Sandy’s Effect On The Economy

On December 5th, 2012, posted in: Economic News, Newsletter by

Hurricane Sandy knocked out electricity all over the North Eastern seaboard and is now causing some flickering in the economic data. Real (inflation-adjusted) consumer spending fell 0.3% in October, the steepest drop since cash-for-clunkers ended in 2009, while real income slipped 0.1%.

The ISM manufacturing index fell to 49.5 in November. This is a BAD indicator for recession. Considering Sandy smashed the eastern seaboard and affected roughly 25% of the US population – with the brunt hitting New Jersey and New York – the economic damage will be spread out. The storm’s timing helped minimized the impact on October data because it struck very late in the month.

September auto sales clocked in at a 14.9 million annual rate (domestic sales plus imports), but the storm cut October sales down to a 14.2 million pace. November should show a full rebound to the faster September pace, with more gains to come in December/January, due to both purchases delayed by the storm as well as replacements for destroyed vehicles. This could be a very positive sign.

Meanwhile, most investors will be waiting to see the upcoming jobs report, it is likely payroll growth probably stumbled in November to an anemic 60,000 pace. Job creation temporarily stalled after Hurricane Katrina in 2005. However, just like Katrina, the key issue will be the speed and size of the recovery. There is nothing indicating the rebound in December or January will be dampened. This would get the US back to a trend of 150,000 payroll jobs per month.

Sandy, at face value, makes it look like fourth quarter results will show zero real economic growth. But, if the expected data rebound late in the quarter actually materializes, it is possible the growth rate will be around 0.5% annualized – not great, but not negative either.

When the Q4 data report hits the media, expect the pouting pundits of pessimism to start squawking the sky is falling. However, it appears from the preliminary data, inventories and government spending will be the largest drag. Other categories, including consumption, home building and business investment should be far more positive. This Plow Horse economy remains steady and moving forward.

Given the election and Sandy, a weak growth report in Q4 will not be much of a predictor for 2013. If the fiscal cliff gets fixed without a major tax rate hike, real GDP growth could near 3% next year. With housing turning around, oil prices down and generally more confidence in the markets, it is expected the US economy could begin to pull out of the doldrums.

Continuation of the Plow Horse is nothing special, but given the lowered expectations, those who see through the temporary lull induced by Sandy and uncertainty should be rewarded for staying the course.

A summary of economic news: GDP growth for the third quarter of 2012 was revised upward to +2.7% from the first estimate of +2.0% a month ago.  It was also considerably higher than the +1.3% for 2Q 2012.

Why the revision? It was mainly due to:

  • increased inventory buildup,
  • the fastest growth in government spending in three years

Also, the economy saw a +3.5% increase in corporate profits. This is the strongest quarterly performance this year.

On the flip side, at least as far as GDP is concerned – the strong growth is sputtering. Inventory investment is going to drop off in 4Q and continue through early 2013.  Overall, GDP growth is likely to decline back to +2% through mid year. As a result, job growth or unemployment will stay about the same until later in 2013.

As noted, the ISM manufacturing index declined to 49.5 in November from 51.7 in October. That is a big drop. It came in below consensus 51.4. (Remember, 50+ signals expansion; below 50 signals contraction.) Not good news if it stays there. But it may be a further reflection of Sandy. This is the fourth time in the last six months that the manufacturing index has been below 50.

Other major measures of activity were mixed in November but most were above the 50 level. New orders fell to 50.3 from 54.2 but it showed expansion for the third straight month. The employment index declined to 48.4 from 52.1. The supplier deliveries index rose to 50.3 from 49.6 and the production index also gained to 53.7 from 52.4. New orders and employment can both be attributable to the hurricane. The prices paid index declined to 52.5 in November from 55.0 in October.

Construction increased 1.4% in October (+2.4% including upward revisions for August/September). The gain in October was led by single-family homes and the federal government. Home building is up 21% from a year ago, with new homes up 32% and improvements to existing homes up 9%. Revisions to construction data for August and September probably push third quarter real GDP growth to 2.8% annualized versus last week’s estimate of 2.7%.

Personal income was unchanged in October, coming in below the consensus expected gain of 0.2%. Personal consumption declined 0.2%, below the consensus expected no change. In the past year, personal income and spending are both up 3.1%. This is probably part of the Sandy effect.

Disposable personal income (income after taxes) was also unchanged in October but is up 3.0% from a year ago. Gains in interest and dividend income in October offset a decline in private wages & salaries.

Assuming a political deal on the “fiscal cliff” sometime in late December or very early January, real GDP growth could be close to 3% next year. That includes boosts from farm inventory replenishment after this year’s drought, as well as Sandy-rebuilding on the East Coast.

Despite October’s weak income number, real disposable income is still up 1.2% from a year ago, which is enough to keep pushing consumer spending higher. Meanwhile, households’ financial obligations – recurring payments like mortgages, rent, car loans/leases, as well as other debt service – are now the smallest share of income since 1984. Consumers are able to stretch their income gains further.

Inflation

On the inflation front, overall consumption prices as well as the core PCE, which excludes food and energy, were both up 0.1% in October. Overall prices and core prices are up 1.7% and 1.6% respectively in the past year, versus the Federal Reserve’s target of 2%. This is awfully close for a central bank running a very loose monetary policy. Expect higher inflation in the year ahead.

The overall PCE deflator (consumer inflation) was up 0.1% in October and up 1.7% versus a year ago. The “core” PCE deflator, which excludes food and energy, rose 0.1% in October and is up 1.6% in the past year.

After adjusting for inflation, “real” consumption fell 0.3% in October but is up 1.3% from a year ago.

Housing

New single-family home sales declined 0.3% in October, to a 368,000 annual rate, coming in well below the consensus expected pace of 390,000. But sales are up 17.2% from a year ago. Sales were down in the Northeast and South but up in the Midwest and West. The months’ supply of new homes (how long it would take to sell the homes in inventory) rose to 4.8. The increase was mainly due to a slower selling pace, although inventories of new homes rose 2,000 units. Housing starts rose 3.6% in October to 894,000 units at an annual rate, easily beating the consensus expected 840,000 pace. Starts are up 41.9% versus a year ago.

The median price of new homes sold was $237,700 in October, up 5.7% from a year ago. The average price of new homes sold was $278,900, up 8.0% versus last year. The Case-Shiller index, which measures home prices in the 20 largest metro areas, increased 0.4% in September (seasonally-adjusted) and is up 3% from a year ago. Nineteen of 20 metro areas saw higher prices in September as well as in the past three months, led by San Diego, Atlanta, and Phoenix. The one exception is Chicago.

The FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.2% in September (seasonally-adjusted) and is up 4.4% from a year ago. On the factory front, the Richmond Fed index, a survey of mid-Atlantic manufacturers, rose to +9 in November from -7 in October, much better than the consensus expected -9. The road ahead for housing may be bumpy from time to time, but it looks better than it has in years. Look for housing to continue to move higher in 2013.

The plow horse economy continues to push forward. Orders for durable goods came in much better than expected in October as companies seem to be gaining more confidence. Although on the surface new orders for durable goods were flat in October, this was completely due to the always volatile transportation sector. Taking out transportation, orders were up 1.5% in October, led by a 2.9% gain in machinery. That’s the good news. The bad news is that machinery orders are still down 9.6% from a year ago. Meanwhile, shipments of “core” capital goods, which exclude defense and aircraft, were down 0.4% in October, the fourth straight monthly decline. Core shipments usually fall in the first month of each quarter and then rebound in the last two months.

Despite the all the ups and down and weak data, Economy.com predicts the following:

“By this time next year, the U. S. recovery should be back on track.  Real GDP growth of around 2% in 2013 will nearly double in 2014 and stay near 4% in 2015.  Job growth will accelerate from approximately 2 million jobs per year today to a pace closer to 3 million.”

We can hope!

WHAT’S HAPPENING IN THE MARKETS

Week

YTD

12 mo

2011

5 yrs

Dow Jones Industrial Ave 13,026 0.21% 9.38% 11.11% 8.41% 2.32%
S&P 500   1,416 0.56% 14.96% 16.14% 2.12% 1.34%
NASDAQ   2,678 1.49% 18.89% 18.12% 3.69% 5.99%
S&P 500 Small Cap Value 1.96% 14.49% 16.83% (1.34%) 3.90%
MSCI Emerging Markets 1.13% 12.71% 11.35% (18.42%) (1.79%)
Past performance is no guarantee of future results. Indexes are not available for direct investment.

The markets ended the week up, despite the Fiscal Cliff nonsense coming from Washington, hopeless one day, hopeful the next.  The Dow Jones Industrials [+0.21%; +9.38%], the S & P 500 [+0.56%; +14.96%], and the NASDAQ Composite [+1.49%; +18.89%] all increased.

The Media circus surrounding the fiscal cliff debates could not hide the strong corporate profits in the 3Q GDP report.  The most newsworthy part of today’s GDP report is that corporate profits increased at a 14.8% annual rate in Q3 and are up 8.7% versus a year ago. Profits are now back at an all-time record high. The market noted virtually all of the increase in corporate profits were from financial sector.  This could be a precursor to market performance through the end of the year.

The Conference Board’s index of consumer confidence increased for the third month in a row.  November reported a level of 73.7, the highest since February 2008.  The Director of economic indicators at The Conference Board, Lynn Franco, said:

Over the past few months, consumers have grown increasingly more upbeat about the current and expected state of the job market, and this turnaround in sentiment is helping to boost confidence.

Interest rates have remained steady during the Washington stalemate since the election.  The fiscal cliff is causing lenders and borrowers to hold their breath until Congress decides how to handle the problem. Most observers believe Congress will kick the can down the road until the new Congress is seated in January.  But it could take even longer.

On the European front, the Euro (€) has been steady versus the dollar due to the lack of bad news on the European meltdown. But don’t expect this to last. Unemployment in the Eurozone reached an all-time high during November. It is likely Europe will be battling the debt monster for the next decade.

Petroleum and gasoline prices have declined and remained basically unchanged during the last weeks of November. Currently, these prices seem to move only during extreme political events or natural disasters.  The basic law of supply and demand doesn’t seem to matter right now. With a recession in Europe and slower growth in emerging markets, supply is ample, but oil prices have not gone lower. Go figure.

FINANCIAL FACT OF THE WEEK

The Motley Fool (www.fool.com) reported U. S. stock ownership by institutional investors has increased from 8% in 1950 to 74% in 2009.  In 1951, the typical mutual fund holding period was six years.  Today, the average holding period is just one year.

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

 

No Responses to “Sandy’s Effect On The Economy”

Leave a Reply