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Despite encouraging signs that the US economic recovery is picking up steam, investors have been spooked by the euro-zone debt crisis amid fears that troubles overseas will spread to our shores. The European crisis calmed momentarily last week as the German parliament approved the country’s participation in the €750 billion bailout fund, but concerns that the worst is yet to come refuse to fade away.
On the domestic front, as anti-big bank sentiment has swelled, and last week, the US Senate passed the most sweeping financial regulation legislation in more than 70 years. A joint committee will now reconcile House and Senate bills and likely have a final legislation on hand by the end of June. Amid all of this noise, the economic recovery has chugged along, and so far, positive data is outweighing the negative. Residential Housing The residential housing market has received recent boosts from government homebuyer tax credits and rising consumer confidence, but the April 30th expiration of the tax incentive program could result in a fallback in housing activity in coming months. April housing starts climbed by 5.8% to the highest level seen in 18 months, but building permits, an indicator of future construction activity, dropped 12% in the largest decline in 16 months. New home sales surged by 14.8% last month to the highest level in two years and the median home price declined 9.5% year-over-year. Existing home sales rose 7.6% in April while the median home price jumped 4.0% from a year ago. The S&P/Case-Shiller 20-city home price index showed that prices declined 0.5% in March for the sixth-straight monthly decrease, but year-over-year, the index gained 2.3%. Spending In its advance estimate of Q1 GDP, the government reported that the economy expanded at only a 3.2% annualized pace, slightly below expectations of 3.3% and also below the 5.6% pace set in the fourth quarter. However, the growth was bolstered by consumer spending, which posted the biggest increase since Q1 2007 in the first three months of the year. The overall performance of the economy over the past two quarters was the strongest since the second half of 2003. The Conference Board’s consumer confidence reading strengthened in May, increasing to 63.3 from 57.7 in April. The gauge of expectations for the next six months increased to the highest level since August of 2007 as consumer pessimism about the labor market lifted. In the same spirit, the University of Michigan’s preliminary May gauge of consumer sentiment rose to 73.3 from April’s final reading of 72.2. U.S. retail sales climbed 0.4% in April, marking the seventh straight monthly increase, while consumer credit expanded for the second time in three month, climbing by $2 billion in March. On the business side, business spending and the manufacturing sector continue to lead the economic recovery. The ISM Manufacturing index reported the fastest growth seen since June of 2004, climbing to 60.4 from 59.6 in April. During the same period, the Chicago Purchasing Managers Index also remained in expansion mode by increasing to 63.8 in April, the highest level in five years. Orders for durable goods grew by 2.9% in April, more than doubling expectations and following no growth in the previous month. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, sank 2.4% in April after climbing a revised 6.5% in March. Finally, the U.S. trade deficit widened by $40 billion in March, as imports climbed 3.1% and exports jumped 3.2%. Labor Market The April Employment Report revealed fresh payroll growth, signaling that the labor market may have turned a corner on the road to recovery. The unemployment rate grew to 9.9% as many Americans resumed their job search, and non-farm payrolls increased by 290,000 compared to expectations of 188,000. March’s data was also unexpectedly revised up to 230,000 from the initial reading of 162,000. However, initial jobless claims, a leading indicator of the labor market, surged by 25,000 to 471,000 for the week ending May 15th. The four-week moving average of initial claims also increased to 453,500. Inflation Overall price pressures remain well contained once again, giving the Federal Reserve plenty of room to fine tune monetary policy at its own pace. The consumer price index fell (by 0.1%) for the first time in 13 month, while core prices, which exclude volatile food and energy prices, were unchanged. In the same period, the producer price index also decreased 0.1% while core prices rose 0.2%. Compared to a year earlier, core consumer prices are up 0.9% while core wholesale prices have risen 1.0%. The next FOMC meeting is scheduled for June 22nd and 23rd, and in light of market volatility stemming from the euro-zone debt crisis, moderate economic improvements and subdued inflation readings, market participants currently expect the FOMC to leave the overnight lending rate unchanged until April of 2011.
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