A Breath of Fresh Air

Written by: David Lereah   Tue, March 17, 2009 Commentary

Good news about the economy and housing markets has been rare this past year so when something positive happens in the markets we will take the opportunity to focus on it. Consumer spending, which had been dreadful during the fourth quarter of last year, has shown signs of life in the first two months of 2009.

Retail sales fell a modest 0.1 percent in February but rose 0.7 percent excluding automobiles. Gains were widespread, and were particularly high in apparel stores and general merchandise stores. Even better news was that retail sales in January that originally were up 1 percent were revised upward to 1.8 percent. It appears that reduction in tax payments and increases in transfer payments in January are having a positive influence on consumer spending. According to Economy.com, consumer spending may even post a slight gain in the first quarter of this year. That could be a breath of fresh air for an economy that had one foot in the grave during the fourth quarter of last year.

However, we must refrain from getting overly optimistic. The level of retail sales remains about 10 percent below year ago levels. And there are still factors that are negatively influencing household spending such as massive monthly job losses, very weak consumer confidence, substantial losses in household wealth due to falling stock and home values, and tight credit conditions. But the relatively good news in recent retail sales numbers suggests that, maybe, we have seen the worst in consumer spending. If that is the case, the economy could show signs of recovery sometime towards the end of this year.

Another piece of good news was that Citigroup reported that it was profitable during the first two months of this year and that it will no longer need any aid from the government, bolstering hopes that the banking system may be stabilizing. Citigroup projects that it will earn about $8.3 billion in the first quarter of this year. Investors reacted positively to the news with the Dow Jones Industrial Average rising 380 points for the day.

Problems in the banking system and financial markets have inhibited economic activity, prolonging the recovery. Any positive developments are welcome news and recent policy efforts are expected to bolster the markets further. Recent gains in equities and modest narrowing of credit spreads are providing further support for the financial markets. Hopefully, we can maintain this positive momentum entering the second quarter.

This week’s economic reports were mixed with regard to current economic activity. As already mentioned, retail sales numbers were upbeat for the second consecutive month. And although the sales levels remain very low compared to a year ago, these recent reports suggest that consumer spending might have reached a bottom. Jobless claims increased by 9,000 to 654,000 for the week ending March 7. Suffice it to say, the labor market continues to deteriorate.

Business inventories declined 1.1 percent in January, while the inventory/sales ratio stayed at 1.43. The University of Michigan consumer sentiment index was relatively flat in March registering 56.6 compared to 56.3 in February. The index continues to hover near its cyclical low, consistent with a weak economy.

On the housing side, foreclosure filings in February were 290,000, up 6 percent from a month earlier and up nearly 30 percent from a year earlier. With the economy contracting and shedding a large number of jobs on a monthly basis, it is likely that the grim foreclosure situation will continue throughout the remaining months of this year. Finally, mortgage applications were up for the week ending March 6. The purchase application index rose 7.1 percent to 253.3 while the refi index rose 13.3 percent to 3,470.7. The 30-year mortgage rate fell 18 basis points to 4.96 percent while the 1-year adjustable rate fell 9 basis points to 6.21 percent


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