Economic and Market Update: March 5, 2012
Wealth Management Services Provided by RSM McGladrey LLC
ECONOMIC & MARKET UPDATE: MARCH 5, 2012 “CONTINUED STRUGGLE BETWEEN BORROWING AND LENDING”
Economic Data - Previous Week Series Actual Forecast Durable Goods -4.0% -1.0% S&P/CS 20 City MoM -0.50% -0.40% Consumer Confidence 70.8 63.0 GDP - Q4 2nd Est. 3.0% 2.8% Personal Spending 0.2% 0.4% ISM Mfg PMI 52.4 54.5 Economic Data - Upcoming Week Date Series Actual Forecast 3/5 ISM Non-Mfg Idx -56.0 3/5 Factory Orders --1.5% 3/9 Trade Balance --$49.0B 3/9 Nonfarm Payrolls -210K 3/9 Unemployment Rate -8.3% 3/9 Wholesale Inventories -0.6% Source: Bloomberg Date 2/28 2/28 2/28 2/29 3/1 3/1
Prior 3.3% -0.74% 61.5 2.8% 0.0% 54.1
Durables contract after robust December Declines continue as distressed sales ramp up Confidence higher on better job outlook PCE, import revisions boost Q4 GDP Spending soft again but incomes up PMI slows as most components fall
Prior 56.8 1.1% -$48.8B 243K 8.3% 1.0%
Expected to ease but remain expansionary Durables data points to contraction in orders Little change in trade deficit expected Positive employment indicators point to solid gain Rebound in labor force could offset job gains Mild expansion predicted for inventories
MARKETS POST MIXED PERFORMANCE
Equity markets posted mixed performance last week, with the S&P 500 rising 0.3% but the Dow Jones Industrial Average finishing virtually flat. Despite the full week slump, the Dow Jones closed above the psychologically important 13,000-mark mid-week for the first time since early 2008. With February in the books, equity markets are off to their best start since 1987. US large cap stocks are up more than 9% in 2012, while many small cap and overseas markets have risen by double-digits.
Markets paused last week on mixed economic data and dimmed prospects of a third round of quantitative easing. Fed Chairman Ben Bernanke’s semi-annual testimony before Congress appeared to quash these hopes, as did the Fed’s Beige Book, which reported improvement in most Federal Districts.
Recent Federal Open Market Committee minutes have revealed conflicting views on the need for additional asset purchases, but it is probably fair to say no action will occur as long as the US economy keeps up its current momentum.
On Tuesday, durable goods orders for January were reported to have declined by 4% from the month before. Most of the series’ components exhibited weakness, including the larger transportation group. Transportation orders fell 6.1%, led down by defense and nondefense aircraft. Tuesday’s report should be taken with a grain of salt, however, as the data series is incredibly volatile. Before the three-month stretch of positive gains from October to December 2011, the series had not seen consecutive
Wealth Management Services Provided by RSM McGladrey LLC
months in the same direction (positive or negative) since mid-2010. Durable Goods Orders - MoM 7.5
Growth (%)
5.0
Total Total ex-Transportation
2.5 0.0 -2.5 -5.0
FORTIGENT®
Source: Bloomberg
Also on Tuesday, the Conference Board reported consumer confidence reached the highest level in a year in February. Encouragingly, the survey’s employment components displayed sharp improvement: the percentage of those who reported jobs as hard to get fell to 38.7% from 43.3% in January. This measure had not fallen below 40% in more than three years.
Home price declines appear to be accelerating, as the Case-Shiller Home Price index fell 0.5% in its month-over-month 20-city composite in December. The trend was broad-based, as 18 of the 20 cities saw price declines. Seventeen of these cities have now seen monthly declines for at least three consecutive months. Tuesday’s Case-Shiller report largely confirms the data seen in the existing home sales data last week. The amount of distressed transactions hitting the market is accentuating declines, as short sales and foreclosures continue to distort market pricing. After mild improvement in 2009 and 2010, the absolute level of home prices is now at its lowest point since 2002, according to the Case-Shiller data. On Wednesday, the Bureau of Economic Analysis released its second estimate of fourth quarter GDP. In a modest surprise, growth was revised upward from 2.8% to 3%. The improvement was driven by revisions to nonresidential fixed investment, imports, and personal consumption expenditures.
Consumer Confidence 90.0 70.0
Growth (%)
Index Level
80.0 60.0 50.0 40.0 30.0 20.0
FORTIGENT®
Source: Bloomberg
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
FORTIGENT®
US GDP, QoQ, SAAR
Source: Bloomberg
Wealth Management Services Provided by RSM McGladrey LLC
Unfortunately, the initial measures of 2012 consumption have revealed only modest improvement. Retail sales for January, released in mid-February, were somewhat encouraging, but the personal spending data released on Thursday painted a more muted picture. Spending increased just 0.2% in January, following no gain in December. The personal outlays report was not entirely disappointing, however, as personal incomes rose an additional 0.3% after a 0.5% gain last month. While the January figure fell a bit short of expectations, incomes have been notoriously stagnant throughout the recovery period. Any sustained improvement in incomes should lead to future increases in spending.
Personal Income & Outlays - MoM 1.5
Growth (%)
1.0
ISM Manufacturing Index 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0
FORTIGENT®
Source: Bloomberg
Seven of the index’s 10 components weakened over the month, including employment and new orders. New orders often portend future months’ advances, so this is not a welcome development. However, it is important to note that most of the PMI’s sub-indices remain expansionary. With several other manufacturing data points in positive territory, February’s PMI may just represent a pause rather than a true slowing in the sector. Outside of the US, there were a few items of note from last week.
Spending Incomes
0.5 0.0 -0.5
FORTIGENT®
Manufacturing has been an area of strength for the US economy during the recovery, so the Institute of Supply Management’s (ISM) manufacturing PMI for February was a disappointment. The reading came in at 52.4, a drop from January’s 54.1.
Index Level
The overall complexion of Q4 GDP improved with this revision, but the fact remains that most of the growth was driven by inventory expansion. While that bodes well for short-term production, underlying measures of demand are not sufficient to sustain this level of growth. Economists and market participants alike are watching consumption data closely for signs of improvement.
Source: Bloomberg
The European Central Bank announced the results of its second Long Term Refinancing Operation (LTRO) in February. Some 800 financial institutions participated, borrowing €529 billion in three-year loans. This was slightly above market expectations, and an increase from the ECB’s first round of financing in December. The infusion of liquidity the ECB provided represents a
Wealth Management Services Provided by RSM McGladrey LLC
backstop to banks in the region, and appears to have calmed fears of a Lehman-style financial calamity. Those hoping that European banks are lending this money may be in for disappointment. ECB data released Tuesday revealed that European bank loans to the private sector were stagnant at best in January, rising just 1.5% year-over-year after falling in December and November. After stripping out lending to private financial institutions, lending has actually been shrinking for the past three months. So what are banks doing with the money? The ECB reported that overnight deposits from banks rose to a record €821 billion over
the weekend, suggesting that many institutions are simply re-depositing their borrowings. This may be temporary, however, as it is unlikely many banks are interested in earning 25 bps on loans costing them 1%. European Union leaders met in Brussels to sign a fiscal compact agreed to last year. The fiscal compact was signed by all but two expected holdouts (most notably, the UK), but will still need to be ratified by each country’s legislature. Ireland’s decision to hold a public referendum on the topic and France’s postponement until after presidential elections has complicated the group’s efforts to finalize the agreement.
CONTINUED STRUGGLE BETWEEN BORROWING AND LENDING
Last week, two key reports on the state of the financial and consumer sectors were released. By all accounts, the consumer deleveraging cycle remains intact, despite an apparent willingness on the part of banks to reengage the lending machine. That will continue to pressure economic growth in the coming quarters, similar to prior debt deleveraging cycles.
At the start of the week, the Federal Reserve Bank of New York released its quarterly review of household debt and credit, an aggregated view of trends in consumer debt. According to the NY Fed, aggregate consumer debt fell 1.1% in the fourth quarter to $11.53 trillion.
Source: Federal Reserve Bank of New York The largest decline in debt outstanding occurred in housing-related debt, which saw mortgage balances fall an additional $134 billion in the fourth quarter. Unfortunately,
Wealth Management Services Provided by RSM McGladrey LLC
the housing situation remains tenuous as 2.2% of mortgage balances moved into delinquency. One of the primary reasons for the continued persistence of high delinquency is the number of homeowners estimated to be “underwater.” Mortgage data provider CoreLogic estimated there were 11.1 million homeowners underwater in the fourth quarter, or roughly 23% of all residential properties that have a mortgage. In total, CoreLogic believes there is more than $715 billion of negative equity weighing on the housing markets.
modifications for borrowers nearing foreclosure. Another $3 billion is going to help underwater borrowers who remained current on their payments.
Source: Federal Reserve Bank of New York The other bit of encouraging news came from the Federal Deposit Insurance Corporation (FDIC) in the form of its Quarterly Banking Profile. Based on FDIC data, bank profitability reached a 5-year high in 2011.
Source: Wall Street Journal There is a degree of good news on the horizon. The number of delinquent loans grew exponentially from 2008 through early 2010, before beginning a slow, gradual reversal. With the recent announcement of a $25 billion mortgage settlement, delinquent balances are likely to fall more quickly. This is due in part to the fact that $10 billion is earmarked for principal reductions and loan
Source: Federal Deposit Insurance Corporation
Wealth Management Services Provided by RSM McGladrey LLC
At the same time, the number of banks failing or considered “problematic” is on the decline. In the fourth quarter, 18 financial institutions failed and the number of “problem” banks fell from 844 to 813.
With banks feeling more sanguine about their current situation, they have become more willing to lend capital to consumers and institutions. Loan balances were up $130 billion in the quarter, representing the third consecutive quarter of loan growth. It also represented the largest quarterly increase since 2007. Although banks are seemingly more able to lend, consumers are simply not in the frame of mind to embrace another credit binge. Bank lending will provide obvious benefits to the economy, but until consumers feel more secure in their own financial situations, the push and pull between lending and borrowing will act as only a modest stimulant to the economy.
Source: Federal Deposit Insurance Corporation
THE WEEK AHEAD
Nonfarm payrolls and the unemployment rate headline the week’s economic data. Consensus expects another 200K+ gain in payrolls and no change in the unemployment rate. Other major economic data of note includes the ISM Non-Manufacturing index and the US trade balance. Abroad, there are
important releases on tap including Q4 EU GDP and EU retail sales. Both the ECB and Bank of England meet this week, but neither is expected to adjust their key interest rates. Other central banks meeting include Russia, Australia, Brazil, Poland, New Zealand, Indonesia, South Korea, Canada, Peru, and Malaysia.
www.mcgladrey.com This report is for illustrative purposes only. Past performance is not indicative of future results. The performance numbers displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. The indices discussed are unmanaged and do not incur management fees, transaction costs or other expenses associated with investable products. It is not possible to directly invest in an index. Some part of the information contained herein was prepared for Wealth Management by employees of Fortigent, LLC. This information is not meant as a guide to investing, or as a source of specific investment recommendations, and RSM McGladrey LLC and Fortigent make no implied or express recommendations concerning the manner in which any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s investment objectives. The information is general in nature and is not intended to be, and should not be construed as, legal or tax advice. In addition, the information is subject to change and, although based upon the information that RSM McGladrey LLC and Fortigent consider reliable, is not guaranteed as to accuracy or completeness. RSM McGladrey LLC and Fortigent make no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. McGladrey, the McGladrey signatures, The McGladrey Classic logo, The power of being understood, Power com es from being understood and Experience the power of being understood are trademarks of McGladrey & Pullen, LLP. RSM McGladrey LLC provides investment advisory services, financial planning and other wealth management services to individuals and businesses. RSM McGladrey LLC is an SEC-registered investment advisor.
ECONOMIC & MARKET UPDATE: MARCH 5, 2012 “CONTINUED STRUGGLE BETWEEN BORROWING AND LENDING”
Economic Data - Previous Week Series Actual Forecast Durable Goods -4.0% -1.0% S&P/CS 20 City MoM -0.50% -0.40% Consumer Confidence 70.8 63.0 GDP - Q4 2nd Est. 3.0% 2.8% Personal Spending 0.2% 0.4% ISM Mfg PMI 52.4 54.5 Economic Data - Upcoming Week Date Series Actual Forecast 3/5 ISM Non-Mfg Idx -56.0 3/5 Factory Orders --1.5% 3/9 Trade Balance --$49.0B 3/9 Nonfarm Payrolls -210K 3/9 Unemployment Rate -8.3% 3/9 Wholesale Inventories -0.6% Source: Bloomberg Date 2/28 2/28 2/28 2/29 3/1 3/1
Prior 3.3% -0.74% 61.5 2.8% 0.0% 54.1
Durables contract after robust December Declines continue as distressed sales ramp up Confidence higher on better job outlook PCE, import revisions boost Q4 GDP Spending soft again but incomes up PMI slows as most components fall
Prior 56.8 1.1% -$48.8B 243K 8.3% 1.0%
Expected to ease but remain expansionary Durables data points to contraction in orders Little change in trade deficit expected Positive employment indicators point to solid gain Rebound in labor force could offset job gains Mild expansion predicted for inventories
MARKETS POST MIXED PERFORMANCE
Equity markets posted mixed performance last week, with the S&P 500 rising 0.3% but the Dow Jones Industrial Average finishing virtually flat. Despite the full week slump, the Dow Jones closed above the psychologically important 13,000-mark mid-week for the first time since early 2008. With February in the books, equity markets are off to their best start since 1987. US large cap stocks are up more than 9% in 2012, while many small cap and overseas markets have risen by double-digits.
Markets paused last week on mixed economic data and dimmed prospects of a third round of quantitative easing. Fed Chairman Ben Bernanke’s semi-annual testimony before Congress appeared to quash these hopes, as did the Fed’s Beige Book, which reported improvement in most Federal Districts.
Recent Federal Open Market Committee minutes have revealed conflicting views on the need for additional asset purchases, but it is probably fair to say no action will occur as long as the US economy keeps up its current momentum.
On Tuesday, durable goods orders for January were reported to have declined by 4% from the month before. Most of the series’ components exhibited weakness, including the larger transportation group. Transportation orders fell 6.1%, led down by defense and nondefense aircraft. Tuesday’s report should be taken with a grain of salt, however, as the data series is incredibly volatile. Before the three-month stretch of positive gains from October to December 2011, the series had not seen consecutive
Wealth Management Services Provided by RSM McGladrey LLC
months in the same direction (positive or negative) since mid-2010. Durable Goods Orders - MoM 7.5
Growth (%)
5.0
Total Total ex-Transportation
2.5 0.0 -2.5 -5.0
FORTIGENT®
Source: Bloomberg
Also on Tuesday, the Conference Board reported consumer confidence reached the highest level in a year in February. Encouragingly, the survey’s employment components displayed sharp improvement: the percentage of those who reported jobs as hard to get fell to 38.7% from 43.3% in January. This measure had not fallen below 40% in more than three years.
Home price declines appear to be accelerating, as the Case-Shiller Home Price index fell 0.5% in its month-over-month 20-city composite in December. The trend was broad-based, as 18 of the 20 cities saw price declines. Seventeen of these cities have now seen monthly declines for at least three consecutive months. Tuesday’s Case-Shiller report largely confirms the data seen in the existing home sales data last week. The amount of distressed transactions hitting the market is accentuating declines, as short sales and foreclosures continue to distort market pricing. After mild improvement in 2009 and 2010, the absolute level of home prices is now at its lowest point since 2002, according to the Case-Shiller data. On Wednesday, the Bureau of Economic Analysis released its second estimate of fourth quarter GDP. In a modest surprise, growth was revised upward from 2.8% to 3%. The improvement was driven by revisions to nonresidential fixed investment, imports, and personal consumption expenditures.
Consumer Confidence 90.0 70.0
Growth (%)
Index Level
80.0 60.0 50.0 40.0 30.0 20.0
FORTIGENT®
Source: Bloomberg
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
FORTIGENT®
US GDP, QoQ, SAAR
Source: Bloomberg
Wealth Management Services Provided by RSM McGladrey LLC
Unfortunately, the initial measures of 2012 consumption have revealed only modest improvement. Retail sales for January, released in mid-February, were somewhat encouraging, but the personal spending data released on Thursday painted a more muted picture. Spending increased just 0.2% in January, following no gain in December. The personal outlays report was not entirely disappointing, however, as personal incomes rose an additional 0.3% after a 0.5% gain last month. While the January figure fell a bit short of expectations, incomes have been notoriously stagnant throughout the recovery period. Any sustained improvement in incomes should lead to future increases in spending.
Personal Income & Outlays - MoM 1.5
Growth (%)
1.0
ISM Manufacturing Index 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0
FORTIGENT®
Source: Bloomberg
Seven of the index’s 10 components weakened over the month, including employment and new orders. New orders often portend future months’ advances, so this is not a welcome development. However, it is important to note that most of the PMI’s sub-indices remain expansionary. With several other manufacturing data points in positive territory, February’s PMI may just represent a pause rather than a true slowing in the sector. Outside of the US, there were a few items of note from last week.
Spending Incomes
0.5 0.0 -0.5
FORTIGENT®
Manufacturing has been an area of strength for the US economy during the recovery, so the Institute of Supply Management’s (ISM) manufacturing PMI for February was a disappointment. The reading came in at 52.4, a drop from January’s 54.1.
Index Level
The overall complexion of Q4 GDP improved with this revision, but the fact remains that most of the growth was driven by inventory expansion. While that bodes well for short-term production, underlying measures of demand are not sufficient to sustain this level of growth. Economists and market participants alike are watching consumption data closely for signs of improvement.
Source: Bloomberg
The European Central Bank announced the results of its second Long Term Refinancing Operation (LTRO) in February. Some 800 financial institutions participated, borrowing €529 billion in three-year loans. This was slightly above market expectations, and an increase from the ECB’s first round of financing in December. The infusion of liquidity the ECB provided represents a
Wealth Management Services Provided by RSM McGladrey LLC
backstop to banks in the region, and appears to have calmed fears of a Lehman-style financial calamity. Those hoping that European banks are lending this money may be in for disappointment. ECB data released Tuesday revealed that European bank loans to the private sector were stagnant at best in January, rising just 1.5% year-over-year after falling in December and November. After stripping out lending to private financial institutions, lending has actually been shrinking for the past three months. So what are banks doing with the money? The ECB reported that overnight deposits from banks rose to a record €821 billion over
the weekend, suggesting that many institutions are simply re-depositing their borrowings. This may be temporary, however, as it is unlikely many banks are interested in earning 25 bps on loans costing them 1%. European Union leaders met in Brussels to sign a fiscal compact agreed to last year. The fiscal compact was signed by all but two expected holdouts (most notably, the UK), but will still need to be ratified by each country’s legislature. Ireland’s decision to hold a public referendum on the topic and France’s postponement until after presidential elections has complicated the group’s efforts to finalize the agreement.
CONTINUED STRUGGLE BETWEEN BORROWING AND LENDING
Last week, two key reports on the state of the financial and consumer sectors were released. By all accounts, the consumer deleveraging cycle remains intact, despite an apparent willingness on the part of banks to reengage the lending machine. That will continue to pressure economic growth in the coming quarters, similar to prior debt deleveraging cycles.
At the start of the week, the Federal Reserve Bank of New York released its quarterly review of household debt and credit, an aggregated view of trends in consumer debt. According to the NY Fed, aggregate consumer debt fell 1.1% in the fourth quarter to $11.53 trillion.
Source: Federal Reserve Bank of New York The largest decline in debt outstanding occurred in housing-related debt, which saw mortgage balances fall an additional $134 billion in the fourth quarter. Unfortunately,
Wealth Management Services Provided by RSM McGladrey LLC
the housing situation remains tenuous as 2.2% of mortgage balances moved into delinquency. One of the primary reasons for the continued persistence of high delinquency is the number of homeowners estimated to be “underwater.” Mortgage data provider CoreLogic estimated there were 11.1 million homeowners underwater in the fourth quarter, or roughly 23% of all residential properties that have a mortgage. In total, CoreLogic believes there is more than $715 billion of negative equity weighing on the housing markets.
modifications for borrowers nearing foreclosure. Another $3 billion is going to help underwater borrowers who remained current on their payments.
Source: Federal Reserve Bank of New York The other bit of encouraging news came from the Federal Deposit Insurance Corporation (FDIC) in the form of its Quarterly Banking Profile. Based on FDIC data, bank profitability reached a 5-year high in 2011.
Source: Wall Street Journal There is a degree of good news on the horizon. The number of delinquent loans grew exponentially from 2008 through early 2010, before beginning a slow, gradual reversal. With the recent announcement of a $25 billion mortgage settlement, delinquent balances are likely to fall more quickly. This is due in part to the fact that $10 billion is earmarked for principal reductions and loan
Source: Federal Deposit Insurance Corporation
Wealth Management Services Provided by RSM McGladrey LLC
At the same time, the number of banks failing or considered “problematic” is on the decline. In the fourth quarter, 18 financial institutions failed and the number of “problem” banks fell from 844 to 813.
With banks feeling more sanguine about their current situation, they have become more willing to lend capital to consumers and institutions. Loan balances were up $130 billion in the quarter, representing the third consecutive quarter of loan growth. It also represented the largest quarterly increase since 2007. Although banks are seemingly more able to lend, consumers are simply not in the frame of mind to embrace another credit binge. Bank lending will provide obvious benefits to the economy, but until consumers feel more secure in their own financial situations, the push and pull between lending and borrowing will act as only a modest stimulant to the economy.
Source: Federal Deposit Insurance Corporation
THE WEEK AHEAD
Nonfarm payrolls and the unemployment rate headline the week’s economic data. Consensus expects another 200K+ gain in payrolls and no change in the unemployment rate. Other major economic data of note includes the ISM Non-Manufacturing index and the US trade balance. Abroad, there are
important releases on tap including Q4 EU GDP and EU retail sales. Both the ECB and Bank of England meet this week, but neither is expected to adjust their key interest rates. Other central banks meeting include Russia, Australia, Brazil, Poland, New Zealand, Indonesia, South Korea, Canada, Peru, and Malaysia.
www.mcgladrey.com This report is for illustrative purposes only. Past performance is not indicative of future results. The performance numbers displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. The indices discussed are unmanaged and do not incur management fees, transaction costs or other expenses associated with investable products. It is not possible to directly invest in an index. Some part of the information contained herein was prepared for Wealth Management by employees of Fortigent, LLC. This information is not meant as a guide to investing, or as a source of specific investment recommendations, and RSM McGladrey LLC and Fortigent make no implied or express recommendations concerning the manner in which any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s investment objectives. The information is general in nature and is not intended to be, and should not be construed as, legal or tax advice. In addition, the information is subject to change and, although based upon the information that RSM McGladrey LLC and Fortigent consider reliable, is not guaranteed as to accuracy or completeness. RSM McGladrey LLC and Fortigent make no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. McGladrey, the McGladrey signatures, The McGladrey Classic logo, The power of being understood, Power com es from being understood and Experience the power of being understood are trademarks of McGladrey & Pullen, LLP. RSM McGladrey LLC provides investment advisory services, financial planning and other wealth management services to individuals and businesses. RSM McGladrey LLC is an SEC-registered investment advisor.
