May 2010 Personal Income and Outlays, Retail Sales, Consumer Debt and Household Net Worth: Income Gains Outpace Spending

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Disposable personal income (DPI) increased $49.0 billion (0.4 percent) between April and May while personal consumption expenditures (PCE) increased $24.4 billion (0.2 percent), according to the Bureau of Economic Analysis. Those changes followed on the heels of a 0.6 percent increase in DPI and 0.1 percent increase in PCE during April. May’s larger increase in DPI (relative to PCE) allowed the personal saving rate to rise to 4 percent -- above the average of 2.8 percent seen since 2000, but still well below the average of 9.3 percent typical up until the mid-1980s.

"The consumer is finally starting to see some positive wage gains," said Omair Sharif, an economist at RBS Securities Inc. "Consumer spending isn't going to propel the recovery forward, but it should be more than enough to sustain it. "

Interestingly, although DPI rose more quickly on a month-over-month basis in May than did PCE, growth in DPI is slowing on an annual percentage change even while the PCE growth rate is picking up. "Consumers are less cautious than they were previously," Robert Niblock, CEO at Lowe's Cos., the second-largest home-improvement chain. "But they still know that we're still not out of the woods yet."

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Although PCE may have increased in May, it was not because of higher retail sales. In fact, total retail sales declined 1.2 percent in May -- the first drop in eight months. Only food service sales were spared, but even they were essentially flat.

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Joel Naroff, president of Naroff Economics believes the 1.2 percent drop in May’s retail sales shows the consumer sector remains sluggish. “Maybe the consumer has not decided that spending money is a good idea,” Naroff wrote in a note to clients. “This was a weak report that points to more sluggish consumer spending than many expected. But it also supports my view that GDP growth will be modest, and that includes the current quarter.” The problem isn’t that people are staying away from malls, Naroff said. It’s that they aren’t spending money once they get there.

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Consumers appear to be venturing very tentatively back into the credit pool, although primarily for bigger-ticket purchases. Consumer credit increased at a seasonally adjusted and annualized (SAAR) monthly rate of 0.5 percent in April 2010. Revolving credit (e.g., credit cards) decreased by 12 percent (SAAR), while nonrevolving credit increased by 7 percent (SAAR).
Federal Reserve statistics show that total credit card debt was down about 12.5 percent from the mid-2008 peak, to $838 billion in April. Most observers attribute the improvement to consumers paring back spending and focusing on paying down debt. But a good portion of that drop -- some estimate two-thirds or more -- came from charge-offs (balances written off as uncollectible). Other consumers may be benefiting from credit card regulations that took effect in February. By constraining banks’ ability to raise interest rates and fees, the rules are making it easier for cash-strapped consumers to keep up with their payments.

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Because of the combination of gradually rising incomes and consumers’ discipline, household net worth is on the rebound (to $54.6 trillion, a 2.0 percent rise from 4Q2009). The nominal value of household assets rose for a fourth consecutive quarter in 1Q2010, while liabilities shrank for a sixth straight quarter.

The take-home message is that consumers appear to be attempting to rebuild their own balance sheets and thus remain cautious about increasing spending. Since approximately 70 percent of U.S. GDP is related to consumer spending, conservatism on their part -- while necessary -- means economic activity is likely to remain constrained, and could quickly go into reverse if expectations of future conditions darken appreciably.

1Q2010 GDP: Another Downward Revision

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The Bureau of Economic Analysis downgraded its estimate of 1Q2010 U.S. economic output for a second and final time; GDP growth now stands at 2.7 percent, 0.5 percent lower than the initial (advance) estimate. The downward revision was primarily a reflection of a smaller gain in consumer spending and a bigger trade gap.

The economy has now grown for three consecutive quarters after shrinking for four straight during the recession — the longest contraction since World War II.

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Analysts at Bloomberg.com said “the revised figures showed an economy that was more dependent on inventory restocking and less driven by demand from consumers and businesses before the European debt crisis intensified.” This view was shared by Jay Feldman, an economist at Credit Suisse in New York: "It's a moderate kind of recovery," Feldman said. Consumer spending "is not growing as fast as in prior recoveries."

Despite the comment by Bloomberg’s analysts, consumers boosted their spending by 3 percent, almost double the pace of the previous quarter and the largest increase in three years. Businesses ratcheted up their spending on equipment and software by 11.4 percent.

A growth rate of 2.7 percent would be considered healthy in normal times but it's relatively weak for a recovery after a steep recession. GDP grew at rates of 7 percent to 9 percent for five straight quarters after the last sharp downturn in the early 1980s. Growth of roughly 3 percent is needed just to generate enough jobs to keep up with increasing population; to lower the jobless rate (currently at 9.7 percent) by one percentage point, growth would need to reach 5 percent for a full year.

April 2010 International Trade: Topped Out or Just Taking a Breather?

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World trade volume decreased by 1.7 percent in April from the previous month, following an upwardly revised increase of 4.0 percent in March, which is close to the highest monthly figure in the data series compiled by the Netherlands Bureau for Economic Policy Analysis (known by its Dutch acronym CPB). Import volumes decreased worldwide in April, with the notable exception of Japanese imports. On the export side, growth was remarkably high in Japan; Central and Eastern Europe and Latin America also performed well. In April, world trade was 6 percent below the peak level reached in April 2008 and 19 percent above the trough reached in May 2009.

CPB also estimates that average world prices rose by 1 percent between March and April. Prices remain 14.0 percent below the July 2008 peak and 6.1 percent above the January 2009 trough.

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Narrowing the focus to the United States, total April exports of $148.8 billion and imports of $189.1 billion resulted in a goods and services deficit of $40.3 billion -- up from a downwardly revised March deficit of $40.0 billion, and the largest deficit since December 2008. The larger trade deficit was in line with our expectation, which was based on currency exchange rates. April exports were $1.0 billion less than March exports of $149.8 billion, while imports were $0.8 billion less than March imports of $189.9 billion.

The March to April decrease in exports of goods reflected decreases in other goods ($0.8 billion); consumer goods ($0.7 billion); and foods, feeds, and beverages ($0.6 billion). Increases occurred in industrial supplies and materials ($0.6 billion) and automotive vehicles, parts, and engines ($0.1 billion). Capital goods were virtually unchanged.

The concurrent decrease in imports of goods reflected decreases in consumer goods ($1.7 billion); other goods ($0.5 billion); and automotive vehicles, parts, and engines ($0.2 billion). Increases occurred in capital goods ($1.4 billion) and industrial supplies and materials ($0.1 billion). Foods, feeds, and beverages were virtually unchanged.

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U.S. pulp, paper and paperboard trade bucked the larger trade trend in April; i.e., both imports and exports rose. For a second month, the change in exports outstripped that of imports by a wide margin. Exports are well ahead of year-earlier levels but imports are barely even.

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Softwood lumber also swam against the prevailing current during April, in that both imports and exports rose. The change in imports dwarfed that of exports, however.

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Because the greenback appreciated rather dramatically in May thanks to concerns over Europe’s sovereign debt problems, we expect the next report to show a narrower U.S. trade deficit. As we have pointed out in the past, a weaker dollar makes U.S.-manufactured products relatively more attractive in both the domestic and export markets, but it also tends to worsen the trade deficit. Conversely, a stronger dollar stunts demand for domestic products, but improves the overall trade deficit. In a sense, then, what’s good for exporters isn’t necessarily good for the economy as a whole.

May 2010 U.S. Treasury Statement: Twenty Months (and Counting) of Deficits

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Outlays by the federal government surpassed receipts once again in May, for the twentieth consecutive month, according to the latest Monthly Treasury Statement.

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Surprisingly, this fiscal year’s deficit is not as deep – so far, at least – as was last year’s. The federal deficit was $992 billion in May 2009, but $936 billion in May 2010.

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If the federal government is running a deficit, where is the money coming from to fund that spending? There are only two other sources: the “printing” press and foreign investment; we deal with the latter here. The graph above shows that, according to the Treasury International Capital (TIC) accounting system, a little more money has been flowing into the United States than out (on average) since September 2009. Using three-month rolling averages smoothes out some of the monthly volatility while highlighting the larger trend.

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A stampede into short-term securities (e.g., T-bills) ensued when the financial crisis hit first in September 2007 and then full-force in August 2008. The overwhelming demand for such securities drove their interest rate essentially to zero, where it has stayed. But, in fairly short order, the lack of return caused investors to lose interest in those vehicles as the panic subsided. Foreigners have been net sellers of short-term securities since mid-year 2009. Interestingly, that lack of demand has not forced the interest rate higher to any appreciable degree.

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At the same time foreign investors abandoned short-term securities, they began substituting longer-dated debt instruments instead – particularly public debt.

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As of April 2010, foreigners held nearly $4.0 trillion dollars in Treasury securities – 80 percent of which were bonds and other longer-term debt instruments. China and Japan are, respectively, numbers one and two but the United Kingdom is notable insofar as its holdings have almost quintupled within the past year (from $70 billion to $321 billion); there has been some speculation that much of the U.K. demand is actually China using intermediary buyers in London to mask its demand.

Why should the forest products industry care about this topic? Because borrowing costs (interest rates) will remain relatively low and prices relatively stable as long as the United States can continue attracting foreign investment. If foreigners find more attractive markets elsewhere (either because of interest rate differentials or because of a sudden loss of faith in the U.S.’s fiscal outlook) the United States will be forced to either pay higher interest rates to attract capital or risk price inflation by “printing” more money (most likely, both). Frankly, we had expected foreigners’ faith to have been shaken long ago, but Europe’s downward spiral has made the United States look comparatively more attractive and stable. That could change overnight, however, in light of the market’s fickleness. For example, some analysts expect China to decrease its Treasury purchases now that it is allowing greater flexibility in the dollar-renminbi exchange rate.

May 2010 Consumer and Producer Price Indices: No Sign of Imminent Collapse

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) declined 0.2 percent in May. Over the last 12 months, the index increased 2.0 percent before seasonal adjustment. For the second month in a row a decline in the energy index accounted for the seasonally adjusted decrease in the all-items index. The index for energy decreased 2.9 percent in May and more than offset a slight increase in the index for all items less food and energy. The food index was unchanged. Within the energy component, the gasoline index accounted for most of the decrease, although all the major energy indexes declined.

Meanwhile, the seasonally adjusted Producer Price Index for Finished Goods (PPI) moved down 0.3 percent in May. This decline followed a 0.1-percent decrease in April and a 0.7-percent increase in March. At the earlier stages of processing, prices received by producers of intermediate goods advanced 0.4 percent and the crude goods index fell 2.8 percent. On an unadjusted basis, prices for finished goods rose 5.3 percent for the 12 months ended May 2010. This was the second consecutive month of slowing year-over-year advances after a 6.0-percent increase for the 12 months ended March 2010. Core inflation, which excludes energy and food, rose 0.2 percent; core prices are up just 1.3 percent over the past 12 months.

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Finished goods: In May, most of the decline in the index for finished goods can be attributed to lower prices for energy goods, which fell 1.5 percent. Also contributing to lower finished goods prices, the index for finished consumer foods moved down 0.6 percent. By contrast, prices for finished goods less foods and energy rose 0.2 percent. The index for finished energy goods fell 1.5 percent in May, its second consecutive monthly decline. Leading the May decrease, gasoline prices dropped 7.0 percent. Lower prices for liquefied petroleum gas and home heating oil also were factors in the finished energy goods decline.

Intermediate materials: The PPI for Intermediate Materials, Supplies, and Components rose 0.4 percent in May, its third straight monthly advance. Accounting for three-fourths of the broad-based May increase, prices for intermediate materials less foods and energy rose 0.3 percent. The indexes for intermediate energy goods (especially electric power and natural gas to electric utilities) and for intermediate foods and feeds also contributed to the overall advance, moving up 0.5 and 0.4 percent, respectively. On a 12-month basis, prices for intermediate goods climbed 8.5 percent in May, the sixth consecutive month of year-over-year increases.

Crude materials: The PPI for Crude Materials for Further Processing fell 2.8 percent in May. For the three-month period ending in May, crude materials prices moved down 0.8 percent; this followed a 6.5-percent jump from November to February. In May, most of the broad-based monthly decline can be attributed to a 5.1-percent drop in the index for crude energy materials. Also contributing to the May decrease, prices for crude nonfood materials less energy moved down 1.6 percent and the index for crude foodstuffs and feedstuffs fell 0.6 percent.

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Only the pulpwood price index has “tipped over” to date; thus, it is the only index exhibiting slower rates of year-over-year increase. Based upon lumber futures price declines over the past couple of months, however, we would not be surprised to see the solid wood indices begin to move lower soon, reflecting the impacts of withering demand.

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The scaling in the six-chart figure above gives the impression that year-over-year percentage changes in the PPIs of virtually all processing stages or commodity groups are “rocketing to the moon.” The figure immediately above and table below provide a better perspective of the relative magnitudes of the indexes and their respective percentage changes.

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May 2010 Industrial Production, Capacity Utilization and Capacity: Manufacturing the Recovery

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Industrial production advanced 1.2 percent in May – the fastest rate since August 2009. At 103.5 percent of its 2002 average, total industrial output in May was 7.6 percent above its year-earlier level.

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Manufacturing output climbed 0.9 percent last month, its third consecutive monthly gain of about 1 percent, and was 7.9 percent above its year-earlier level. Output also rose in May among forest products manufacturers: by 3.7 percent for Wood Products, and 0.5 percent for Paper.

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The all-industries capacity utilization rate rose 1.3 percent (to 74.7 percent), a rate 9.0 percent above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009. Forest products facilities also ran harder in May, although – as with industrial production – the monthly percentage increase among Wood Products manufacturers was larger (4.2 percent) than that of Paper (0.7 percent).

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The jumps in industrial production and capacity utilization were not sufficient to prevent additional capacity from being curtailed, however. The rates of curtailment were equal (0.1 percent) at the all-industries level and among paper producers. Wood Products took a bigger “hit” of 0.5 percent in May.

"We continue to have an economic expansion that's moderate overall and uneven," said Richard DeKaser, chief economist at Woodley Park Research. "Clearly, the factory sector is helping to offset the weakness" in other parts of the economy (e.g., the housing market).

Manufacturing, which makes up about 11 percent of the economy, is benefiting from gains in business spending and global economic growth. U.S. exports have risen 10 of the last 12 months, helped by growth in emerging Asian and Latin American countries.

As explained in our Clearing the Mist essay Smokey Bear Economy, rising capacity utilization will slow and ultimately reverse the capacity drawdown. For now, the amount of existing overcapacity is helping to keep prices relatively stable at the consumer level because manufacturers can ramp up output with relatively little difficulty. It will be a different story, though, if and/or when new capacity must be built to meet demand.

Of course, it is nearly impossible to predict with any degree of accuracy when that reversal might occur. In light of our expectation for another recessionary relapse during 2011, our best guess is 2012 at the earliest.

Macro Pulse June 2010 -- Waiting with Finger in the Wind

Executive Summary

Time will tell whether the downward revision of 1Q2010 growth in U.S. GDP from 3.2 to 3.0 percent is just a temporary setback or a harbinger of a more protracted slowdown. There is plenty of evidence to support either viewpoint. We still forecast some growth through the rest of 2010, but additional data may cause a change in expectations.

Private-sector employment continues to drag on the economy. Non-farm payrolls expanded in May, but 95 percent of those jobs were temporary positions related to the 2010 Census; further, three-fourths of new private-sector jobs were created by temporary-help agencies. The bottom line is that the U.S. economy may have actually lost 11,000 permanent jobs in May.

Manufacturing continues to be a bright spot in private domestic investment, but construction spending – especially the residential component, now that the federal homebuyer tax credit has expired – is unlikely to add substantially to GDP growth for quite some time. Single-family starts and sales, and total completions all jumped by double-digit percentages in April, and the inventory of new homes fell to a four-decade low in absolute terms. However, permits of both single- and multi-family units retreated by double-digit percentages relative to March.

The volume of world trade expanded in March. Closer to home, U.S. exports and imports both rose in March; but the trade deficit widened mainly because of petroleum imports. The dollar’s dramatic appreciation against the loonie and euro in May is likely to dampen U.S. exports in the near-term.

The monthly average price of West Texas Intermediate crude oil fell in May, to $73.83 per barrel – a drop of $10.65 (-12.6 percent). The oil price retreat was not a result of just dollar strength – but rather a combination of concerns over sovereign debt, prospects for flat or falling consumption in the developed world, and rising OPEC production – evidenced by the fact that the euro price also dropped despite that currency’s depreciation against the greenback.

Click here to read the entire June 2010 Macro Pulse.

May 2010 Monthly Average Crude Oil Price: Retrenchment

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The monthly average price of West Texas Intermediate crude oil fell in May, to $73.83 per barrel – a drop of $10.65 (-12.6 percent). That price decrease coincided with a stronger dollar, and occurred despite the lagged impacts of a jump in consumption of roughly 0.2 million barrels per day (BPD) in March – the latest data available – and despite rising crude stocks.

That the drop in oil price was not a result of just dollar strength – but rather a combination of concerns over sovereign debt, prospects for flat or falling consumption in the developed world, and rising OPEC production – is evidenced by the fact that the euro price also dropped despite that currency’s depreciation against the greenback.

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In reaction to the ongoing Deepwater Horizon disaster, the Obama administration has blocked some or all new offshore drilling in the Gulf of Mexico. The Gulf Coast office of the Minerals Management Service issued an email, obtained by The Associated Press, saying that "until further notice" no new drilling is being allowed in the Gulf, no matter the water depth.

Despite the email, a spokeswoman for Interior Secretary Ken Salazar denied that the administration was placing a hold on shallow-water drilling. "There is a six-month moratorium on deepwater drilling," Kendra Barkoff said in a June 3 e-mail. "Shallow-water drilling may continue as long as oil and gas operations satisfy the environmental and safety requirements Secretary Salazar outlined in his report to the president and have exploration plans that meet those requirements. There is no moratorium on shallow water drilling."

Even if shallow-water drilling is not part of the moratorium, additional restrictions are forthcoming. Bob Abbey, the acting director of the Minerals Management Service, said operators will be required to submit additional information about potential risks and safety considerations before being allowed to drill. The administration will establish separate requirements for deep water and shallow water exploration, Abbey said.

In a recent letter, Gulf Coast senators urged President Obama to allow shallow-water drilling to continue; they argued that it is safer than deepwater exploration, and shutting down the roughly 60 shallow-water rigs in the Gulf could cost some $135 million in revenues and affect at least 5,000 jobs.

May 2010 ISM Reports: Manufacturing Gain Slows; Service Sector Steady

The Institute for Supply Management’s (ISM) reports on the manufacturing and service sectors provide a more up-to-date view of conditions than either the Federal Reserve Board’s G.17 report on industrial production and capacity utilization or the U.S. Census Bureau's report on manufacturers’ shipments, inventories and orders.

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"The manufacturing sector grew for the tenth consecutive month during May,” remarked Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “The rate of growth, as indicated by the purchasing managers’ index, is driven by continued strength in new orders and production. Employment continues to grow as manufacturers have added to payrolls for six consecutive months. The recovery continues to broaden as 16 of 18 industries report growth. There are a number of reports, particularly in the tech sector, of shortages of components; this is the result of excessive inventory de-stocking during the downturn."

Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee, indicated that – with the Non-Manufacturing Index registering 55.4 percent – the service sector expanded at the same pace in May as in April and March.

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The performance of individual industries that are at least somewhat related to the forest products sector improved “across the board” during May. All industries reported growth in new orders and stable or growing employment. Paper Products and Construction reported growth in new export orders, while imports were unchanged. A Construction respondent commented that "business is steady right now — not the normal spring for construction, but improving."

Inputs cost more in May, although the price increases were smaller than in April. Commodities whose prices rose in May included corrugated products and containers, fuel, lumber and wood products, paper and paper products, and pulp.

May 2010 Employment Report: Private Sector Hiring Stalls

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Total non-farm payroll employment grew by 431,000 in May, reflecting the hiring of 411,000 temporary employees to work on Census 2010, the U.S. Bureau of Labor Statistics (BLS) reported. Private-sector employment changed little (+41,000). Manufacturing, temporary help services, and mining added jobs, while construction employment declined. The unemployment rate edged down to 9.7 percent – not because of a dramatic increase in hiring, but rather because 322,000 workers dropped out of the labor force.

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Some forecasters had predicted private-sector employment to grow by as much as 180,000 jobs, so the 41,000 figure was a disappointment. "This shows the recovery continues but at a modest pace. Expectations going forward are going to be tempered," said Boris Schlossberg, director of research at GFT Forex in New York.

Census employment is distorting payroll figures, particularly in light of claims that some enumerators are being repeatedly hired and fired – thereby inflating the impact of Census hiring. Thus, changes in private sector payrolls are a better gauge of the labor market’s health.

Average workweek length and hourly earnings provide other perspectives of labor demand. In May, the average workweek for all employees on private non-farm payrolls increased by 0.1 hour to 34.2 hours. Average hourly earnings of those same workers increased by 7 cents (0.3 percent), to $22.57. Both of these metrics demonstrate a considerable amount of residual slack in the labor market.

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It is important to note that without the 215,000 jobs added from Current Employment Statistics (CES) models, private sector employment would have shrunk by 174,000 instead of expanded by 41,000. The BLS uses the CES models to account for business closings and openings that occurred recently enough that they were not captured in the employment survey. Because these numbers are statistically derived, many analysts refer to them as “ghost” jobs. Those models do no always perform well, so their results should be taken with a grain of salt.

To wrap up: Adding the 411,000 temporary Census jobs to the 31,000 private, temporary help-service hires implies that the U.S. economy may actually have lost 11,000 permanent jobs during May.

April 2010 Manufacturers’ Shipments, Inventories and New Orders

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According to the U.S. Census Bureau, shipments – up ten of the last eleven months – increased $2.5 billion or 0.6 percent to $422.3 billion. Shipments of manufactured durable goods increased while manufactured nondurable goods decreased – driven lower by petroleum and coal products.

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Shipments of wood products rose 4.9 percent, to $7.3 billion dollars – the fourth consecutive monthly increase. Paper products shipments took a breather after rising for seven months, and remained unchanged.

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Data from the Association of American Railroads provides another (and in this case, more pessimistic) view of shipping activity in the United States. Rail traffic fell by double-digit percentages in April, relative to March, but most categories are still well ahead of year-earlier volumes.

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Inventories, up six of the last seven months, increased $2.6 billion (0.5 percent) to $521.7 billion. The inventories-to-shipments ratio was unchanged at 1.24. Inventories of manufactured durable goods increased 0.7 percent, thanks to primary metals. Plastic and rubber products pushed inventories of manufactured nondurable goods higher. Wood products inventories backed off 0.7 percent, after four months of increases, while paper products rose 1.0 percent.

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New orders for manufactured goods, up twelve of the last thirteen months, increased $5.1 billion (1.2 percent) to $420.1 billion. Excluding transportation, new orders decreased 0.5 percent. Durable goods orders increased $5.2 billion (2.8 percent) to $193.8 billion - a fifth monthly increase. New orders for nondurable goods decreased $0.2 billion (0.1 percent) to $226.3 billion.

May 2010 Currency Exchange Rates: The Dollar Rallies

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The U.S. dollar appreciated in May against two of the three currencies we track: by 3.5 percent against Canada’s “loonie” and 6.8 percent against the euro. Only the yen was spared; it gained 1.6 percent against the greenback. On a trade-weighted index basis, the dollar appreciated 2.9 percent against a basket of 26 currencies.

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Canada: The loonie weakened even though Canadian GDP expanded in real terms by 6.1 percent (annualized) in 1Q2010, and 7.4 percent just in March. The 1Q2010 growth rate was the fastest in a decade, and March’s increase marked the seventh consecutive monthly advance. Much of the expansion resulted from increased spending on housing and consumer goods and services. Even expectations of an interest rate hike by the Bank of Canada failed to boost the loonie, which was caught in the whirlpool created by concerns over European sovereign debt.

Canada’s lumber production and shipments were heightened by a slightly weaker loonie back in March. Lumber production increased 15.4 percent, to 4.6 million cubic meters, in March; compared with the same month in 2009, lumber production increased 27.8 percent. At the same time, sawmills shipped 4.4 million cubic meters of lumber, up 11.7 percent from February.

Europe: In weakening for a sixth consecutive month, the euro has fallen to a four-year low against the U.S. dollar. The single currency rallied briefly during the third week of May, when German lawmakers approved their country’s share of a $1 trillion euro-region bailout. But the “euphoria” quickly wore off when the implications of the austerity measures associated with that bailout – coupled with Fitch Ratings’ downgrade of Spain’s credit rating – began to sink into the market’s collective consciousness.

From a statistical standpoint, the 16-nation euro area’s economy shows little in the way of an overall trend. For example, 1Q2010 GDP grew (albeit at a rather tepid 0.8 percent, annualized) along with industrial production. But the unemployment rate continued to inch up in March, and the external trade surplus eroded significantly even though industrial new orders put in a strong showing.

Japan: If there is a poster child for the fickleness of the market, the yen would have to be it. After years of playing the part of “funding currency” for the carry trade that often favored the euro, the yen is now gaining strength as Japan “emerge[s] as a sound investment refuge.” After all, "only the bravest of souls would invest in [euro-denominated] assets these days," Uwe Parpart, chief Asia strategist at Cantor Fitzgerald, said in a recent note to clients. "But there are several large U.S. funds with a non-U.S. mandate that were heavily invested in euro-zone stocks, and they will now be looking east, past Europe," he said. And "Japan should prove the most attractive place to park homeless funds."

In light of Japan’s widening trade and current-account surpluses; solid 1Q2010 GDP growth of 4.9 percent; and rising industrial production; it is perhaps understandable that investors would want to get in on the action.

China: Because China’s renminbi is pegged to the U.S. dollar, the euro’s depreciation against the greenback is making euro area manufacturers more competitive and threatening the already razor-thin profit margins (estimated to be only 2 percent) of their Chinese counterparts. As one analyst put it, the gradual reduction of China’s competitiveness may complicate government attempts to “meet the population’s soaring aspirations.”

The debate rages on as to whether China’s real estate market is or is not in a bubble. Li Daokui, a professor at Tsinghua University and a member of the Chinese central bank’s monetary policy committee, claims “the housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the U.S. and U.K." before the financial crisis began. The Boeckh brothers are at the other end of the spectrum with their assertion that “there are no signs of a widespread bubble in asset markets, with the possible exception of inventory stockpiling of some commodities.”

April 2010 Personal Income and Outlays, and Retail Sales: Consumers “On the Wagon?”

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Growth in personal income outpaced changes in consumer spending during April. Personal incomes rose a seasonally adjusted 0.4% in April for the second straight month. Because of relatively flat price changes, nominal and real disposable incomes both rose 0.5% in April, the largest increase since May 2009. Consumer spending was flat in April. With incomes rising faster than spending, the personal savings rate jumped to 3.6% of disposable income (from 3.1% in March) – the highest savings rate since January.

The picture changes somewhat when looked at on a year-over-year basis, however. Incomes are 2.8 percent higher than a year earlier, while consumer spending is up 4.6 percent. Annual percentage increases in incomes have been smaller than spending since November 2009.

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As we indicated last month, government transfer payments are one of the reasons why incomes continue to rise despite a high unemployment rate. Since the recession began in December 2007, federal transfer payments (defined in this case as only federal unemployment insurance benefits and “other” government social benefits to persons) have jumped from 5.3 percent of total personal income to 7.5 percent – the highest percentage since 1947.

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Although overall personal consumption expenditures remained flat in April, the component that includes retail and food services sales increased 0.4 percent from the previous month – the seventh consecutive monthly increase – and 8.8 percent relative to April 2009.

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The bump in retail sales drew mixed reactions from the mainstream financial press. "No doubt, tax refunds supported the overall level of spending, but the core trend – no matter how you slice and dice it – looks solid," wrote Joseph Brusuelas of Brusuelas Analytics. But "[l]ooks can be deceiving,"countered Eric Green, an economist for TD Securities. "The sales pace in the first quarter was unsustainable and driven by a combination of government transfers including refunds and a drawdown in savings."

The Consumer Metrics Institute (CMI) recently warned that the behavior of its Personal Finance sub-index – which tracks transactions with default and foreclosure counseling services, among other items – may “portend a new round of credit challenges for consumers” or at least means “that some consumers are trying to be more aware of their legal options concerning their debt obligations.”

These pieces of anecdotal evidence support our contention that the consumer is a “weak reed” and should not be depended upon to drive an economic recovery.

April 2010 U.S. Construction: Cautiously Positive

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The value of construction spending jumped in April by 2.7 percent (compared to March), the biggest one-month improvement since August 2000.

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Private residential construction improved the most on a percentage basis (4.4 percent). Home construction has been helped by home buyer tax credits, but the durability of that recovery remains to be seen now that the tax credit expired at the end of April.

Public construction spending came in second place with a 2.4 percent increase. State and local spending increased 2.3 percent and federal spending rose 2.9 percent. This category has been helped by the government's economic stimulus program, but those projects are starting to wind down.

Private nonresidential construction rose 1.7 percent, the first advance since March 2009. April’s stength came from gains in private sector work on communications projects and power generation facilities. Construction of office buildings and the category that includes shopping centers fell in April.

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Turning to the private residential component, rising consumer confidence and the expiring home buyer federal tax credit mentioned above boosted most metrics of housing activity in April.

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Total starts rose to 0.672 million in April – a 5.8 percent jump from March. Although still well below the troughs of previous retreats, total starts are nearly 41 percent above year-earlier levels (which also corresponded to the low point of the latest downturn).

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Most (88 percent) of the increase in starts occurred in the single-family component. Because of the lack of activity in the multi-family component, the National Association of Home Builders attributes some of the increase in starts in April to “builders rushing to begin and ultimately complete modest homes in time to qualify for the home buyer tax credit” at the end of June.

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Sales of new single-family dwellings also rose for the second consecutive month in April, to 0.504 million. That means starts were only 20 percent higher than sales, which is quite remarkable when considering that the Census Bureau counts a “sale” only when a “spec” home is sold – homes built under contract are excluded.

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Although single-family completions ticked higher (to 0.504 million), the jump in new-home sales helped pull the inventory of unsold homes lower in both absolute terms and months of inventory. The absolute level of single-family inventory has not been this low (0.211 million units) since late 1970; only five months would be required to clear that backlog of inventory – the lowest level since late 2005 – at the current sales rate.

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Existing home sales also rose in April. The National Association of Realtors (NAR) attributed the increase to “buyers motivated by the tax credit, improving consumer confidence and favorable affordability conditions.”Lawrence Yun, NAR’S chief economist, said the 7.6 percent gain was widely anticipated. "The upswing in April existing-home sales was expected because of the tax credit inducement, and no doubt there will be some temporary fallback in the months immediately after it expires, but other factors also are supporting the market," he said. "For people who were on the sidelines, there's been a return of buyer confidence with stabilizing home prices, an improving economy and mortgage interest rates that remain historically low."

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The median price of new homes sold fell 9.7 percent in April, primarily because of large jumps in the number and proportion of lower-priced homes; over half of the homes sold in April were priced below $200,000.

By contrast, the affordability of existing homes was undercut for a third consecutive month by another uptick (2.1 percent) in the median price. Interestingly, the trend in NAR’s median price appears to be diverging once again from that of the 10-city S&P/Case-Shiller home price index.

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Retreats in the 10- and 20-city composite indices picked up speed in March (the latest data available) because only six metropolitan statistical areas (MSA) showed month-to-month price gains.

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“The housing market may be in better shape than this time last year; but, when you look at recent trends there are signs of some renewed weakening in home prices,” said David Blitzer, chair of Standard & Poor’s Index Committee. “In the past several months we have seen some relatively weak reports across many of the markets we cover. Thirteen MSAs and the two Composites saw their prices drop in March over February…The National Composite fell by 3.2% compared to the previous quarter and the two Composites are down for the sixth consecutive month.

“While year-over-year results for the National Composite, 18 of the 20 MSAs and the two Composites improved [improvement here appears to include declining more slowly than in the past], the most recent monthly data are not as encouraging. It is especially disappointing that the improvement we saw in sales and starts in March did not find its way to home prices. Now that the tax incentive ended on April 30th, we don’t expect to see a boost in relative demand.”