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Will Consumers Hold U.S. Economy Back?

Will Consumers Hold U.S. Economy Back?
3/5/2012 2:26 AM ET

Agreed that the U.S. economy is faring better than its other developed counterparts. But the domestic recovery is yet to find a firmer footing. Just when we were getting used to firmer data points that emphasized the strength in various segments of the economy, an insipid consumer spending data released last week came as a sore disappointment. What has pushed the consumers to the defensive despite the buoyant performance shown by equity markets recently and the resurgence seen in consumer confidence?

Consumers are continuing with the process of deleveraging, and at the same time employment gains and income growth have not picked up sufficient pace to remove all anxieties in the minds of consumers. Most recently, higher oil prices and in turn higher gas prices have emerged as a threat that has the potential to thwart a sustainable recovery in consumer spending. Without the benevolent support of consumers, it is unlikely that the U.S. economy expands at its trend-like pace this year.

Last week, the National Association of Realtors reported that its pending home sales index rose by a better than expected 2 percent month-over-month in January. The previous month's reading was upwardly revised to show a 1.9 percent decline rather than the 3.5 percent drop estimated initially. Pending home sales rose in the Northeast and the South, while pending sales fell in the West and the Mid-west.

Meanwhile, the S&P Case-Shiller house price survey showed that prices of houses in the top 20 metropolitan cities declined in December, with the corresponding indicator declining 0.5 percent month-over-month. On a year-over-year basis, house prices declined 4 percent.

A separate report released by the Commerce Department showed that construction spending fell 0.1 percent month-over-month in January following a 1.4 percent increase in December. Spending on private construction remained unchanged compared to a 0.2 percent drop in spending on public construction. In the private construction category, weakness in the lodging, office, commercial and transportation categories was offset by strength in residential construction.

Disappointing to the downside was the Commerce Department's personal income and spending report for January. Personal consumption rose by a mere 0.2 percent month-over-month in January. In real terms, consumer spending remained almost unchanged. Spending on durable goods increased, while spending on services was unchanged. The savings rate edged down 0.1 points to 4.6 percent.

That said, consumer morale remains quite buoyant. The Conference Board reported that its consumer confidence index rose to 70.8 in February from 61.5 in January. The present situation index climbed 6.2 points to 45, while the expectations index surged up 11.3 points to 88. The respondents finding "jobs hard to get" declined in February, confirming the labor market revival.

The results of the Institute for Supply Management's manufacturing survey showed that manufacturing activity continued to expand in February, although at a slower pace. The headline manufacturing purchasing managers' index fell by 1.7 points to 52.4. The new orders index fell 1.7 points to 54.9 and the production index edged down 0.4 points to 55.3. The employment index was down about a point at 53.2.

At the same time, the results of the Institute for Supply Management- Chicago's manufacturing survey were broadly positive. The Chicago business barometer index rose to 64 in February from 60.2 in January. The new orders index rose 5.6 points to 69.2 and the order backlogs index climbed 5.3 points to 50, while the production index was up 4 points. More importantly, the employment index rose about 10 points to its highest level since May 1984.

The Beige Book released last week stated that overall economic activity continued to increase at a modest to moderate pace in the 12 Federal Reserve districts. The expansion of the manufacturing sector was termed as steady, while the report also said that activity in the non-financial services industries remained stable.

Consumer spending was observed as generally positive. Banking conditions also generally improved. The report also noted that hiring increased slightly across districts, although wage pressure remained contained. Pricing was also termed as having remained stable.

The focus of the unfolding week is likely to rest on the job market, as the calendar has three separate employment market indicators that could confirm the recent strength seen in the labor market. Traders may closely watch the Labor Department's non-farm payrolls report for February, the ADP's private sector employment report and the weekly jobless claims data. The results of the Institute for Supply Management's service sector survey may also create some ripples in the markets.

The Commerce Department's factory orders report for January, the Federal Reserve's consumer credit report for January, the revised fourth quarter non-farm productivity and costs report, the Commerce Department's trade balance and wholesale inventories reports, both for January and announcements concerning the Treasury auctions of 3-year and 10-year notes and 30 year bonds round up the economic events of the week.

The pace of payroll gains is expected to moderate slightly in February, although remaining healthy. Private sector payrolls may have expanded solidly once again in the month, while the government is likely to have slashed jobs. Meanwhile, the unemployment rate is expected to remain unchanged. Danske Bank expects healthy gains in the months ahead, given the slowdown in the pace of firing and the resurgence in consumer confidence.

Monday

The Commerce Department is due to release its report on factory goods orders for January at 10 am ET. Economists estimate a 1.6 percent drop in orders for factory goods.

Durable goods orders, which make up the bulk of factory goods orders, fell a worse-than-expected 4 percent month-over-month in January. Excluding transportation, orders were down 3.2 percent. The declines were broad based, with orders for machinery and metals declining sharply. Orders for non-defense capital goods orders, excluding aircraft orders, considered a proxy for capital spending pulled back 4.5 percent.

In December, factory goods orders rose 1.1 percent month, with the 3 percent increase in durable goods orders responsible for the bulk of the upside.

The Institute for Supply Management is scheduled to release the results of its non-manufacturing survey at 10 am ET. The non-manufacturing index is likely to show a reading of 56 for February.

In January, the service sector expanded at the fastest pace in about a year. The headline index rose 3.8 points to 56.8 and the business activity index climbed 3.6 points to 59.5. The new orders index was up about 5 points to 59.4 and despite rising 4 points, the backlog orders index remained just short of the cut-off mark of '50' that demarcates expansion and contraction. Additionally, the employment index surged up 7.6 points to 57.4.

Tuesday

There are no important economic reports due to be released on Tuesday.

Wednesday

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 am ET. The report is usually released two days prior to the Labor Department's employment report. The consensus expectations are for an addition of 203,000 jobs by the sector in February following an addition of 170,000 jobs in January.

The U.S. Labor Department is also scheduled to release its final fourth quarter non-farm productivity and unit labor costs at 8:30 AM. Economists expect productivity growth to be upwardly revised to 0.9 percent, but the increase in unit labor costs is expected to be left unrevised at 1.2 percent.

Preliminary estimates released in early February revealed that fourth quarter worker productivity increased by 0.7 percent. The increase was a reflection of a 3.6 percent increase in output, somewhat offset by a 2.9 percent increase in hours worked. The overall productivity increase fell slightly short of the 0.8 percent increase predicted by most economists.

Despite the increase in productivity, unit labor costs increased by 1.2 percent in the fourth quarter as the productivity increase grew slower than the 1.9 percent increase in hourly compensation.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended March 2nd at 10:30 AM ET.

Crude oil inventories rose by 4.2 million barrels to 344.9 million barrels in the week ended February 24th, remaining in the upper limit of the average range for this time of the year.

Gasoline inventories fell by 1.6 million barrels yet were in the upper limit of the average range. Distillate inventories declined by 2.1 million barrels and were in the middle of the average range. Refinery capacity utilization averaged 84 percent over the four weeks ended February 24th compared to 83.5 percent over the previous four week.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 pm ET. Consumer credit for December is expected to show an increase of $10 billion.

Outstanding consumer credit rose at a healthy pace for a second straight month in December. Consumer credit rose by $19.3 billion or at a seasonally adjusted annual rate of 9.3 percent, with non-revolving credit rising by 11.8 percent compared to a more modest 4.1 percent increase in revolving credit.

Thursday

The Labor Department is due to release its customary jobless claims report for the week ended February 3rd at 8:30 AM ET. Economists expect claims to remain unchanged at 351,000.

Initial jobless claims fell 2,000 to 351,000 in the week ended February 25th, the lowest reading since March 2008. The four-week average slipped 5,000 to 354,000. Continuing claims edged down 3.402 million in the week ended February 18th from 3.404 million in the previous week.

Friday

The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 am ET. Economists expect non-farm payrolls for January to increase by 204,000 and the unemployment rate to remain unchanged at 8.3 percent.

The U.S. economy added 243,000 jobs in January, higher than the average monthly gains of 152,000 for 2011. Private sector payrolls expanded by 257,000. The job gains showed depth, with strength seen across most sectors of the economy. And what's more, the unemployment rate based on the household survey dipped further to a near 3-year low of 8.3 percent.

The trade gap data for January is due out at 8:30 am ET. Economists estimate that the trade gap narrowed slightly at $48.4 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.

In December, total U.S. exports came in at $178.8 billion while imports were recorded at $227.6 billion. This resulted in a trade deficit of $48.8 billion, up from the $47.1 billion recorded in November. Most economists had predicted the deficit figures to come in at $47.8 billion.

The U.S. trade deficit widened to $48.8 billion in December, the biggest gap since June. Imports rose 1.3 percent month-over-month compared to a muted 0.7 percent increase in exports.

The Commerce Department is due to release its wholesale inventories report at 10 am ET. Economists expect wholesale inventories at the end of January to show a 0.6 percent increase.

In December, wholesale sales rose 1.3 percent month-over-month and were 11.8 percent higher than in the year-ago period. Meanwhile, inventories at the end of the month rose 1 percent from the previous month. The inventories to sales ratio came in at 1.15 compared to 1.16 in the year-ago period.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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