European Cash Needs Overblown

Negative moods in Europe are finally being calmed by news on Wednesday that the European Central Bank will likely lend less money than expected for the next three months. The data suggests that region's banks' cash needs were wildly overblown again by the crisis fear-mongers.

"The result of the ECB's money market operations indicated that money markets have been less distorted than originally feared," BNP Paribas said in a note. BNP Paribas is considered the leading financial group of the eurozone.

Also providing a hopeful sign, Germany's unemployment rate declined to 7.5% in June thanks not only to the traditional springtime upturn, but also an improving economy, according to the country's labor agency report. They released data showing that the jobless rate was down from 7.7% in May.

The German data raised hopes on Wednesday that consumer spending in Europe's biggest economy will help the region, a zone where doomsters have suggested that severe spending cuts will darken the growth outlook.

The European reality now mirrors what most analysts now recognize in the U.S. economic prognostications. "The U.S. economy has stabilized in the near term," said Castor Pang, director of research at Cinda International. "Maybe the U.S. markets are overreacting a little."

Consumers Score Another 2010 Trifecta

Income, Spending, and Saving All Grow in May

According to the Bureau of Economic Analysis the month of May provided a triplet of economic good news -- personal income, spending, and savings all grew. Furthermore, income grew even greater than consumer expenditures and consequently, savings grew as well.

All three measures added similar gains in March of this year.

Personal income has remained fairly stable over the past three months, growing between 0.4% and 0.5%. Over the same period, disposable income has averaged about 0.5% growth. For consumers to be able to spend more on discretionary purchases, their disposable income must of course increase.

Spending has been less stable, recently. In February and March we finally saw spending growth increasing, after the recessionary downward trend of 2009.   The first uptick however post-recession had consumers increasing spend without as much additional income, which meant shoppers were relying more on credit to spend and saving less. In April, however, that changed. Spending was constant, while income continued to grow. And in May? We're now seeing an even better reading: more income growth, but with some additional spending as well.

Geithner: "Unpopular 2009 Actions Were The Right Thing To Do"

Treasury Secretary Timothy F. Geithner said credit availability is improving and companies are building up unprecedented cash reserves, signs that the U.S. economy continues on a path of increased growth.

Further the Secretary claimed on Tuesday that the government’s management of the $700 billion Troubled Asset Relief Program has yield the desire results while costing much less than originally estimated. The unpopular program he claims “played a critical role” in loosening access to credit and putting the economy back on a solid footing.

“Credit conditions overall, which dragged our economy into a deep recession in 2007, no longer pose an obstacle to growth,” Geithner said in his testimony to the Congressional Oversight Panel. Geithner pointed to U.S. firms that are now raising money in capital markets “and have built up record cash reserves, which will eventually be reinvested and fuel growth.”

The TARP program was criticized by both Democratic and Republican lawmakers as favoring Wall Street over small businesses. Many thought the government would likely lose all of the $700 billion lawmakers had allocated to rescue large banks as well as several U.S. automakers and housing loan backers.

Surprisingly, the cost to taxpayers has now plummeted to $105 billion at last estimate, down from an estimate of $341 billion in August. And it seems now that the benefits have thus far continued to outweigh the cost of the program.

Congress authorized TARP in October 2008 to prevent a collapse of the U.S. financial system. Against the predictions of many, companies like Goldman Sachs Group Inc. and Bank of America Corp. that borrowed funds have since repaid the government with interest. Additionally because of the return to more palatable market conditions, Geithner said the Treasury plans to sell the remainder of its stake in Citigroup Inc. in an “orderly fashion” by year end, further reducing the overall cost of the rescue program.

In additional good news, prospects for the government’s investments in the auto industry have improved, and the Treasury plans to begin to recover its stake in General Motors Co. after the company has an initial public offering later this year or in 2011.

Losses from government investments in GMAC Inc. “will be less than forecast last year,” the Secretary said.

Geithner said the Obama administration doesn’t plan to extend TARP past its Oct. 3 expiration and called Tuesday’s hearing “a eulogy” for the program.

The TARP loans “did what they were supposed to do,” Geithner continued. The economy wouldn’t have started to rebound “without the dramatic actions we took, however unpopular, to bring down the cost of credit and stabilize the system.”

U.S. Consumer Spending Power Increases

Over the last two months, consumer spending power has increased and not just because of income gains. The U.S. dollar actually goes farther these days as prices have dropped on average in the past two months.

Many argue that prices are down largely because of gasoline prices. However, in May overall inflation declined 0.2%, following the -0.1% measure in April. These latest cost of living adjustments are in line with what most economists were expecting and point to good news for consumers -- provided the labor picture continues to improve.

As has been the trend since May of last year, this past week saw several indications that labor indeed will continue to improve. On Thursday the conference board released the leading economic indicators. The most substantial gain in the May report was the factory work-week. The indicators underscored another release on Wednesday which illustrated that overall industrial production in May surged 1.2%, following a 0.7% boost the month before. The production numbers continue to beat forecast -- this month above the +1.0% consensus estimate.

Post Stimulus: Home Buyers Now Phoning Their Bankers Again

On Wednesday, the Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey for the week ending June 11, 2010. Their Market Composite Index, a measure of mortgage loan application volume, increased 17.7% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 29.7% compared with the previous week.

Their Refinance Index increased 21.1% from the previous week. It was the highest Refinance Index recorded in the survey since May 2009.

"Mortgage applications for home purchases increased last week, the first increase in over a month. Refinance applications also picked up significantly over the week," said Michael Fratantoni, MBA’s Vice President of Research and Economics.

Purchase applications dropped sharply as a result of the tax credit expiration, but with rates continuing at historic lows and the spring buying season in full swing applications are rebounding sharply.

The four week moving average for the seasonally adjusted Market Index is now up 3.8% and the average is now up 5.5% for the Refinance Index.

U.S. Consumers Confidence Highest in Over 2 Years

On Friday the University of Michigan's consumer confidence index indicated that spenders mood is at its highest level since January 2008. Since its low late in the recession, the measure has now risen by more than one-third.

One measure which records expected economic conditions advanced by 2.8% -- now up increase by 43.7% from its 2008 low. The readings for expected change in personal finances and expected five-year business conditions also both improved.

Another measure which registers sentiment about current economic conditions improved to the highest level since early-2008 and it was up 44.2% from the 2008 low. Consumers expectations for price inflation during the next year fell sharply.

The increases topped even the most optimistic of economists' predictions for gains for the period. The report, because of its strength, continues to point to steady underlying improvement in the jobs market.

Hiring Expected To Improve in 23 of 36 Countries

Hiring Intentions in Europe are Also Up

According to Reuters and Manpower Inc. reports, employers in most of the global economy are more likely to add workers than three months ago, including those in the United States. Significant gains in economies like Brazil, India and China are also likely according to the surveys.

Manpower Inc. is considered one of the leading surveyors of employment demand. They report that the employment recovery will continue in most of the world. The company said Tuesday its seasonally adjusted forecast for the third quarter was now up over its second quarter forecast. Its forecast a year ago was negative.

The firm surveys over 18,000 U.S. hiring managers and measures the difference between those managers who say they will add to their workforce and those managers who plan cuts. "We'll go into the third quarter and see more of what we saw in the second -- no doubt improved BLS numbers...," Manpower Chief Executive Jeff Joerres was quoted saying on Tuesday.

Beyond the U.S. the survey covers a total of 82 countries including hot markets in Brazel, India, and China covering a grand total 61,000 manager interviews. The most recent surveys reveal positive employment prospects in 23 of 36 countries and all but four are higher than a year ago.

In Latin America, most Brazil employers anticipate adding jobs in Q3. And in Mexico an improving environment is also expected -- especially in manufacturing and mining.

Surprisingly in Europe, employers in all of the larger economies like France, Germany and the United Kingdom also expect to add workers over the next three months despite talk of a "crisis."
More employers than last quarter also expect to increase hiring in Central European economies, as well as in Spain, Sweden, Austria and Belgium.

"We've been seeing really no change in our business since the Greek credit crisis of a month ago," Joerres said.

Despite Distractions, US Economic Recovery Gains Momentum

Recent distractions with economic uncertainty in Europe have turned many heads, but the strong U.S. economic recovery rolls on.  Just about all new U.S. economic reports are now posting positive results.  This past week was no exception.

A very strong month-to-month surge in new manufacturing orders and additional employment boosts highlighted another robust ISM manufacturing report.  New orders have been rolling in steadily now for well over a quarter and employment is now accelerating a level not seen for almost 6 years.  Other ISM readings included strength for production, backlogs, and export orders.  Additionally all the activity in production is drawing-down inventories – a sign that points to additional necessity for inventory restocking and even further production and employment.

The recent surge in home sales has also carried over to unexpected strength in construction activity. Construction outlays in April have jumped 2.7%, following a 0.4% rebound in March.  Even though economists knew about expiring tax credits for home buyers, the consensus had expected no change for the April reading.  The recent jump in home sales has now cut home inventories enough to give contractors renewed confidence to pick up their pace of additional construction.

Car and truck sales are also proving very solid.  In the latest report, sales are now ramping to an annualized adjusted rate of 11.6 million -- surpassing April's 11.2 million.  The best news for the auto sector is that even now that those government incentives have been curtailed, sales continue to ramp steadily.

The Challenger's job-cut report held its count at a pre-recessionary 38,810 in May.  The level is little changed month to month, but compared to last year's 111,182 in May the rate is now at "normal" levels.  The report supports continued expectations for sizable payroll gains and lowering unemployment rates in the months to come. 

The ISM's non-manufacturing composite also continues to report solid gains. Its readings continue to   indicate steady month-to-month acceleration in activity.  The employment component of the report now shows a net gain in hiring with rising backlogs pointing to accelerated hiring ahead. 

So while short term market fluctuations many times have folks asking if the recovery is over, the reality is all indications are that this recovery cycle (even though it is now about a year old) is likely just getting started.  Fundamentally, most indicators now point to steady economic growth and an increase in hiring for the foreseeable future.