What did Last Week's Data Tell Us?

From Barron's

Friday, for instance, we learned that U.S. employment grew in April at its slowest pace in more than two years, as payrolls rose by just 88,000 while the unemployment rate inched up to 4.5% from 4.4%.

That marks a three-month average decline in job growth to 118,000 from a 12-month average of 157,000, "a significant drop-off," says Daniel Genter, chief investment officer of Los Angeles-based RNC Genter Capital. It's also "a trend that's likely to continue," he says.

Though the jobs report was weak, the Institute for Supply Management reported stronger-than-expected readings for both its manufacturing and non-manufacturing indexes. Yet the week before, the Commerce Department said gross domestic product grew at a seasonally adjusted annual rate of 1.3% in the first quarter, the slowest growth since the first quarter of 2003.

1.) The economic trend is definitely slowing. Overall GDP growth is clearly slowing. GDP has been dropping from the 2.5% range to 1.3 range.

2.) Employment is a lagging indicator. Employers will do everything they can with current employees before adding new ones.

The year-over-year percent change in employment is still positive. Here is a chart from the St. Louis Federal Reserve.



Notice that while the trend is still positive, it has been decreasing at a constant rate since about the first quarter of 2006.

3.) While the ISM data was positive, it was one month's worth of data. Here is a chart from Martin Capital that places the ISM information in a more detailed context.



Notice that

-- The Industrial ISM was hovering between 50 and 54 for the last few months, indicating just enough activity keep the economy out of recession. Last month was a postive spike out of this activity level, but it is only one month of activity.

-- the year-over-year chart of industrial production is still down.

-- capacity utilization is still heading lower.

In other words, the usage of industrial assets is still saying things are slowing down. We'll need a few more months of ISM manufacturing data to confirm the trend.

In addition, compare the national ISM with the following regional manufacturing information.

From the Richmond Fed:

Manufacturing activity in the central Atlantic region continued to contract in April, according to the Richmond Fed’s latest survey. Respondents reported somewhat sharper declines in factory shipments with the pace of decrease of new orders and backlogs on par with March. Employment and capacity utilization declined at slower rates, and delivery times edged lower. In addition, manufacturers reported that growth in inventories remained on pace with March.

From the Philly Fed:

Activity in the region’s manufacturing sector was basically unchanged again this month, according to firms polled for the Business Outlook Survey. The index for general activity was near zero, and indicators for new orders, shipments, and employment were only slightly positive, suggesting little change from March. Regarding future activity, the region’s manufacturing executives were somewhat more optimistic this month than they were in March.

From the New York Fed:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers were flat again in April. The general business conditions index edged up 2 points, to 3.8, rebounding only marginally from March.

From the Kansas City Fed:

Tenth District manufacturing activity rebounded strongly in April, and expectations for future factory activity remained high following a strong increase last month. The price indexes in the survey were largely unchanged, with raw materials price indexes easing somewhat and finished goods price indexes rising only slightly.

It looks like the Kansas City area may be responsible for the increase.

Let's sum up.

-- The employment picture is slowing.

-- GDP growth is slowing.

-- The positive news from manufacturing may be the result of one region having a good month.

Money Moving Into Health Care?

Earlier this year Barron's had an article discussing health care. The gist of the article was health care -- which has languished for the last few years -- may make a comeback this year. The article focused on earnings and new products. I would add the added dimension of safety. As the economy slows down, investors may start to switch assets into safer investments -- especially investments that are a bit more immune to economic fluctuations.

Two charts indicate this may be happening. Here is a chart of the health care ETF. The chart has enjoyed a slightly upward moving rally since late 2005. Recently the ETF has broken through resistance just below 35 on a good volume spike.



Here is a chart of the big-Pharma ETF, PPP. This chart has a classic triangle consolidation and has broken out of the pattern on good volume as well. This chart still has a major point of resistance just a bit below 54.

It's All About Liquidity

News of Microsoft looking to acquire Yahoo is keeping the markets afloat today. This at a time when the economy is growing at 1.3% annually and employment growth appears to be slowing.

However, looking at the Flow of Funds report, a different measure comes up. Retained corporate profits came in at $731 billion dollars in 4Q 2006. That number is $499 billion with capital consumption adjustments. That's one of the primary ways that companies are fueling all of the merger and acquisition in the market right now.

Take a look at this chart from the St. Louis Fed of corporate profits with inventory adjustments. In short, companies are doing very well.



Here's the year over year change in corporate profits.



There's a ton of liquidity in the market right now.

Employment +88,000

From the BLS:

Nonfarm payroll employment edged up (+88,000) in April, and the unemployment rate was essentially unchanged at 4.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains continued in several service-providing industries, including health care and food services, while employment declined in retail trade and manufacturing.

An important note. The BLS has issued some very sweeping revisions to employment reports for the last 5 years. That means this number could be subject to an upward revision in the coming months.

Let's look a bit deeper into the numbers.

Goods producing dropped 28,000, with construction dropping 11,000. My guess is the increase in non-residential construction is absorbing some of the losses from residential construction.

Education and health was up 53,000. The education and health category has a steady increase for the last 5 years. So long as the US population continues to age, this trend will probably continue. So basically, the employment report can count on this category to continually add jobs to the figures.

Government increased 25,000. The fact that government employment is responsible for about 30% of total monthly employment growth should raise a few eyebrows. When the public sector is responsible for a pretty large chunk of job growth there might be a problem.

Retail lost 26,000 jobs. Remember these are April numbers, so we're beyond letting people go for the Christmas season. While productivity increases may be responsible for some of the losses, retail is still pretty dependent on the "human touch". That means that letting people go could mean retail sales are not where people want them to be.

Here's a graph of the y/t change in retail sales from Martin Capital. Note they are still strong, but have been declining for the last year or so.



This is not a good report. Expectations were for a low number anyway, and the initial report was below those expectations.

ISM Services Up

From the Institute for Supply Management:

ISM's Non-Manufacturing Business Activity Index in April registered 56 percent compared to the 52.4 percent registered in March, indicating a faster rate of growth in business activity in April. The implication is that non-manufacturing business activity is continuing to increase for the 49th consecutive month. Thirteen industries reported increased business activity, and two reported decreased activity for the month of April.

The industries reporting growth of business activity in April are: Arts, Entertainment & Recreation; Accommodation & Food Services; Transportation & Warehousing; Utilities; Information; Public Administration; Other Services*; Retail Trade; Real Estate, Rental & Leasing; Finance & Insurance; Construction; Educational Services; and Health Care & Social Assistance.

The industries reporting contraction of business activity in April are: Wholesale Trade; and Professional, Scientific & Technical Services.

Looking at an average of the last 4 months, the overall activity index is about 54, which puts the average in the expansion area.

Notice in the second paragraph above the large number of industries experiencing an expansion versus the number that are experiencing a contraction.

In addition, there were positive anecdotal comments about the overall economic situation:

* "Progressive improvement in the business cycle." (Transportation & Warehousing)
* "We are showing signs of recovery from bad news. Transactions are increasing faster than our normal seasonal increase." (Accommodation & Food Services)
* "Concerned about the rapid increase in energy cost." (Professional, Scientific & Technical Services)
* "The level of business is maintaining an even level at this time. Capital projects are ramping upwards." (Educational Services)
* "Sales in the first three months of the year are slower than expected while pressure to lower prices is increasing." (Wholesale Trade)

These quotes indicate business is getting better and at a faster than expected rate.

The only negative to this report was the prices component:

Prices paid by non-manufacturing organizations for purchased materials and services increased in April for the 47th consecutive month. ISM's Non-Manufacturing Prices Index for April is 63.5 percent, 0.2 percentage point higher than March's index of 63.3 percent. In April, the percentage of respondents reporting higher prices increased by 4 percentage points to 42 percent as compared to March. The percentage indicating no change decreased from 58 percent in March to 54 percent in April. The percentage of respondents noting prices decreased remained the same at 4 percent in April.

While the increase was small (.2), it was still an increase. In addition, notice this is the 47th month of prices paid increases. The increases in productivity for this expansion may be enough to absorb those increases, but the Federal Reserve will still be looking at the overall increase next week.

Buying Panic?

That's the title from an article in today's WSJ.

I've been having an extremely difficult time understanding this market. The market goes higher as the economy continues to slow down. There are a few explanations.

1.) Once the market establishes a trend, it tends to stay intact. The SPY and QQQQ have solid, uptrending rallies in place. For traders who simply look at screens, this says "buy". In other words, traders are ignoring economic fundamentals in favor of technical trading.

2.) The market is anticipating an economic turnaround later this year. There are some economists who are arguing the current slowdown is simply a pause in the economy and economic growth will return to 2%-3% later this year or earlier next year. Traders may be looking to the future in an attempt to get in the ground floor of another rally.

3.) While the market isn't cheap, it certainly isn't expensive. According to Barron's the Dow's P/E is 17.29 and the S&P's is 20.18. While this isn't cheap, we have sen far loftier valuations in the past.

4.) Corporate earnings have surprised this earnings season. However, let's add an important caveat to that statement. It's entirely likely that companies were aware of the earnings slowdown and therefore lowered their earnings guidance. At the same time, analysts may have grown more conservative in a slowing earnings environment, making their projections conservative. This means the earnings beating numbers were in fact fact beating a low-ball set of estimates.

5.) There are a ton of deals going on in the market right now. Traders may be buying shares in an attempt to anticipate the next big merger.

6.) Corporate stock buy-backs are providing upward buying pressure, or at least providing some type of buying floor to shares.

While I spend a fair amount of time on technical analysis, I am also a fan of having a solid fundamental backdrop to a chart. If the economic background isn't solid, then trading for an upward move is far riskier. And right now, the fundamentals just aren't as solid as I would personally like.

That's my take.

I'll add that I've been wrong before -- I thought Madonna would be a one hit wonder.

GMAC Swings to Loss As a Result of Sub-Prime Loans

From the WSJ:

GMAC's home-lending unit, also known as ResCap, posted a loss of $910 million compared with a year-earlier profit of $201 million, due to continued pressures of the U.S. mortgage market. The slower housing market has led to an increase in the number of defaults on high-risk, or subprime, loans -- an area where ResCap, traditionally thought of as the jewel of the GMAC portfolio, does business.

Amid the sharp downturn in the U.S. mortgage market, GMAC said many of ResCap's nonprime assets were liquidated at a loss or marked substantially lower to reflect the severe illiquidity and depressed valuations in the prevailing market environment. GMAC established substantial incremental reserves during the quarter against various nonprime loans on the balance sheet.

In Wednesday's release, the company said its ResCap unit should "be far less vulnerable to further adverse developments in the nonprime space." GMAC also said the setback ResCap incurred "is expected to be a temporary one."

A few points.

1.) This is the last thing GM needs right now. They're already under pressure from a declining market share in the US and are attempting to turn the company around.

2.) This may be a one time event. GMAC may have seen the writing on the wall and took a great deal of corrective action all at once rather than letting it bleed out over several quarters.

3.) Notice the severity of the profit to loss swing. GMAC went from $210 profit to $910 loss -- almost a billion dollars in value. That's more than just a few mark-downs; that's a fundamental shift in the value of certain assets.

Bonds Backed By Sub-Prime Loans Downgraded

From the WSJ:

More challenges are hitting bond investors who own securities backed by risky mortgages.

Over the past two weeks, Moody's Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of "subprime" mortgages, home loans made to consumers with troubled or sketchy credit histories. The downgrades came as more borrowers defaulted on their mortgages and caused losses to spike among the pools.

More than half the bonds that were downgraded were originally rated "investment grade" but were cut to "junk" status, because they now are viewed as much more likely to lose money. A few bonds with weak ratings already have been eroded by losses, which means investors in those bonds probably won't be repaid.

"It's unusual to see downgrades in subprime deals so soon after they were issued," said Jay Guo, a director of asset-backed securities research at Credit Suisse Group. "This is not a normal phenomenon and is a cause of concern."

So long as there is liquidity, everything is fine. And that's where this news comes in. With rising defaults, sub-prime liquidity is starting to dry-up. That means fewer buyers of homes, which in turn means the high levels of homes on the market will remain on the market for a longer time.

If this type of news continues, it will eventually ripple through the economy in the form of lower GDP growth as builders continue to stop building homes because of high inventory levels caused by lower demand. What makes this most troubling is the time it takes for this to happen. The real estate market takes time to react to and influence the economy.

Gas Prices Up; Supplies Down

From This Week in Petroleum:

Gasoline stockpiles are still decreasing.



And prices are still increasing

Gasoline prices rose sharply for the week of April 30, 2007, increasing 10.2 cents to 297.1 cents per gallon. Prices are 5.2 cents per gallon higher than at this time last year. All regions reported price increases. East Coast prices were up 8.2 cents to 291.7 cents per gallon. The largest increase was in the Midwest, where prices jumped 15.0 cents to 292.5 cents per gallon. Prices for the Gulf Coast rose 9.8 cents to 285.3 cents per gallon, while Rocky Mountain prices increased 11.3 cents to 295.7 cents per gallon. West Coast prices were up 5.9 cents to 327.7 cents per gallon. The average price for regular grade in California was up 4.3 cents to reach a record price of 335.9 cents per gallon, 15.7 cents per gallon above last year's price.

The short story is simple: as supply decreases, prices increase.

In addition, notice the rapid and steep drop in inventories. Oil refiners are going to have to make some serious production moves to add enough gas to the supply chain to satisfy summer demand.

Finally, these price increases are going to add inflationary pressure, which is further going to back the Federal Reserve into a painful policy corner.

New Manufacturing Orders Up

From the Census Bureau:

New orders for manufactured goods in March, up four of the last five months, increased $11.9 billion or 3.1 percent to $400.2 billion, the U.S. Census Bureau reported today. This followed a 1.4 percent February increase. Shipments, up following two consecutive monthly decreases, increased $5.9 billion or 1.5 percent to $392.9 billion. This followed a 0.6 percent February decrease. Unfilled orders, up twenty-two of the last twenty-three months, increased $12.9 billion or 1.8 percent to $717.3 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 1.1 percent February increase. The unfilled orders-to-shipments ratio was 4.92, up from 4.88 in February. Inventories, up twelve of the last thirteen months, increased $1.0 billion or 0.2 percent to $484.0 billion. This followed a slight February increase. The inventories-to-shipments ratio was 1.23, down from 1.25 in February.

Looking at the numbers, we have a 1.5% increase excluding transportation and a 4.5% increase excluding defense.

There was a 12.3% increase in communications equipment and a 4.2% increase in machinery.

However, the unadjusted orders are down .3% Y/Y, largely because of poor y/y comparisons in communications equipment and computers/electronics.

This is a solid report, and dovetails with yesterday's increase in the ISM. It confirms that manufacturing may be coming out of a slump. However, we need a few more months of data before we are completely out of the woods.

Business Investment For This Expansion

Here is a graph of the year-over-year percent change in business investment in chained 2000 dollars. Notice the following:

1.) The trend in equipment in software has been decreasing consistently for the last year.

2.) There was a big increase in structure investment starting in the second quarter of 2006, peaking the next quarter and then decreasing since.

Gas Prices Are Still Rising

From the WSJ:

The latest Energy Information Agency data show gasoline demand in the past few weeks rose 2.3% from the same period last year, outstripping growth in refinery capacity. That, in turn, is making the U.S. ever more dependent on gasoline imports.

Regular gasoline nationally averaged $2.97 a gallon, AAA reported yesterday. While that's still about nine cents shy of the highest price ever recorded, which was in September 2005, it is a record high this early in the season. Gas was selling for just $2.70 a gallon as recently as the beginning of April.

How high prices go this summer depends largely on what happens to the refineries that crank out the nation's fuel. Refinery outages in recent weeks, largely for maintenance, are part of the reason fuel prices have rocketed up. If refinery operations smooth out, gas prices could remain stable or even fall.

But the picture could be far bleaker if supply interruptions persist or intensify. In 2005, hurricanes Katrina and Rita smashed into the petrochemical-refining belt in the Gulf of Mexico, idling more than a quarter of the nation's refining capacity and sending gasoline prices climbing. Another hurricane striking Louisiana or Texas this year, even if less severe than the storms in 2005, could have a similar effect on pump prices.

"There's very little slack in the system, so it doesn't take a lot to go wrong to send prices higher," says Doug MacIntyre, senior oil-market analyst from the Energy Information Agency, a federal agency.

This highlights a few important points.

1.) Here is a graph from the same article that shows a few years of gas price history. Notice that prices typically spike in the mid to late summer. Notice this year prices are already spiking before the summer. That means we could have some really painful price action by July or August.



2.) This price action shows how silly the inflation ex-energy prices analysis is outside of Federal Reserve policy making. Consumers see total inflation -- inflation with food and energy prices -- every day. Therefore, keeping an eye on total inflation numbers is very important.

3.) The economy withstood higher energy prices last summer. However this year we have a completely different backdrop. We've had a year of sub-par economic growth. We've also had about a year of bad housing news. Those two factors could change the consumer's reaction to high gas prices.

Car Sales Slow

From the WSJ:

U.S. consumers, wary of rising gasoline prices and falling home values, pulled away from new-car showrooms in April, depressing new light-vehicle sales to the slowest annual pace since 1998.

The slowdown in demand for new cars and trucks marks the economic head winds Detroit's traditional Big Three auto makers face as they try to turn around their loss-plagued North American auto operations.

But the results also demonstrate the challenge the U.S. economy poses to more-successful Asia-based competitors like Toyota Motor Corp., which posted its first monthly U.S. sales decline in nearly two years. Toyota, which recently surpassed General Motors Corp. in global vehicle sales to become the world's No. 1 auto maker, had been increasing sales earlier this year even as Detroit struggled and has continued to invest in auto-making capacity in North America, the world's largest car market.

....

Total car and light-truck sales fell 7.6% to 1,338,603 vehicles in April, according to Autodata. That translated to a seasonally adjusted annual selling pace of 16.27 million vehicles, down from 16.69 million a year ago.

"The consumer seemed to be frozen," said Brad Bradshaw, Nissan Motor Co.'s U.S. vice president, who noted decreased traffic at his company's dealerships in April. The No. 6 U.S. auto maker's sales were off 18%.

There are a few points to make here.

1.) Let's assume that purchases of durable goods (like cars and trucks) represent a sign of confidence in the future. If this is true, then consumers may not be that confident in the next few years.

2.) I am looking at buying a car at the end of this year or the next. The first thing I do when looking at a big purchase is to read Consumer Reports. According to their reliability analysis, Japanese cars are still very dependable and US cars are still a bit spotty. This has been the trend since I was a kid and I'm 40 now.

3.) There is also the question of household debt. According to the Federal Reserve's Flow of Funds Report, total household debt outstanding totals about 130% of disposable income at the national level. There is no hard and fast rule for how much debt is too much. But I feel pretty confident in saying we're a whole lot closer to saturation than we were 5 years ago.

Turn Up the Volume

There are numerous technical indicators that I ignore because a simple reading of the price and volume will usually say the exact same thing without adding to the noise. However, indicators that combine price and volume action can be very helpful in seeing what is happening in a particular security or index.

Here are three charts of the SPY, QQQQ, and IWN respectively. Ignore the price lines of the charts and instead focus on the two technical indicators below the price lines.

The first is of the Chaikin Money Flow. It attempts to measure the amount of money flowing into and out of a stock. You can read more about it here. Whenever the indicator has a green mountain appearing formations like those below it indicates money is flowing into the stock.

The second is the On Balance Volume indicator. You can read more about it here. A rising line indicates money is flowing into a stock and a declining line indicates money is flowing out of a stock.

The point of these graphs is simple: two technical indicators are telling us that money is flowing into all three securities, and has been for about nine months.

How Confident Are Traders .... Really?

Here are two charts. One is for Federal Express (FDX) and the other is for UPS. Are traders really confident in the US economy?

ISM Increases

From the Institute for Supply Management:

Manufacturing growth accelerated in April as the PMI registered 54.7 percent, an increase of 3.8 percentage points when compared to March's reading of 50.9 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

.....

ISM's New Orders Index surged to 58.5 percent in April.

.....

ISM's Production Index registered 57.3 percent in April, 4.3 percentage points higher than the 53 percent reported in March.

.....

In April, the ISM Prices Index registered 73 percent, indicating manufacturers are paying higher prices on average when compared to March.

In short, this is a solid report. It indicates manufacturing may be poised for a rebound. If we have 2-3 more months of similar performance in the index then manufacturing could be said to be turning around.

The only drawback is the prices paid component of the index. Inflation has been incredibly sticky this expansion. Despite the clear economic slowdown for the last three quarters inflation has been very stubbornly clinging to the 2%-3% range. This report confirms that trend is likely to continue for the foreseeable future.

Oil Market Update

Here's a daily chart of the oil market from Stockcharts. Notice the following bullish chart patterns.

1.) The uptrend that started in mid-January is still firmly in place.

2.) There is a secondary uptrend in place that started in early April.

3.) There is an ascending triangle pattern that started in early April. These are considered bullish chart patterns because the market continually makes higher lows, indicating traders think the lowest price for the commodity is increasing.

4.) The 20-Day SMA is rising, which is puling the 50-day SMA higher.

5.) Prices are over the 20 and 50 day SMA, which will continue to pull these averages higher.

6.) Prices have been bouncing off the SMA, using the SMAs as support.

7.) Remember the fundamental picture is still bullish. OPEC has reduced production, the US entering the summer driving season and China and India are still growing at high rates.

Gasoline Prices Over $3.00/Gallon

From IBD:

The nationwide average price at the pump shot up 10 cents last week to $3.02 a gallon, the most since mid-Aug. Gasoline prices have soared as refinery woes limit already tight supply and demand ramps up for the summer driving season. Gas futures rose 3.4% — 18.6% in April — to $2.4405. June gas closed nearly flat Mon. at $2.2594. June crude fell 75 cents to $65.71 a barrel.

The primary reason for this is a continued dwindling of gas stockpiles. Here is a chart of national gasoline inventory from the Energy Department's "This Week in Petroleum". Notice the clear downward trajectory over the last few months.



Here's a chart of gas prices from the same report.



Note that prices were about this high at the same time last year. However, this year is different because the US economy has had about a year of sub-par growth and a big housing slowdown. These two factors may have changed consumer perception to make the $3.00 prices feel more expensive this year and forcing consumers to slowdown their spending a bit more.

Circuit City Issues Warning

From the WSJ:

Circuit City Stores Inc. warned that April sales were "substantially below plan" and pulled its financial guidance for the first-half of the year. Shares fell 8% in late trading.

The consumer electronics retailer, which is in the midst of restructuring and faces intense competition in the television market, cited weak sales of large flat-panel and projection-televisions. The company previously anticipated a pretax loss of $40 million to $50 million in the first half of the year.

Circuit City shares closed the regular trading session on the New York Stock Exchange down 2.7% at $17.45. In after-hours trading, the stock was recently at $16, down 8.3%.

I looked for similar announcements from Best Buy and couldn't find any. Therefore, this may be company specific information.

However, it may also be a sign of a broader consumer slowdown. Yesterday the BEA announced that consumer purchases dropped .2% in March after adjusting for inflation. This may be a single data point in time which will rebound in the future.

However, it may not. Therefore, it's important to watch retailers' announcements for clues about future consumer behavior.

About This "Core Inflation" Thing

From today's WSJ:

On the inflation front, yesterday's report was mostly positive. The price index for PCE increased 0.4% in March, due to higher food and energy prices, after a 0.4% gain in February. Excluding food and energy, which economists often ignore because they tend to be volatile, the PCE index was flat. Year over year, the core PCE index was running at a 2.1% annual rate, down from 2.4% in February.

Economist have been watching inflation indicators for signs that energy and food prices would lead to broader price increases, but that hasn't happened. "Although headline inflation continues to climb, there is scant evidence of any pass-through to consumers," wrote Joseph Brusuelas, chief U.S. economist at research firm IDEAglobal, in a note to investors.

The statement in bold is completely removed from reality and needs to stop. Consumers see the signs of higher prices whenever they fill up their cars or buy groceries. In other words, consumers see higher prices at least twice a week and probably more often.

While the core/ex-food and energy data is important at the national level, it is only relevant to members of the Federal Reserve Board when they are considering interest rate policy. For everybody else, the total inflation number is a very important number.

Please adjust your reality perception accordingly.

Thanks --

Bonddad

A Deeper Look At Consumer Spending

Here is a graph of the year-over-year percent change in consumer spending in chained 2000 dollars. DG = Durable Goods, NDG = Non-Durable Goods and Service = service (duh). Pay particular attention to the first two areas of change. They represent the first year over year levels of consumption expenditures coming out of a recession. Here is the point of this graph. Consumption expenditures are still strong on a year-over-year basis. Until we start seeing YOY comparisons like those in the first few quarters after the recession the economy should be doing OK.

Consumer Spending Year Over Year Change

Here is a chart of Personal Consumption Expenditures year-over-year change in chained 2000 dollars. The previous chart I used was derived from the wrong data set.

Construction Spending Up .2%

From CBS:

Spending on U.S. construction projects rose 0.2% in March, fueled mostly by outlays for private nonresidential projects and offsetting a drop in spending on federal and private residential construction.

Construction spending in February was also revised to rise significantly upward, by 1.5%, from a previously estimated gain of 0.3%, causing some economists to boost their projections for first-quarter economic growth.

Let's look at the numbers:

Total annualized construction spending was $1.187 trillion in March, with private construction spending totaling $900.281 billion.

Private residential construction totaled $569 billion or about 48% of total construction spending and 63% of total private spending. This number was down 1% from February and 14% from March 2006. At the same time, private nonresidential spending is up 2.4% from February and 16.5% from March 2006. However, public nonresidential spending was up .4% from February 2006 and 9.5% from March 2006.

Here's an interesting fact. The total value of private and public nonresidential spending is $609 billion, making it about $50 billion larger than nonresidential. That means these combined sectors could theoretically absorb construction workers displaced in the housing slowdown. That assumes that residential and nonresidential construction projects are occurring in the same location and involve the same skill sets etc...

Consumer Spending Decreases .2% In March

From the AP:

The Commerce Department reported that consumer spending on all items was up 0.3 percent last month, the slowest increase since a similar rise in October. Incomes rose by 0.7 percent, the fourth straight solid month of income growth.

The spending performance was even weaker when the effects of higher gasoline prices were removed. After adjusting for price increases, consumer spending actually fell by 0.2 percent in March, the poorest showing since the fall of 2005 when the economy was suffering the aftershocks of Hurricane Katrina.

From Bloomberg:

``I would expect, especially if gas prices continue to push higher, that consumers are not going to be contributing nearly as much'' to economic growth, Chris Low, chief economist at FTN Financial, said before the report.

.....

``The rise in gasoline prices ate up the gains in nominal spending,'' said James O'Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. ``Everything points to a much weaker consumer in the second quarter.''

This is one of the main reasons I focus a great deal of attention on gasoline prices. It's a price consumers have to pay, usually at least once a week. It's also a vital expense. Consumers will buy gas pretty-much regardless of the economic circumstances. When gas prices increase, consumers may cut back on spending on other goods and services.

The drops in consumer spending occurred in non-durable goods and services. These sectors dropped by 2.8 billion and 13.2 billion in chained 2000 dollars.

The inflation numbers were mixed. CBS reported:

The core personal consumption expenditure price index was flat in March, bringing the year-over-year increase down to 2.1% from 2.4% in February. Economists had expected a 0.1% gain in the core PCE.

The downward direction on inflation is sure to please Fed officials, but the level remains above the central bank's inflation ceiling of 2%.

Total inflation rose 0.4% in March and is up 2.4% over the past year.

For those of you who don't consumer food or energy, you saw no price increases. For the rest of us, we saw an increase especially in oil. The price at the pump in Houston Texas (where I live) is just below $3.00/gallon for premium. And it's only the end of April.

It's important to add the Fed has been forecasting lower inflation from lower growth for nearly a year now. Inflation has remained above the Fed's comfort zone for most of this time. While it has dropped a bit it's still higher than the Fed would like. Conversely, it's also important to point out inflation has not gotten out-of-hand. It's just been very stubbornly hanging on to the 2% - 2.5% range for some time.

I still don't see the Fed lowering rates because of this. They have firmly come out on the side of fighting inflation at the expense of economic growth.

Technical Issues Hurting Refiners

I've been closely following the gas market for the last few months. The reason is simple: gas prices are higher than the same time last year partly because gas stockpiles are down in a big way (here's a link to the latest update.) It turns out refiners are having more problems than usual:

Oil refining's perception problem has taken a new, unflattering turn: Not only are there not enough U.S. refineries, they don't run right.

After several years of calls for more production capacity in one of the world's most technically sophisticated industries, attention has shifted to what appears to be an unusual number of breakdowns and extended downtime that has raised concerns about the adequacy of oil-product supplies.

Just about every day in recent weeks, a period when refineries ramp up production, unit malfunctions, fires and other mishaps have had oil traders and market watchers riveted. Oil futures and wholesale prices have staged breathtaking rallies that traders say are due to the prospect of lost supply and falling inventories.

This is an issue the US will have to come to grips with over the next few years. So long as the US is dependent on gas for a variety of necessary economic functions all of the parties involved -- but primarily business and environmental concerns -- are going to have to figure out a way to deal with the situation.

Big Stocks Finally Beating Small Stocks

From the WSJ:

For months, Wall Street professionals have been recommending big-company stocks as a safe bet in a slow-growing economy, only to be proven wrong as small stocks surged ahead.

Now, after the Dow Jones Industrial Average's run this month to records and its first close above 13000, gains for blue-chip industrials this year are equal to those of the small-stock Russell 2000 index. Both are up 5.3%. But for just this month, the industrial average is up 6.2%, compared with 3.6% for the Russell.

The gains for big household names like those in the industrial average were fueled by quarterly earnings gains that beat expectations for the likes of 3M, Microsoft and Exxon Mobil. Microsoft, for instance, posted a 65% earnings surge and its stock jumped 3.5% in one day on the Nasdaq Stock Market.

......

The common wisdom has been that large companies, which often have more-extensive overseas operations than small companies, are better positioned to withstand a softer U.S. economy. They also benefit from a weaker dollar because profits in foreign currencies look more impressive when translated into dollars. The U.S. currency on Friday touched its lowest point against the euro since the launch of the common currency in 1999.

Strong international sales have been a common theme for the duration of this earnings season. Many large companies have literally the same reporting template: weak US economy, strong international demand.

However, how much of the gain in sales is actually due to stronger sales and how much is actually due to the dropping value of the US dollar relative to other currencies?

This has been a theme of the WSJ's blog for the past week or so.

Here's a chart of the Dow versus the Russell 2000 for the last 4 years and the last week.

Painting Weekend

I'm painting the house this weekend -- with much needed and appreciated help from Bonddad's wonderful girlfriend. I'll be back Sunday night.