Weekly Update: Oh dear, that's not a mask you're wearing!
I feel like everything is slowing down. This morning, we learned third-quarter GDP came in at 2% (more below). That’s a little better than the consensus, but so what? Is that good? Also this week, new-home sales hit a 2½-year high and consumer sentiment stayed at a 5-year high (more below). That sounds good, until you look at the numbers in context. Home sales are still at deep-recession levels and sentiment is still at a level associated with recessions. In the markets, some technicians think we've seen the highs for the year, that the weekly momentum indicators are falling back, that recent cycle highs have come on lower breadth. I’m not saying I agree … yet. But it is something to think about. Perhaps when we’re finished with our Halloween parties next week, and we attempt to take the mask off all this data making us a feel a bit uncomfortable, we’ll find we’re still uncomfortable ….
The third-quarter’s global deceleration has brought us the worst earnings season since the recession. Rather than the 2% to 4% earnings beats and the 8%+ year-over-year earnings-per-share (EPS) growth of the past several quarters, it appears that the steadily lowered third-quarter estimates will be beaten by only 1% and that year-over-year EPS growth will be flat for the S&P 500 and down 3% for non-financials. Sales growth is not terrible given a 2% foreign exchange headwind, soft commodity prices and capital markets. But the growth rate in revenues is down from the cyclical peak of 11.2% during 2011’s second quarter to zero or below—the 245 companies reporting so far have beaten consensus expectations by 4.7%, leaving earnings up a slight 1.2% over the last year and revenues down modestly. Guidance has been poor. Given that analysts have yet to make many adjustments to the fourth quarter and are still projecting revenues to rise 4% next year and profit margins to widen from 9.5% this year to 10.1% in 2013, one wonders if this quarter has been priced in yet. If we’re honest with ourselves and stand back and assess the situation, it could be that we are starting to see some clouds gather ….
I’m not running for office, but I felt like a candidate this week, crisscrossing the eastern U.S. I went to Ohio, West Virginia and Arkansas, before finishing off in D.C. Everywhere, people were very worried, very negative and very interested to hear what I think will happen if this or that candidate wins. The people in D.C., where I spent most of my time, were talking about how special their perch is, being in the middle of everything, and complained about how dirty politics have become this campaign season. It seems we’re in a bit of a holding pattern until after the election. Even the Fed agrees not a lot has changed in the past few weeks—its policymakers didn’t do anything when they met this week and only a few minor tweaks were made in their description of the economy vs. the last time they met in mid-September. As I was leaving D.C., it was gloomy and misting and gray—eerily quiet before scary Hurricane Sandy is scheduled to make her way up the East Coast ….
Positives
GDP surprises The 2% flash estimate for growth in the third quarter beat expectations and was led by big jumps in government defense spending, which accounted for nearly a third of the increase (Can you say “election year?”) and residential investment, which accounted for a sixth of the increase. Private consumption also rose more than expected, reflecting the recent pickup in consumers’ moods (this morning’s final reading of Michigan consumer sentiment for October dipped slightly but was still up significantly from October and near a five-year high). On the downside, this summer’s severe drought drove down farm inventories, shaving growth by 0.4 percentage points. Our sources characterized the report as solid but noted growth remains extremely subpar for this stage of recovery and raised concerns about what happens in the fourth quarter.
Housing can only do so much September new-home sales surged to 389,000 units, the highest level since April 2010, when there was a home-buyer tax credit. This time, a fundamental improvement in demand is the cause. But for context, the last time we saw sales so low outside of the housing crisis aftermath was in the early 1980s. Still, the number of houses for sale normalized for the number of potential buyers is at a record low (there are 2 million houses for sale vs. 240 million potential buyers); new home supply is bumping along at historical lows; the pending home sales gauge of future existing home sales rose 14.5% year-over-year in September; and the FHFA home price index has risen seven straight months and is up a seasonally adjusted 4.7% year-over-year. So housing should contribute to GDP, but not nearly enough to offset the “cliff.”
Time to begin looking for Santa? The Washington Post reports American consumers are generally aware of the debate about the “fiscal cliff” (not in my audiences) but aren’t worried enough to scale back holiday spending plans, according to data from the National Retail Federation. Improving consumer attitudes and labor-market conditions led the group to predict sales over the holiday season will jump 4.1%, its most optimistic forecast since the recession. In a speech in West Virginia this week, I finished by wishing the group, “Happy holidays!” Too soon? It’s almost November, and the holiday decorations have been up for weeks and several major chains already have begun advertising.
Negatives
Capex troubling The better-than-expected 9.9% increase in September durable goods order—up 2% ex-transportation—masked (boo!) discouraging news on the capital expenditures front. Nondefense capital goods orders ex-aircraft were flat and the prior month was revised down, pushing core capital goods orders down 7.4% year-over-year. The falloff in this proxy for capex may reflect uncertainties about the post-election fiscal-tax policies, but core capital goods orders peaked at $66.7 billion in December 2011, well below the $69.8 billion all-time peak on April 2008. Other than the February 2000 one-month drop in orders in the aftermath of Y2K, such a large a drop in core capital goods orders historically has signaled an imminent recession. (Did you hear that evil laughing sound?)
How does this make sense with a falling unemployment rate? North American companies have announced 62,600 job cuts at home and abroad since Sept.1, the biggest two-month total since the start of 2010. Firings have totaled 158,100 so far this year, more than the 129,000 job cuts during the same period in 2011, and compiler John Challenger says disappointing sales and earnings reports signal a potential increase in firings over the next two quarters. Some of this is because of China’s slowdown. U.S. heavy machinery, mining and metal processing companies, which thrived when China was growing rapidly, are laying off workers. China is the world’s third-biggest customer of U.S. goods, after Canada and Mexico.
Europe likely to remain a drag Germany’s IFO business confidence index unexpectedly dropped in October, the sixth consecutive monthly decline, to a 2½-year low, and the composite eurozone flash PMI also unexpectedly fell to its lowest level since June 2009, disappointing market expectations for an improvement. Among countries, Germany’s manufacturing PMI disappointed by a considerable margin, falling for the first time in four months, and France’s manufacturing PMI also fell short of expectations as it has been contractive for more than a year. On the plus side globally, the UK’s economy appeared to exit recession and China’s HSBC flash manufacturing PMI rose to its best level in three months, although it remained below 50 as it has all year.
What else
Do you think this would be scary? If Obama and Romney win all the states they are supposed to, with Romney also winning Florida, North Carolina, Virginia, Nevada, Colorado and Iowa, and Obama winning Wisconsin, Michigan, Ohio, Pennsylvania and New Hampshire, the candidates would be tied with 269 electoral votes each. The House of Representatives would then determine the next president. Each state delegation would get one vote. Currently, Republicans control 35 state delegations, so Romney would easily be elected. The vice president is elected by the Senate in the case of an Electoral College tie, so Joe Biden could serve as Romney’s VP. At least they wouldn’t have to reach across the aisle!
Oddsmakers say Ohio State is a lock to beat Illinois on Nov. 3 Slate reports that three economists who examined whether the outcomes of college football games on the eve of elections affected the choices voters made found that a win by the local team in the week before an election raises the vote going to the incumbent by around 1.5 percentage points. When it comes to the 20 highest-attendance teams—big athletic programs such as “The” Ohio State University (shout-out to my Buckeye son, David)—a victory on the eve of an election pushes the vote for the incumbent up by 3 percentage points.
I have suggested to my four children that it would be good for them to study outside of our home state The average student-loan debt load for a graduating college senior in 2011 was $26,600. However, the amount can vary widely from state to state. Students graduating from schools in New Hampshire, Pennsylvania and Minnesota had the heaviest average debt loads.
