Chicago PMI Up, Consumer Confidence Jumps, Retail Spikes

On Tuesday, Chicago manufacturing reports and Consumer Confidence led the good news of the day.

Chicagoland continues to report accelerating month-to-month growth in their manufacturing sector. New orders rose in November vs October to extend what is now extremely strong order growth trending. Production is now cranking and like other regions is raising the demand for manufacturing employment which was reported strong in November as well as October. The healthy production is also holding down and unfilled orders, which now reflect a contracting rate.

The Chicago report covers both non-manufacturing and manufacturing and indicates that we will continue to see strength in the nationwide purchasing reports for November also to be released this week.

Consumer confidence improved in November at a rate better than any economist had projected this month. The Conference Board's reading jumped more than four points to 54.1 fueled by gains in their "expectations component." That measurement points to overall improvement in future months.

Retail sales also moved higher in the November 27 week according to ICSC-Goldman's index released on Tuesday. The improvement now registers a year-on-year rate of plus 3.5 percent. For November as a whole, ICSC-Goldman has measured a three to four percent year-year gain.

Redbook reported a spike higher in same-store retail sales during the week just past. Its reading at a plus 4.9 percent on-year rate is now the strongest retail growth rate of the whole recovery.

All of these reports underscore a solid recovery that is on track and jobs growth (particularly in manufacturing) that continues to increase.

A Small Price to Pay: $25B And Falling

The Troubled Asset Relief Program will cost taxpayers far less than initially feared, with the new price tag estimate now just in at $25 billion. That according to the Congressional Budget Office report released on Monday.

The nonpartisan group underscored that, "it was not apparent when the TARP was created two years ago that the costs would be this low. Because the financial system stabilized and then improved, the amount of funds used by the TARP was well below the $700 billion initially authorized and the outcomes of most transactions made through the TARP were favorable for the federal government."

The once much debated program, now has fewer and fewer skeptics. And it seems each month brings better news from the CBO. In August, the CBO report predicted a cost of $66B. Just last month the the Treasury Department estimated that TARP cost could end up being as little as $29 billion. Monday's report bested even that. At the $25B estimate, the program will cost less than half of what it took to clean up the massive savings and loan crisis of the 1980s.

The program which provided the equivalent of U.S. taxpayer loans to automakers, big banks, and bad loan brokers has ended up costing far less than expected because of a number of reasons. Most banks that received bailout funds repaid their TARP money sooner than even the most optimistic forecasters had projected 18 months ago. In addition, participation in a program designed to aid struggling homeowners with their mortgages has turned out to be much lower than forecast.

Indeed we now are seeing objective measures that point to 2008 gloom and doom claims that were massively overblown and our report that "TARP is Working" in early 2009, was right on.

Markets Likely to Applaud Irish Bailout Terms

On Monday, markets will likely applaud the 85 billion euro bail-out of the Irish economy from the International Monetary Fund and European Union financing.

Over the weekend, the rescue package was approved at a meeting of European Union finance ministers in Brussels.

The overall financing includes up to 35 billion euro to support the Irish banking system - 10 billion euro of which will likely be needed immediately.

The Irish government applied for the loan last Sunday when it conceded the bank crisis was too big for the country to handle on its own.

IMF managers and directors say the Irish authorities propose "a clear and realistic package of policies to restore Ireland's banking system to health." The program and funding will put its public finances on a sound footing, "and bring Ireland's economy back on track."

The Real Stock Market Chart for 2009, 2010 (and 2011?)

You may remember our famous chart that predicted the bottom for the bear market of 2007, 2008 and 2009 and then predicted the ensuing bull market to follow.

The methodology was simple. Compare a stock chart from the bear market of 1973 and 1974 with that of recent bear trends of 2008 and 2009.

The downward similarities were so striking that one would be led to believe that what happened next in the market in 1975 and 1976 would be a good prediction for what would happen in 2009 and 2010...

And what a prediction it has turned out to be. We published the chart three (3) days prior to bottom of the bear. We joked that we had no idea what would happen next and then showed the chart for the bull run of 1975 and 1976.

Since that chart was published, the graph has turned out to be the most visited page every day on The Good News Economist blog from that day back in March of 2009 until the present day!

So what did actually happen? Here you go... Look familiar?


(Click chart to enlarge)

Any guesses on what the 2011 chart might look like?  (Hint:  Take a peek at 1977)

(Click chart to enlarge)

Charts Source:  Google Finance

More Positive Signs for Jobs

On Thursday the government's report of jobless claims held onto the big improvement of the prior week and only rose 2,000 to a lower-than-expected level of 439,000. The four-week average of 443,000 is now down more than 15,000 from a month ago and signals solid improvement for November payrolls.

Also reported on Thursday by the Conference Board were leading economic indications that continue to strengthen. Gains now reflect two strong back-to-back 0.5 percent gains for the Board's index of leading economic indicators. A big central positive is the factory work week, strength that is likely to continue given persistent uplift underway in the manufacturing sector.

Philly Fed data has been lagging national data recently -- but not in November. Thursday's report of the November index registers general business conditions jumping from a zero-flat trend to a ballooning 22.5. This indicates very sharp month-to-month growth. New orders also rose more than 15 points to 10.4. Shipments were also up more than 15 points, to 16.8.

And all this is translating into jobs. The region's factory jobs index rose more than 10 points to 13.3.

Other readings confirm strength: unfilled orders rose while delivery times and inventory contraction slowed. Input prices show steep month-to-month pressure at an accelerating rate yet output prices, that is prices manufacturers receive for their finished goods, continue to contract though now only slightly.

This report points to accelerating strength for what is already solid growth for the national manufacturing sector. Interestingly, these results contrast with Monday's weak Empire State report from the New York Fed, a report that had been significantly stronger than Philly's recently. Month-to-month swings in regional data shouldn't cloud what is generally a positive outlook and continued leadership for the nation's manufacturing sector.

Industrial Production Index Shows Factory Output Jumped

Manufacturing rose quite handily in October. That is according to the Industrial Product report released on Tuesday.

By major components, manufacturing increased a healthy 0.5 percent, following an upwardly revised 0.1 percent rise in September (previously a 0.2 percent dip). Excluding motor vehicles, manufacturing rose 0.5 percent, following a 0.1 percent increase the month before.

The output of durable goods increased 0.9 percent, with increases in most major categories. The production of nondurable goods moved up 0.2 percent in October after having risen 0.4 percent in September.

It really is the manufacturing component that matters in this report since the utilities component can swing sharply on adverse weather. The manufacturing component is quite healthy and should lead us to discount any weakness in the Empire State report yesterday.

Manufacturing Continues to Lead Recovery; Jobs Growth

On Monday we will continue to watch for signs of significant hiring strength in the manufacturing sector.

Last month the Empire State manufacturing index jumped to 15.73 from 4.14 in September.

You may have noticed in the raw data, two series that suggest continued improvement ahead. First, the new manufacturing orders index rose to 12.90 from 4.33 in September. That type of strength in new orders almost always translates into healthier production. But of perhaps more interest was the employment index which jumped to a very strong 21.67 from 14.93 and 14.29 in the two prior months which were already strong. Manufacturers would not be hiring if they were not expecting to continue to expand production.

On Monday we will likely see a report that indicates a sector that continues it's year-long streak of growth and jobs expansion.

Obama -- More Tax Cuts for Small Businesses

Late last month, President Barack Obama signed legislation that will cut taxes and provide credit help for small businesses. It is yet another step that the government is taking to continue programs that spur job growth in the U.S. economy.

The Small Business Jobs Act is now the fourth jobs measure that Congress has enacted this year -- it is likely to be the last before the Nov. 2 midterm congressional elections.

The bill provides billions of dollars worth of tax cuts over the next 12 months, with the bulk coming through “bonus depreciation.” The measure allows companies to more quickly write off the cost of business-related purchases. The bill also revives stimulus provisions that cut fees and increase limits on loan guarantees offered by the government's Small Business Administration.

More Bullish Signs for Housing

As the U.S. recovery churns into its second year, more bullish arguments for housing are beginning to emerge.

Talk and writings about real estate has finally shifted lately. It looks as if our contrarian view of the housing market is finally beginning to gain traction.

For instance, Credit Suisse analysts say the worst is behind us and that fear of another hit on the housing market is just an overreaction. The bank experts point to U.S. government support of 70% of home mortgages that will likely keep prices from the drops seen in 2007 and 2008. Last week Brett Arends of the Wall Street Journal listed 10 reasons to buy a home. He strongly counters the recent Time Magazine cover story that questions the pros of homeownership. But perhaps the strongest voice comes from Bill Wheaton of Massachusetts Institute of Technology's Center for Real Estate. Wheaton believes the housing market is poised to make a strong comeback. His research points to "a sleeping giant that is about to wake up."

Wheaton modelling shows that much of the excess home inventory will either be sold, occupied or otherwise absorbed by 2013. Furthermore from 2011 onward, buying demand will return to pre-recession levels. Even more encouraging is that he shows that the recovery of home construction could boost overall GDP to levels unseen during recoveries after other previous recessions -- the the exception being that of the massive building that happened right after World War II.

His paper illustrates that, "housing construction will not only rise, but it will stay high for a while, which didn't happen in previous recoveries." Wheaton continues, "It won't just be a one or two year blip."

The heart of the Wheaton argument lies in the rate of residential construction today. It's been historically low – so low that demand is now actually significantly overtaking the level of building going on. This demand-side factor alone sets the stage for a relatively large comeback in residential rebound.

As we've noted here on several occasions, housing drew us into the large slump and it is likely that housing will provide significant bounce to lead us out on the positive side.

Housing construction could hugely drive America's economic growth over the next few years, Wheaton says. Residential investment as a share of GDP is relatively small, averaging about 3% to 4%. But given that there's so little building going on today, it's plausible housing construction could add an average of 0.7% to GDP growth per year over five years – a level far greater than what has been seen during recoveries of previous downturns.

Of course many see Wheaton (and others listed above) as way too bullish given what the majority of "experts" are saying about the housing rut.

But remember when it comes to economics, the majority is always wrong.

September Ushers In Welcome News; Manufacturing Growth Accelerates and Adds Jobs for Ninth Straight Month

The beginning of September saw good news flowing in many corners of the economy.

The consumer made a comeback in July-in both income and spending. Personal income in July posted a 0.2 percent gain, following no change in June. The July figure was a little lower than the consensus expectation for a 0.3 percent rise. More importantly, the wages & salaries component rebounded 0.3 percent after slipping 0.1 percent in June. This component would have been even stronger had it not been for a dip in government payrolls from laying off temporary Census workers. Private industry wages and salaries gained 0.5 percent in July, following a 0.1 percent dip in June. The consumer sector bounce-back should help support overall economic growth.

And retail sales followed the consumer. Chain-store sales improved in the August 28 week, according to Redbook's tally which shows a plus 3.0 percent year-on-year pace vs. a plus 2.6 percent pace in the prior week. The positive trend is very steady, showing a four-week average of 2.8 percent over the past two weeks and 2.9 percent over the five prior weeks.

ISM's manufacturing report on business reported a PMI that came in at a stronger-than-expected 56.3 for a sizable eight tenths gain from July. The reading is well over 50 to signal month-to-month growth and in the comparison with July, and points to growth at an accelerating rate. Further this growth is in business activity like production, employment, and inventories. These three factors all accelerated in August. The ISM report is solid and includes strength in both exports and imports and an increase in prices paid that reflects demand for inputs. Jobs in manufacturing have now grown for 9 straight months and last month reflects hiring that is accelerating.

Initial jobless claims are now edging down, as they have for the past couple of weeks. Initial claims for the August 28 week came in at 472,000 compared with a revised 478,000 in the prior week and the 2010 peak of 504,000 the week before that. The four-week average fell 2,500 to 485,500.

And the overall private sector is providing jobs again... that sector added 67,000 positions after a 70,000 boost in July. Leading the way was a 45,000 boost in education & health services, with health care up 40,000. Professional & business services returned to positive territory, rising 20,000 after dipping 3,000 in July.

Q2 GDP Reading Surprises Most

On Friday, the Commerce Department confirmed that Q2 GDP growth was 1.6%. Many of the details pointed to good news for the U.S. Economy. With inflation almost non-existent the report also shows that year over year the economy is up 3.0% Reading surprised almost all analysts to on the upside.

Many stock traders focused on the U.S. final sales number of the report. Real final sales to domestic purchasers was revised up to 4.3% from the initial estimate of 4.1%

So even though overall economic growth slowed from the first quarter's 3.7% pace, domestic demand was actually stronger-4.3% compared to 1.3% in the first quarter.

In summary, the latest GDP revisions report is quite supportive of continued recovery for the U.S. economy for the foreseeable future.

30 year fixed rates -- now below 4.4% -- Should you refi yet again?!

How low can they go?

Mortgage rates managed to reach yet another low this week, with the 30-year fixed rate now costing borrowers less than 4.4% for the first time in history.

Freddie Mac (FMCC) said on Thursday that the average rate for traditional 30-year fixed mortgages fell to an average of 4.36%, the ninth decline over the past 10 weeks.

Fixed mortgages with a 15-year duration also fell to a historic low of 3.86% and adjustable-rate mortgages, which have shorter terms of one or five years continue hovering near 3.5%.

Additionally those folks who need a payday loan are also likely to find the lowest rates in quite some time. Folks wishing to take a personal payday loan may be surprised at just how easy it is.

The sharp decline is a reflection of three factors: Ongoing stress in the housing market, regulatory policies aimed at spurring demand and an increasing belief on Wall Street that deflation (and inflation) is basically non-existent.

"...long-term bond yields fell to the lowest levels since January 2009, allowing fixed mortgage rates to ease to new record lows this week," said Amy Crew Cutts, Freddie's deputy chief economist.

In response to the low rate that Mortgage Bankers Association reported on Wednesday that in its Weekly Mortgage Applications Survey for the week ending August 20, 2010 the Market Composite Index, a measure of mortgage loan application volume, increased 4.9% on a seasonally adjusted basis from one week earlier.

"The volume of refi applications last week was up 26% over their level four weeks ago. Mortgage rates dropped to their lowest level in the survey, going back to 1990," said Michael Fratantoni, MBA’s Vice President of Research and Economics. "We are at a new 15 month high for the Refinance index. With rates this low, many borrowers who refinanced in the past two years may well have an incentive to refinance again, and this is likely increasing refi application activity."

Stimulus May Have Added 3.3M Jobs

The economic stimulus package may have added as many as 3.3 million jobs to the economy during the second quarter of this year and according to the independent Congressional Budget Office (CBO) may have prevented the nation from lapsing back into recession. The report was released by the CBO on Tuesday.

The details of the CBO report said that the stimulus lowered the unemployment rate by between 0.7 and 1.8% in the second quarter and increased the number of people employed by between 1.4 million and 3.3 million.

The budget office said the act also increased the nation's GDP by between 1.7% and 4.5% in the second quarter of the year.

Leveraged Buyouts Reach $42B Year to Date

The big banks are now openly seeking out deals to back once again. And in response, some savvy private equity firms have sought to accelerate what they do best -- acquiring firms and then reselling those companies at a premium.

Following retrenchment in activity in 2009, this year buyout firms have been seeking to put their billions of dollars in untapped investor capital to use by taking on additional risk.

For instance on Friday, the Blackstone Group, one of the largest private equity holding companies, agreed to buy Dynegy, the Houston power company. The price tag -- $4.7B -- the largest of the year.

According to Thomson Reuters that brings the total for leveraged buyouts to just over $42B in calendar year 2010.

Friday's transaction continues to remind us that big money is betting on a world economy that grows steadily well into next year.

General Motors: "Extraordinary Turnaround"

On Thursday, General Motors Corp. posted its best quarterly profit in six years in one of the clearest signs yet the ailing automaker (and its beleaguered industry) is on a road to recovery.

The record profits were posted slightly more than 12 months after a steep drop-off in sales caused by the financial crisis of 2008/2009.

GM says that the strong profits will pave the way for the company file for an IPO and begin to rid itself of a more than US$50-billion taxpayer liability -- company equity that is majority owned by the U.S. government.

Total second-quarter earnings came in at US$1.3-billion, a huge reversal from the US$12.9-billion it lost in the same period a year ago. Revenue jumped 44% to US$33.2-billion during the quarter.

Last year the government had estimated that it would take perhaps 8 years for the GM to pay taxpayers back. The quick GM rebound however has surprised even the most optimistic of forecasts.

“Given the extraordinary turnaround — frankly, faster and better than what we had imagined — I think the IPO could be very successful if the overall markets co-operate,” Steven Rattner, the Obama administration’s former Car Czar, said in an interview on Bloomberg Television.

Retail Sales Continue at a Steady, Healthy Year over Year Rate

Retail sales continued at a steady pace in the Aug. 7 week according to Redbook's tally on Tuesday. The Redbook report shows a plus 3.0% year-on-year pace, unchanged from the prior week.

According to a similar measure from ICSC-Goldman on Tuesday the year-on-year pace currently is at 3.7%. The Goldman report sees the full-month pace coming in at a year-on-year rate of plus 3.0%.

Retail sales under-girds much of U.S. GDP growth. In July (and now into August), the growth rate has been quite steady in the moderate 3% range.

Fears Continue to Subside As Positive Data Kick-starts August

Market fear continues to subside drastically following a peak six weeks ago. Fear about the insolvency of European banks -- which was a basic staple of bear analysts has now proven itself to be grossly overblown. And as the fear about Europe has subsided so has the VIX S&P Volality Index

(chart source: yahoo finance)

The index -- which appeared to be on its way to 50 at the height of the European Crisis -- now appears to be headed for the teens again.

And there were plenty of signs this week that August news will continue to calm the markets.

1.  The Institute for Supply Management released 2 reports this past week.  Pointed to continued growth in both the manufacturing and non-manufacturing service sectors.

2.  Construction spending -- which was forecast to decrease -- actually increased during the June reporting period.

3.  Domestic motor vehicle sales for July came in stronger than most economists had predicted.

4.  According to the most reliable retail indices, the retail sector (which accounts for nearly three quarters of the US GDP) continues to growth at a healthy rate between three and four percent year over year.

5.  The mortgage purchase index for the purchase of new homes has now been up for three weeks in a row.  Refinancing and purchase interest rates continue to fall.

6.  Although jobs creation is always the last sign of a healthy recovery, the private sector is now clearly beginning to add jobs -- ADP reports + 42,000 private sector additions and the U.S. government calculated 71,000 additions in July.  The return to jobs growth can be argued as the quickest return to growth from a recession than at any point in modern U.S. history.

7.  It is now clear -- as evidenced by earnings calls and transcripts -- that the majority of U.S. businesses have returned to profitability.  Not only have the majority report Q2 results better than expected, but the majority now forecast continued growth and profitability into the end of the year.

And investors are finally starting to agree with the positive business assessment.  Not only is the VIX index on a steady decline, but stock markets finished the first week of August up nearly 2 percent for the week and over 6 percentage points year to date.

U.S. Manufacturing Grows 12m Straight; Jobs Up in Sector 8m in a Row

The ISM released its manufacturing report on business on Monday. Their index continued to show healthy growth in the sector. Perhaps even more encouraging is the employment growth measured in the report. It now registers an increase in jobs for 8 straight months and now at an accelerated pace.

Manufacturing continued to grow in July as their PMI registered 55.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

According to their report on business: "The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (58 percent) corresponds to a 5.4 percent increase in real gross domestic product (GDP). In addition, if the PMI for July (55.5 percent) is annualized, it corresponds to a 4.5 percent increase in real GDP annually."

Flu down; Profit Up at Aetna

On Tuesday Aetna Inc. lifted its 2010 earnings forecast a second time after the firm reported milder-than-expected flu season. The good news about flu this year tacked one more positive in an earnings season that has been dominated by profit results and increasingly positive projections.

The firm now projects that their operating earnings may reach $3.05 to $3.15 a share in the upcoming quarter. That’s significantly up from their earlier forecast of $2.75 to $2.85 in April.

In further positive economic stimulus, Aetna's Chief Financial Officer Joseph Zubretsky said that in addition to healthy profit for the firm in the second half of 2010, the company will also increase their spending to upgrade computer systems.

For the 2Q 2010, net income rose 42 percent to $491 million easily topping most medical market analyst expectations.

Source:  Aetna

Investors Continue Focus On Earnings

U.S. stocks surged last week following yet another strong batch of earnings.

Earnings results from heavy weights such as Caterpillar (CAT), 3M (MMM), UPS (UPS) and AT&T (T) all topped earnings estimates and raised their outlooks.

Some economists pointed to data that seemed to show some weakness. Weekly jobless claims jumped, but it may have been due to seasonal factors.

The markets have been trying to sort out all the data and it seems that for now investors have decided that the positive corporate earnings from so many sectors do not indicate a slowdown in the economic recovery. And even if there is some weak elements, those are not affecting companies' profits in general.

For the week the S&P 500 index was up nearly 3%.