March. The rise in inventories matched economists' expectations for a 0.3%.

The March inventory gained 0.4% while the March wholesale sales increased upward to 2.1%.

The inventories-to-sales ratio, a measure of how quickly stocks would be depleted at the current sales pace, fell for the fourth straight month, indicating high sales.

Stocks of durable goods, items meant to last at least three years, fell 0.5% in April, the biggest drop since July 2003, after a 0.1% decline in March. Inventories of nondurables rose 1.6%, the biggest rise since a 2.0% increase in November 2006, after a 1.1% increase in March.

Automotive inventories fell 3.5%, the largest drop since a 4.0% fall in April 1998

(Source: CNN Money)

Worker Productivity Below Estimates

Worker productivity in the Q1 was much lower than original estimates, according to a government report. Productivity increased by 1% in the quarter, down from the original estimate of a 1.7% gain, but matching the consensus of economists. The slower economic growth cut into productivity gain, which measures the output of U.S. workers. The slower productivity raised inflation, as the unit labor costs rose 1.8% in the quarter. It indicates growth was not so great in the first quarter and that went straight into productivity.

The lower productivity and higher labor costs could keep the Federal Reserve from moving to cut rates to spur the economy in the face of the slowing economy. Higher labor cost could lead to job cuts. U.S. employers announced plans in May to eliminate 71,115 jobs, up 32% from May 2006. It was the second consecutive month in which job cuts increased from the same period a year ago.

Still, year to date, the pace of job cutting remains below last year's level, but the gap is rapidly closing. Heavy downsizing in the computer industry dominated May job cuts. Heavy job cutting in the computer industry reflects a slowdown in business spending on new technology.

White House's Economic Forecasts

The White House recently lowered its forecast for economic growth this year even as it slightly upgraded its outlook for unemployment. The administration expects the GDP to grow by 2.3%, down from a previous projection of 2.9%. The main reason for the downgrade was due to extremely weak start in Q1 2007. The economic growth was merely 0.6% in this period, its worst showing in more than 4 years. The economy did much better in 2006 growing by 3.1%. The administration expects the economy will regain speed and grow by 3.1% in 2008 and 2009.

Federal Reserve Chairman Ben Bernanke, the administration and private economists expect the economy will rebound in the months ahead. The housing sector will play an important role in deciding whether the economy will improve or get worse. As of now no one is quite clear whether the housing market has bottomed out or there is more in store.

However the unemployment rate, which averaged 4.6% last year is expected to dip to 4.5% this year. That is slightly better than its old forecast that the unemployment rate would hold steady at 4.6%. Next year, the administration predicts the unemployment rate will edge up to 4.7%. Surprisingly the employment rate has remained strong even though the economy is showing signs of weakness. Analysts believe the reason has been that only housing and auto sectors were affected and did not affect other types of sectors.

Inflation directly affects the consumer prices. Inflation has been increasing this year due to higher prices for gas and other energy products. The administration expects consumer prices to rise by 3.2% this year. That's higher than the 2.6% increase previously projected. However the administration also expects consumer prices to rise by 2.5% in 2008 and edge down to 2.4% in 2009.

The White House's economic forecasts are issued twice a year. The administration's projections are in line with those offered by private analysts.

(Source: Yahoo Finance)

A Higher Ground: U.S. Service Sector

The dominant U.S. service sector grew at its fastest rate in a year in May, beating market expectations for a slightly slower pace.

The Institute for Supply Management's ISM services index rose to 59.7 in May from 56.0 in April. The analyst had actually expected a slight decline of 55.3. Analysts believe this is a very strong number and a key piece of the recent strength seen in U.S. data.

The stock market did not respond to these strong numbers from the service sector. However the dollar did respond gaining some ground to euro. Also the bond prices weakened on signs of strong growth. The services sector represents about 80 percent of U.S. economic activity, including businesses such as restaurants, hotels, hair salons, banks and airlines.

Federal Reserve Chairman Ben Benanke Speaks Up

According to Ben Bernanke

Elevated levels of inflation excluding food and energy may not recede as weakness in the housing sector is likely to restrain economic growth for longer than expected. Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside. The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected. The rate of increase in housing costs, which had contributed to a rise in core inflation, seems likely to slow, although the timing of that deceleration is uncertain, However, the tight labor market has the potential to contribute to price pressures

The dollar fell, U.S. stock market futures lost ground, and Treasury bond prices got some help due to Bernanke's comments about the housing sector's drag on the economy, suggesting the Federal Reserve is likely to hold interest rates steady at 5.25%.

Bulls Step Aside In June

Come June, with the bulls stepping aside for a while, a 3-month stock rally could hit a road block. There is still alot of money that could possibly be invested in the stock markert, but the bulls know there is not much coming out this month.

In the coming week there will be few economic reports like April factor orders, April trade balance and the May services sector reports. However none of these reports cause much market movement. Analyst predict not much movement in June, with the occasional up day as more deal news comes out.

Analyst also predict that if there is any pullback in the market, it will be temporary, since the factors that lead to the 3-month stock rally is still intact. Factors like better earnings, company buyback, mergers & acquisitions, steady interest rates, confidence from the Federal Reserve about the economy are all still in place. These factors helped recharge the bulls after a late-February through early March stock selloff that was sparked by worries about a global growth slowdown. The Dow Jones industrial average and the S&P 500 have both risen for 8 of the last 9 weeks. Both ended last week at all-time highs. The Russell 2000 small-cap index is at a record high. The Nasdaq composite is at a more than 6-year high.

Summer, starting with June, tends to be tough for stock investors, as the old "sell in May and go away" expression suggests. It's tough because with fewer traders around, there is less money trading hands and less of an incentive to put new money to work. This June is unlikely to be an exception, particularly as there is little expected in the way of market-moving news other than corporate deals. Q1 earnings are done with and the Q2 earnings reports won't start until next month. The next Federal Reserve policy meeting is not until the end of the month and they are expected to hold steady on interest rates. Most of the major economic reports for the month of June were already released, the 1st day of the month, leaving investors less to chew over in the next few weeks.

All in all, June is going to be the month where bull investors keep away.

(Source: CNN Money)

Biggest Drop in 18 Years

The dollar fell and treasury yields declined on news that existing-home sales sank 8.4% in March, their steepest drop since January 1989, on poor demand hampered by bad weather. The National Association of Realtors reported that March sales came in at 6.12 million, shy of economists' expectations of 6.5 million. The decline follows a 3.7% rise in February. March sales were down 11.3% from the year-ago period. The median home price in March dropped 0.3% from a year ago to $217,000, while inventories rose to 7.3 months of supply from 6.8 months in February. The Conference Board's consumer confidence index declined to to 104, its lowest level in eight months, from 108.2. "The housing downturn is now weighing increasingly heavily on the U.S. economy," said Mark Zandi, chief economist at Moody's Economy.com. It is "starting to have an impact on consumers' psyche and also their spending. The second quarter is going to be no better than the first.'' The yield on the 10-year Treasury note fell to 4.61% from 4.64% yesterday, while the dollar fell 0.3% against the euro to $1.3621.

(Source: Seeking Alpha)