- The Washington Times - Friday, June 19, 2009

OPINION/ANALYSIS

The investment community, along with the talking heads and other pundits (myself included, I suppose), have been waiting with bated breath for fresh economic data. The data will help us better understand whether the market is as forward-looking as some think about the supposed economic recovery or is ahead of itself now as it was to the downside in early March.

Looking in the rearview mirror, it was not hard to see that the world did not come to an end in early March despite what sentiment suggested. As soon as signs started to emerge, the stock market, no matter what index you examine, rebounded sharply. Hence the question, is the market where it should be or has the pendulum now overswung in the other direction?

This week saw more than a dozen economic data points, the vast majority of which painted the picture of May 2009. A good source of these ongoing weekly data streams, along with Wall Street expectations, can be found at Briefing.com. While the actual data points, looked at on a month-to-month basis, stitch together a trend line, data that is better or worse than Street expectations can renew vigor or concern in the market.

On Tuesday came several data points for May, including the producer price index and figures on housing starts, industrial production and capacity utilization. While housing starts and building permits were up over the previous month and better than Street expectations, recent moves in bond yields and, subsequently, mortgage rates have reignited concerns that rising mortgage costs could quell refinancing activity and drive potential buyers away.

RealtyTrac, a California firm that tracks real estate foreclosures, said that while foreclosure filings fell modestly in May from April levels, May foreclosures were still the third-highest on record and increased 18 percent over the previous May. The question at hand will be - how will new housing starts fare when there are roughly 4 million homes available for sale, cheap foreclosures in the market and rising rates?

In addition to that mixed data, industrial production figures for May were not only weaker than expected but fell for the seventh consecutive month. At the same time, the capacity utilization rate, which measures slack available in the economy, fell from 69 percent in April to 68.3 percent in May, the lowest level since 1967.

The modest positive in Tuesday’s data was the slight drop in producer prices, however the driver behind that decline - continued weakness in the industrial sector - simply reinforces concern raised by other data. Moreover, the rebound in oil and gas prices in recent weeks could give rise to higher producer prices in coming months.

Aside from economic data, Best Buy reported its quarterly earnings Tuesday. And while the headline was better than expected, digging behind the headline also reinforced concerns about the consumer. First, same-store sales fell 6.2 percent for the quarter, with the worst declines of the quarter in May. Second, even though Best Buy beat earnings expectations for the quarter, it kept its prior annual earnings guidance intact. Simple math shows that earnings for Best Buy in the remainder of the year will likely be weaker than previously expected.

All in all, Tuesday’s data makes one wonder how deep the roots of this “green shoots” recovery are?

Wednesday did not bring much better news as FedEx, much like Best Buy, beat Street expectations for the quarter when it reported its earnings and also offered an outlook for the second half of 2009 that was less than expected. Management cited rising fuel prices and “manufacturing activity [that] is expected to be substantially negative year over year through the summer.”

Much like Tuesday’s housing data, consumer prices were a mixed bag as well. The Labor Department reported the consumer price index rose a seasonally adjusted 0.1 percent last month, below analysts’ expectations of a 0.3 percent rise. Food prices fell for the fourth straight month but gasoline prices rose 9.6 percent in May. While well below year-ago levels, the rise in gasoline prices over the last several weeks, as noted by FedEx’s outlook, could dampen earnings outlooks when companies report their second-quarter results in July and offer an updated perspective on the balance of the year.

On Thursday, the latest initial unemployment claims data was released and again it was a mixed bag, in my opinion. On the positive side, the four-week moving average of unemployment claims fell marginally by 7,000 to 622,750, and continuing jobless claims fell by 148,000 to 6.69 million. The knee-jerk positive is that this is the first fall in continuing jobless claims since early January, which breaks 19 weeks of record highs for the data, but I would argue that a 2 percent decline is marginal at best. Moreover, initial jobless claims ticked up by 3,000 to 608,000 for the week ending June 13. This speaks to me of stabilization in unemployment claims, which, while good, is not the same as job creation on a sustained basis. That in my view is a sign, albeit a lagging one, that the economic recovery is under way.

Stitching these data points together suggests to me that while things have stabilized and might be modestly better than they were in March, the improvement in the last few months has been one more of outlook than actual improvement. With rising fuel prices, rising interest rates and a lack of meaningful job creation, a potential near-term risk is that expectations and outlooks get reset and reflect the current economic data rather than simply “things have to get better.”

Chris Versace is the director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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