VERSACE: The economic hits keep on coming

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ANALYSIS/OPINION:

Some people hear the word “hit” and quickly think of positive uses such as hit song or “one-hit wonder.”

In reviewing recent economic and other data thus far in May, I see the negative use — to strike or deal a blow — as more fitting when talking about the domestic economy. While there were some bright spots, the vast majority of the data were unfavorable in my opinion and point to a continued economic soft patch. I say continued because gross domestic product in the first quarter of 2011 slowed to a revised rate of 1.8 percent compared with 3.1 percent in the last quarter of 2010.

While there were a lot of data to chew through, the three that give me the greatest concern are manufacturing, housing and jobs. I say manufacturing because that sector has been a key factor in the economic rebound over the past several quarters, but new data suggest a weakening trend. According to the Federal Reserve Banks of Philadelphia, Chicago and Richmond, manufacturing activity decreased for April/May and has reached its lowest expansion rate since the fourth quarter of 2010.

In the text of the Federal Reserve Bank of Richmond’s manufacturing sector activity survey for May, we learned that the overall activity index turned negative because of weak shipments and new orders, and that districts under the Richmond Fed’s purview reported that capacity use turned negative and backlogs fell further. These regional commentaries were affirmed by the greater-than-expected drop in durable goods orders in May as reported by the Commerce Department.

Turning to housing, a sector that has been weighing on the economic recovery for a number of quarters, it remains poised to be a drag over the next several quarters. As more cities across the nation experience double dips in home prices, more than half (54 percent) of U.S. adults think recovery in the housing market will not happen until 2014 or later, according to survey released by RealtyTrac.

Rick Sharga, senior vice president at RealtyTrac, said, “With the amount of inventory we have left, it tells me in the best-case scenario we’re probably looking at 2014 before we start to see home price appreciation on a national basis.”

More than a few people are looking at falling home prices and are wondering what it will take to get housing demand boiling again. Many consider mortgage rates as key drivers in home sales, however — as I learned more than a few years ago — job creation is a far greater stimulus on regional housing demand.

No jobs equates to a tepid housing demand in a normal economic environment.

With that as a cue, early in May we received an “OK” April employment report with better than expected private-sector job creation, but the overall unemployment rate ticked back up to 9.0 percent in April from 8.8 percent in March.

While there have been a few reports touting an improved job market, one has to wonder why average weekly jobless claims rose to 435,000 in May from 406,000 in April. Keep in mind, too, that states, which are running budget deficits and need to close the gap given the requirement to balance their budges, are more likely than not to make cuts to get there. Dont forget the federal budget issues. All in all, I would not rule out further public-sector job cuts as those budgets get scrutinized.

No wonder the National Association for Business Economics recently cut its 2011 GDP forecast.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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