***¶***Weekly Economic Indicators & Second Guessing Grenspan.... WEEKLY UPDATE FOR: August 11, 2001 by Bob Bose
Prior Week in Review: Financial Market Highlights:
08/10/01 08/03/01 %Change
S&P 500 1,190.16 1,214.35 -1.99%
Dow Jones 10,416.25 10,512.78 -.92%
NASD Comp 1,956.47 2,066.33 -5.32%
Russell 2000 475.52 487.15 -2.39%
SOX Index 593.05 641.06 -7.49%
Value Line 378.67 388.59 -2.55%
MS Growth 547.08 544.86 +.41%
MS Cyclical 559.25 568.95 -1.71%
T - Bill 3.35% 3.43% -8 BP
Long Bond 5.53% 5.58% -5 BP
Gold - Oz-Near Month $276.80 $270.80 +$6.00
Silver - Oz-Near Month $4.15 $4.23 -$.08 Economic News:
Last Week Focus Was On The Negatives - And There Were Some
Markets Ignored One Huge Positive - Productivity Growth
Our Best Bet Is Still For A Late Second Half Recovery
*Consumer Credit fell -$1.5 billion in June - At -1.2% rate
*Second Quarter Productivity rose at +2.5% rate - See Below
*FRB Beige Book - Softer Than Expected - See Below
*June Wholesale Sales fell -.9% - Wholesale Inventories -.2%
Inventory/Sales Ratio 1.33 months - Highest in two years
*Jobless Claims rose +33,000 to 385,000 - But Four Week
Moving Average down -16,000 to 380,000 - Four month low
*July Producer Price
Index fell -.9% - Core Rate - Without
Volatile Food & Energy Prices - Rose +.2%
Last week financial market participants focused on the negative
Federal Reserve Board (FRB) Beige Book and concluded that the
economy was accelerating to the downside. They ignored the
very, very positive report on second quarter productivity.
And, while some reports are only loved by economists, productivity
drives living standards, as well as corporate profits. But, as
is often the case, investors are focusing on the very short term
negatives and ignoring a long term positive.
The "negative" trigger was the FRB Beige Book in general, and
the comment that "Sustained weakness in the manufacturing
sector spilled over to other businesses ... " (from the
Summary) in particular. But some of the comments from the
Beige Book don't "square" with other data.
For instance, under the Manufacturing subheading, " ...
layoffs were pervasive." But, as noted above, the less
volatile four week moving average of jobless claims is at a
four month low. And, under the Labor Markets subheading
"Most Districts reported that conditions in labor markets
remained steady or loosened somewhat in recent weeks." That
comment is not reinforced by the Labor Department Report
of the prior week, even though the surveys would have been
conducted at approximately the same time.
Then there were the reports of sluggish retail sales, but there
was a big difference between discount stores and those that
sell more upscale merchandise. For instance, WalMart reported
July same store sales rose +6% - an excellent gain. But
Federated Department Stores (Bloomingdale's) reported a decline
of -4.2% in same store sales. Clearly WalMart is benefiting
from the tax refund checks, as are other discounters, so we
continue to believe that retail sales, particularly outside
the auto sector, will not soften materially.
Obviously, then, we do not share the degree of gloom that
some "read into" the FRB Beige Book, preferring instead to
focus on the growth of productivity for the second quarter.
Given the context of essentially flat GDP growth, a gain of
+2.5% is excellent.
The reason that this number is so important is really twofold.
First, on a fundamental level it reduces the threat that
inflationary pressures will build, thereby easing one of my main
concerns. And second, it tends to validate Chairman Greenspan's
assumption that much of the productivity growth of the late 1990's
was secular, not cyclical. If he is right, there are profound
implications for monetary policy.
Simply put, higher productivity growth supports the FRB's higher
growth rate assumptions of sustainable, non-inflationary growth.
We have discussed a target range of 3.5% - 4.0% in the past, but
questioned the validity of that range, given weakened productivity
trends, particularly in this year's first quarter. If the latest
numbers hold up, the FRB will be slower to raise rates during
the economic recovery, and corporate profits will be higher,
lending support to higher valuation metrics.
Obviously we don't think all the news last week was bad. Quite
the contrary. It is simply a question of getting from the here
and now, out a few months, when we believe the recovery starts
to take hold. And given our longer term investing time horizon,
we remain optimistic that the financial markets will improve
later this year. So, stay tuned ! Current Weekly Calendar of Economic Data:
Tuesday: Retail Sales
Wednesday: Business Inventories, Industrial Production/Capacity Utilization
Thursday: Jobless Claims, Consumer Price Index, Housing Starts/Permits, Philadelphia FRB Index