March 5, 2010
By Brian Kilb
Executive Vice President
Landaas & Company
The week began with upbeat carryover news from the weekend. Bailout bad boy American International Group announced it’s close to selling its Asian unit for $35.5 billion and that those funds would be used to repay a portion of the $182 billion it owes the government from the Troubled Asset Relief Program.
The Oracle of Omaha, Warren Buffet, reported Saturday that Berkshire Hathaway’s net earnings skyrocketed 61% last year. Criticized for big bets on GE and Goldman Sachs during the fall of 2008, Mr. Buffet is now having the last laugh once again.
Both stories reassured investors the economy is stabilizing if not gaining momentum.
The Commerce Department said Monday that personal spending grew 0.5% in January, slightly more than anticipated and despite a small loss in income. As you might then expect, personal saving as a percentage of disposable personal income declined – to 3.3% in January, compared with 4.2% in December. The increase in spending helps alleviate some concern that higher savings and less consumer spending will be a long-term drag on economic growth.
The Institute for Supply Management reported a decrease in manufacturing output. Partly as a result of heavy snow in the northeastern United States, the February manufacturing index fell to 56.5 from 58.4; down but still a strong showing.
Construction spending for January dropped 0.6%, a wider gap than expected; maybe we can blame that on the weather as well.
The week began headed in the right direction as the Dow Jones Industrial Average gained 78 points, the dollar strengthened against the euro and the yen, and the 10-year U.S. Treasury continued its rally as yields dropped to 3.6%.
Key senators were close to a deal on legislation that would overhaul financial regulations, another pillar of rebuilding confidence in the financial industry and economy. A major component of the agreement would create a new consumer protection division within the Federal Reserve and thereby change the focus of the Fed.
February U.S. auto sales rose by 13.2% to 10.38 million vehicles, up from 9.17 million a year ago on a seasonally adjusted basis. Not surprisingly, Ford outsold General Motors and picked up share against struggling Toyota. Chrysler Group, which includes the Chrysler, Dodge and Jeep brands, reported flat U.S. sales. On a fairly quiet day of economic news, stocks rose early in the day Tuesday only to give up those gains to end the day flat.
A busier day Wednesday, with stocks giving back early gains as traders wrestled with the latest Fed report and promising data from labor and the service sectors.
The Federal Reserve released its Beige Book, a regional look at economic activity which suggested much of the improvement so far seems to be driven by the inventory rebound. There were also more references to snowy weather seemingly holding back economic growth in the short term.
Meanwhile, the ISM non-manufacturing index showed the service sector expanded more than expected. The index rose to 53.0, from 50.5, topping expectations for a more modest rise to 51.0.
Also boosting market confidence, the Greek government announced Wednesday that it will take new austerity measures totaling $6.53 billion to ensure it can meet its deficit-cutting pledge this year, including steep cuts in civil service salaries and entitlements. Greece also intends to raise its sales tax by 2%.
Another building block for the mending economy is the pick–up in mergers and acquisition activity. Pfizer is reportedly planning to bid as much as $4.1 billion for German drug company Ratiopharm, while software leader Novell is the target of a $1 billion takeover by hedge fund Elliott & Associates.
President Obama urged Democrats in Congress to get a health care bill passed and highlighted a number of opposition ideas, which may be included in final legislation.
Several retailers announced same-store sales Thursday, and about 70% of companies reporting beat Wall Street estimates. February sales at stores open at least a year are expected to rise 2.9%, compared against a 4.7% decline a year earlier, according to Thomson Reuters, which tallied Wall Street estimates on 28 retailers.
The Bank of England and the European Central Bank both left interest rates on hold. At the ECB's press conference, President Jean-Claude Trichet praised Greece's decision to slash its budget by another $6.5 billion, and downplayed talk of International Monetary Fund involvement in that nation's financial crisis.
Jobless claims swung lower, down 29,000 to 469,000. The four-week average, which helps smooth out volatility, fell 3,500 in the week to 470,750, a level showing no significant change from late January and hinting at little improvement for Friday’s non-farm payroll headline. Continuing claims fell 134,000 to 4.5 million in data for the Feb. 20 week. The drop marks a significant move lower, pointing to an uncertain mix of hiring and benefit-expiration.
Factory orders were up, labor costs were down and productivity continues to surprise on the upside. Productivity grew again by 6.9% in the fourth quarter following a 7.8% rise in Q3. With factory orders on the rise for 9 of the last 10 months, retail numbers gaining strength and consumer durables showing stability, perhaps an increase in jobs is not too far behind.
Finally, pending home sales disappointed, down 7.6% when analysts were expecting gains. Data regarding the housing recovery continues to offer conflicting signs.
In a full day of mixed economic news, stocks eked out minor gains on Thursday.
Friday’s headline was all about the Bureau of Labor Statistics employment report, and the news was warmly received. Severe weather in February did not have as much impact on jobs numbers as feared. Nonfarm payroll employment in February declined 36,000, following a 26,000 decrease in January and a 109,000 drop in December.
In addition to better-than-expected February results, the January and December revisions were up a net 35,000. On a year-ago basis, payroll jobs improved to minus 2.5% in February from minus 3% in January. The unemployment rate held steady at 9.7% in February and wage inflation in February eased to an anemic 0.1% rise from 0.2%.
As I’ve noted several times in recent months, the growth in temporary workers remains brisk and may portend some job growth is just around the corner. On an otherwise pretty quiet day, stocks made healthy gains, the dollar strengthened against the euro, and Treasuries edged lower.