Consumer borrowing increased by $21.3 billion for March to $2.54 trillion, which represented the largest monthly increase since November 2001. In addition, the bank loan officer survey showed an increased willingness to lend. Apparently, the feared credit contraction from consumers buckling down and doing some ‘extreme’ saving hasn’t happened, at least on a permanent basis. Despite a lack of confidence and continued economic fears, this isn’t entirely surprising, as it can take a long time to change economic and cultural behavior—assuming a change is what people are after in the first place. Americans are spenders.
On a related note, the NFIB Small Business Optimism Index increased two points to 94.5 in April, which is still low in historical terms, but is the highest reading since December 2007 (right before the ‘Great Recession’ began). This improvement is a bit unlike most small business surveys which remain mired at the same low levels as a few years ago. In this index, earnings trends, business expectations and new hiring plans all improved. Despite better conditions, though, it still appears (from other data and anecdotal reports) that many smaller business owners remain guarded, especially when it comes to uncertain government policy and increased regulations they’ve dealt with in recent years.
Headline producer prices fell in April, mostly as a result of energy prices (gasoline and natural gas) that fell by over a percent. The core PPI rose +0.2%, which was largely as expected, and was driven by computer prices, medical prescriptions and apparel. The monthly balance of trade deteriorated from -$45.4 billion to -$51.8 billion in March, which was lower than the anticipated -$50.0 billion. Mostly, a large rebound in imports (+5.8% for the month) did the trick, and from items other than petroleum.
On the employment front, initial jobless claims were roughly unchanged for the first week in May—at 367k. The continuing claims report the April 28 week was a bit better than expected at 3,229k versus a consensus 3,275k, and represented a decline of 61k over the previous week. The emergency benefit recipient list also fell.
An interesting question from the past several months is… what’s causing the change in the U.S. labor participation rate (which, in turn, affects the level of unemployment)?
Since the Great Recession came to an end, private and public economists as well as investors have been searching for the secret to boosting employment. There are several related issues involved and none prove to be an easy fix. On one hand, the structure of the economy itself is an issue. In the last several recoveries (early 2000’s and early 1990’s, specifically), employment growth has been slow out of the gates due to structural changes in the U.S. economy. We now have fewer heavy-industrial jobs (that tend to be more cyclical) and more service-oriented positions (that tend to be a bit ‘stickier’ and feature less volatility), so it’s more difficult to see sharp rallies in employment right away.
What’s the problem now? Several of the same factors, with a few others unique to the severity of the Great Recession. As always, a bifurcation between the educated and uneducated has created chasms where certain groups have fared far differently—the unemployment rate for college graduates is far lower (4.9%) than that of high school graduates (9.4%), which is turn better than non-graduates (14.1%). This relationship has always been present, but appears to be a bit more dramatic this past cycle.
Of course, ‘discouraged’ workers have played a role in this to an extent—especially as the period for receiving unemployment benefits has increased. In economic terms, this isn’t surprising—the longer benefits go on and the better, there is likely a trade-off for some between continuing to receive benefits and actively looking for a job.
Demographic factors play into this as baby boom generation peak employment had begun to taper off. A census impact in surveys and adjustments made for age groups leaving the work force (baby boomers) served to shrink the actual pool of workers and made the ratio of unemployed to employed look even worse.
Another factor is that the longer that potential workers are unemployed, you begin to see more of a ‘structural’ effect, as marketable skills become outdated or diminish altogether—making the ongoing job search process even more challenging and, in the worst case, making certain job seekers less and less employable over time. It’s estimated that perhaps half (more or less, as it is hard to put an exact number on this) of current unemployment is structural in nature. This is a difficult one to tackle—as long-term solutions require incentives such as job training, which have their own political issues attached, as do alternative long-term solutions like direct government assistance.
All of these are inherent issues and create different challenges, when it comes to government policy. The longer structural employment issues persist and the more potential workers it effects—the more of an economic and political minefield it creates. As ‘maximum employment’ is one of the Fed’s two major mandates (the other is ‘stable prices’/lack of high inflation), high unemployment could cause Fed action to stay accommodative for longer than if ‘stable prices’ were the only goal.
Market Notes
Period ending 5/11/2012 1 Week (%) YTD (%)
DJIA -1.50 5.97
S&P 500 -1.06 8.44
Russell 2000 -0.19 7.12
MSCI-EAFE -2.42 3.92
MSCI-EM -4.14 5.96
BarCap U.S. Aggregate 0.09 1.74
U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2011 0.02 0.25 0.83 1.89 2.89
5/4/2012 0.07 0.27 0.78 1.91 3.07
5/11/2012 0.10 0.27 0.75 1.84 3.02
U.S. stocks were mixed on the week, but ended up down with fallout from the French and Greek elections. Domestic small- and mid-caps generally outperformed large, which, in turn, outperformed foreign equities. From an industry perspective, defensive sectors like utilities and health care outperformed, while financials, materials and technology lagged.
Additionally, JPMorgan Chase came out Friday with a surprise announcement of a $2 billion loss on their speculative trading portfolios. Ironically, this was apparently a result of hedging strategies that were either improperly designed or sloppily implemented by employees—bringing about an apology by Jamie Dimon and some calls for his resignation (several executives are already gone). This brought down the entire financials sector, unfortunately, due to concerns about this happening at other banks (After all, JPM was one of those megabanks that came through 2008 in relatively good shape compared to its peers and Dimon was not shy about mentioning it). What this may mean is more scrutiny from regulators and additional support for Volker Rule regulations on bank trading activity.
With a flight away from risk, interest rates fell, causing bonds to have a generally decent week. In the portfolios, lower duration mortgage bond and floating rate performed well (despite the lower rates), while credit was a bit weaker on average. Foreign bonds were generally weaker, given the strength in the U.S. dollar over the course of the week.
In the commodities world, oil prices have really fallen apart during May. While this doesn’t make oil companies happy, it does provide an indirect tailwind to consumers—which are notoriously sensitive to higher gas and oil prices. Of course, it takes a while for lower oil prices to translate into lower gasoline prices (the latter of which are expected to begin a decline in summer).
Have a good week.
Karl Schroeder, RFC, CSA, AACEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
480-895-0611
Sources: FocusPoint Solutions, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Reuters, Schroder’s, Standard & Poor’s, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. Schroeder Financial Services, is a registered investment advisor.