The last week in April was packed with economic data; the FOMC meeting and the death of Osama Bin Laden. The Case-Shiller Home Price Index decreased once again by 2.6% over the last year and eased 1.1% last month. Consumer Confidence improved from 63.4 last month to 65.4 in April, and 1st quarter Gross Domestic Product (GDP) slowed to 1.8%, lower than expectations. Ben Bernanke and the Federal Open Market Committee (FOMC) concluded their three-day meeting and, as expected, left rates unchanged and held their first-ever press conference. Finally after a 10-year saga to find the mastermind of the September 11th massacre, a team of United States Navy Seals killed Osama Bin Laden at a compound near the Pakistani capital city.
Case-Shiller Home Price Index
The Case-Shiller HPI tracks the home prices of the 10 largest metropolitan areas in the United States. The report once again indicates the continued weakness in the housing sector, and confirms consumers’ decisions to delay their purchase fearing that home prices will continue to fall. As a result of the massive amount of existing homes for sale, new home construction continues to lag the rest of the economy. The consensus believes this trend will continue as long as the consumer believes home prices will continue on its downward trend.
Consumer Confidence in April
After a big decline from March to April of nearly 8 points, Consumer Confidence improved 2 points from 63.4 in March to 65.4 in April. The details of the report were somewhat encouraging, suggesting that consumers are becoming more optimistic about jobs, but inflation expectations are directly influencing consumers’ future purchasing behavior. The report also suggested jobs are becoming easier to find with its best reading in two years. Future inflation expectations eased from March, but are still above 6.0%. Moreover, consumers are increasingly becoming more concerned about the rise in fuel prices, and how it will ultimately effect their buying decisions in the months to come. I suspect that as oil inventories continue to climb gas prices should begin to ease later in the summer. Overall, the report suggests the consumer is well aware of the potential risk of higher fuel costs, and is basing their future purchasing decisions on their inflationary outlook.
Gross Domestic Product (GDP)
The first quarter GDP Report was less than stellar. Overall, growth in the United States was below the consensus estimates of 2.0%, which was continually revised lower throughout the quarter. Most of the weakness came from growth of imports, lower personal consumption, and (believe it or not) lower government spending. There was some strength in personal spending and investment in equipment and software, which rose nearly 11.6% from the fourth quarter of 2010. The most notable change in the headline number was the weakness in non-residential structures down 21.7%.
Most economist are discounting the weak quarter, blaming the poor results on harsh winter weather, and the slow-down in Japan because of the Tsunami and earthquake that took place in March. Others believe the drop-off in government spending, which has artificially propped up past GDP figures, has finally run its course. Whatever the case may be, this is a disappointing report and does cause concern for the remainder of the year.
The Federal Open Market Committee (FOMC)
After three days of meeting the Fed decided to keep short-term rates unchanged with a target range of 0.00% - 0.25%, and reiterated its stance that they will finish its $600 billion purchase of government treasuries ending in June. The committee also stated they will continue to keep rates at the current levels for an “extended period of time”.
With regards to the economy, the committee stated, “the recovery is progressing at a moderate pace, and overall economic conditions are improving at a gradual pace”. Bernanke commented in his press conference that “some prices have increased at a higher rate (food and energy), but inflation is subdued and future inflation expectations remain low”. The Fed is concerned about the rise of commodity prices, and how it is effecting overall consumption in the United States, and the continued rise in commodity prices are putting undue pressure on the consumer in the short-term causing slower economic activity. Hence the poor GDP report!
The Current Market Environment and Expectations
Given the condition of the economy in the first quarter of 2011 was less than stellar, and the fact the FOMC is going to complete QE2, I have some concern about the robustness of the US economy over the next 6-12 months. The recent Weekly Jobless Claims figure is back above 400,000, and the 4-week moving average is also above 400,000 indicates some overall economic weakness. On the other hand, corporations continue to report excellent profits and top line sales are starting to improve as well. So, is the recent slow down a cause for concern? Is the recent increase in unemployment claims a cause for concern?
The majority of economists believe the recent slowdown is short-lived, and will subside in the coming months. Let us not forget the current recovery is the worst on record, but with the US dollar valuation at its lowest level in years, multi-national companies are going to continue to profit from overseas consumption. This should continue to offset weakness in the United States, and continue to allow corporate profits to increase. If economists are correct in assessing that the recent slow-down in GDP growth is short lived, we should see more robust economic activity for the remainder of the year.
Finally, in my opinion, the most important risk for the stock market and the global economy is US government’s ability to create a successful long-term debt-reduction plan. If the Congress and President Obama deliver to the world a successful plan, world stock markets will set new highs soon after. If not, all bets are off.
