GDP Expected to Slip

The Federal Open Market Committee announced on Wednesday it would complete purchases of $600 billion in treasury securities in June. Defending the strategy, also known as quantitative easing or QE2, Chairman Ben Bernanke said the Fed’s actions helped increase stock prices, reduce spreads in credit markets, and lower volatility.

Earlier that day, the Fed downgraded its estimate of the gross domestic product, or the total production of goods and services by the United States’ economy, for the whole of 2011.

Bernanke said he expected a relatively weak estimate for the first quarter, a little under 2 percent growth, down from 3.1 percent growth in the fourth quarter last year.

Most economists estimates were around 2 percent for the first quarter, a significant downgrade. Earlier this month, the average estimate was 2.7 percent from a survey of 56 economists conducted by the Wall Street Journal.

The Fed expected GDP to grow 3.1 to 3.3 percent for the whole of 2011, down from its January estimate of 3.4 to 3.9 percent.

Weak exports and low spending in construction and defense resulted in lower expectations this quarter, Bernanke said.

Economists were surprised by China’s high numbers in February. Imports from China were higher than expected, despite Chinese New Year falling on February 3, said economist Russell Price of Ameriprise Financial.

“We saw the [imports] spike in January and we thought that might be temporary.” Price said. “It continued into February, which was quite surprising. A lot of Chinese operations were closed that first week of February.”

Another reason for the downgraded estimates is decreased expectations in consumer spending.

“The combination of the higher oil prices and gasoline prices took a little bit off our consumer spending expectations.” Price said.

Also on Wednesday the Federal Reserve brightened its outlook on unemployment: 8.4 to 8.7 percent, down from 8.8 to 9.0 percent.

During the press conference, Bernanke was asked what the Fed could do about unemployment. While he defended QE2 earlier, he said the Fed would not pursue another round quantitative easing because of inflationary worries.

“The trade-offs are getting less attractive at this point. Inflation has gotten higher.” Bernanke said. “If we are going to have success in creating a long-run sustainable recovery with lots of job growth, we have to keep inflation under control.”

Consumer Confidence Primed for April Resurgence

The Conference Board’s Consumer Confidence Index looks to make a rebound this month on the wings of signs that the turmoil that roiled Japan, the Middle East and North Africa in March is finally beginning to calm.

The Index, which fell 8.6 percentage points to 63.4 in March, after having hit a three-year high of 72 in February, seems primed for an April resurgence, analysts surveyed by Bloomberg said.

Chris Christopher, senior principal economist at IHS Global Insight, said a combination of natural disasters striking Japan in March, coupled with growing instability throughout the Middle East and North Africa, prompted an “over- reaction” by consumers.

Christopher added that there aren’t yet dependable metrics for gauging the fallout of such global occurrences on U.S. consumer psyche.  “We certainly noticed a similar phenomenon during the oil spill in the gulf,” he said.

Jennifer Lee, a senior economist for BMO Capital Markets, agreed that such unanticipated global shocks can have untold effects on American consumers.  “Fewer headlines from overseas” in April will have a “calming effect” on consumer confidence, she predicted.

While analysts surveyed by Bloomberg forecast a rebound of about 1 to 2 points, consumer confidence, which has consistently outpaced analysts’ expectations for the past several months, will probably witness an even stronger resurgence—in the 3 to 5 point range—if the fundamentals of the economy remain sound for the remainder of the month.

Christopher, whose company was by far the most bullish in their estimate of this month’s Conference Board figure, predicting a bounce-back of 4.6 points, said “The stock market doing well, the unemployment rate falling and the alleviation of consumer paranoia about the Middle East and North Africa all point to strengthening fundamentals.”

University of Michigan Survey

In perhaps the most positive omen for the Index thus far, the Thomson Reuters/University of Michigan Consumer Sentiment Survey—which has tended to be more conservative than the Conference Board in gauging consumer sentiment—exhibited a small rebound in April, rising 2.1 percentage points to 69.6 after falling to 67.5 in March, the lowest measure since November 2009.

“There is a ‘meaningful’ correlation between the numbers from the University of Michigan and the Conference Board,” said Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors, who forecasts an almost 3 point bounce-back in the Conference Board’s index.

What is more, the University of Michigan’s survey also noted a 9.4% decline in the number of respondents who said they were concerned about inflation in the long-run—inflation over the next 5 years, as defined by the University of Michigan.

This is sure to be welcomed news for Fed Chairman Ben S. Bernanke and his inflation dove colleagues, Fed Vice Chair Janet Yellen and William C. Dudley of the New York Fed, who have all been desperately trying to convince Americans that recent spikes in food and oil prices are merely transitory.

Other Welcomed Signs

Consumer spending, arguably one of the most telling measures of root consumer attitudes, also continues an upward climb, rising 0.4% last month, proving consumers aren’t being turned off enough by the dual spikes in food and gas to leave their wallets at home.

Still, there are other reasons to be optimistic about current conditions, said Mr. Johnson of Hugh Johnson Advisors.

“Improving equity market prices and employment conditions are helping against a backdrop that does, admittedly, include many negatives,” Johnson said.

Indeed, consumer expectations about the future and the economic recovery are certainly being bolstered by an ever-improving jobs picture.  Last month, BLS reported that the economy added 216,000 jobs, a gain that saw the overall unemployment number fall to 13.5 million, or 8.8 %, a two-year low.

BMO’s  Lee acknowledged “an increasing number of jobs and a decrease in unemployment” played a key role in her company’s 1.6 point April bounce-back estimate.  Consumer confidence is “based a lot on what’s happening in jobs and public perception of future job stability.”

Revised 4/29/2011

Jobless Claims to Return to Normal

Initial claims for unemployment jumped from 385,000 to 412,000 in the first week of April, but experts say that this does not signal a reversal of the downward trend in layoffs.  Most economists forecast the number of initial weekly claims to go back below 400,000.

The more reliable four-week moving average, an average that smoothes out the volatility of claims data, stands at 396,750.  The consensus among economists is that claims for unemployment last week will go back down to 390,00, continuing the general decrease in claims since the recession ended in 2009.

Brian M. Jones, an economist at Societe Generale in New York says that the upward tick in last the previous week’s claims might have resulted from a statistical aberration.  In some states, claimant’s unemployment checks are adjusted for inflation every quarter. It is probable that a number of workers that were laid off in late March waited until the first week of the second quarter to file in order to take advantage of the higher allotments.

He did acknowledge that some companies such as Ford Motor Company and Bank of America have been laying off workers in significant numbers.

“There were significant layoffs in the automotive industry where some plants’ supply chains are disrupted by the earthquake in Japan,” he said. “That might have had more of an impact.”

Continue reading Jobless Claims to Return to Normal

Housing picture bleak in spite of modest gains

Better weather and an improving jobs outlook likely pushed existing home sales upward in March, but foreclosures, tight credit and lingering unemployment continue to dog the housing market as it enters the spring selling season.

Home sales will rise 2.5% to a seasonally adjusted annual rate of 5 million when the National Association of Realtors releases its monthly report on Apr. 20, a consensus of economists polled by Bloomberg News predicted. That uptick would be welcome news after sales plummeted 9.6% to 4.88 million and median home prices hit a nine-year low of $156,100 in February.

The projected gains for March are not entirely indicative of a strengthening market. Because existing home sales measure closings—which typically occur one to two months after buyers and sellers sign contracts—February’s sales likely suffered from harsh weather in January. While spring is the most important season for home sales—when buyers are motivated by warmer weather and the desire to move homes before the start of the fall school year—the market is unlikely to achieve anything more than modest gains.

“The housing market is generally lousy,” said Jeff Silverbush, president of 21st Century Best in New York. “People are worried they might lose their job, or that their pay will go down. Until people start being employed at a higher level, it’s unlikely we’re going to see the market improve substantially.”

The economy added 216,000 non-farm jobs in March, but is still over 7 million jobs short of the peak employment reached in December 2007. Not only would improved job numbers increase the pool of potential homebuyers, it could also loosen the spigot on home loans.

“If the economy produces more jobs, the banks are going to feel more comfortable granting loans,” said Bernard Baumohl, chief economist at the Economic Outlook Group.

In addition to the jobs situation, foreclosures remain a persistent culprit in the housing malaise, raising fears that an influx of cheap homes will drive prices further downward, and creating an atmosphere in which many would-be buyers find it difficult to get home loans.

Although RealtyTrac reported that foreclosures fell 15% in the first quarter, many observers expect foreclosures to increase as lenders work through the backlog created by improperly processed paperwork.

And even with interest rates on 30-year fixed loans under 5%, the National Association of Realtors reported that 33% of home sales in February were all-cash transactions, indicating that buyers would rather pay cash than jump through the hoops required by lenders.

With potential buyers waiting for prices to fall or unable to get credit, Baumohl worried that home sales may remain slow for months to come.

“The market has created a logjam,” he said. “You can’t buy a new home until you sell your current home, and you can’t sell because prices are too low. On top of that, the banks are very wary of providing mortgages unless buyers have top-notch credit. We may end up seeing 2011 as a year in which the recovery of the housing market was delayed.”

But while job recovery has a long way to go, recent returns have been encouraging. The economy added 478,000 jobs in the first quarter, more than in any quarter since 2006, providing a glimmer of hope that the worst days for the housing market may be over.

“There’s no question that February was ugly,” said Russell T. Price, senior economist at Ameriprise Financial, who predicted existing sales would rise to 4.95 million. “But we’ve seen enough improvement on the employment front to think that housing may be stabilizing.”

Buyers won’t wait on the sidelines indefinitely, Price added. If the Federal Reserve ends its $600 billion bond-purchasing program—commonly known as QE2—as scheduled in June, the rise in interest rates that is expected to ensue could spur potential buyers to action.

“In terms of the long-term costs of buying a home, people who are bottom-ticking the market should be cognizant that mortgages won’t stay this cheap forever,” Price said.

But whether rising interest rates would drive sales is far from certain, Silverbush said.

“When you psychoanalyze the market, sometimes you’re right and sometimes you’re wrong,” he said. “I’d be afraid that if interest rates go up, that would be another impediment. But it’s hard to know until it happens. For now, the bottom line is that people are still afraid of this economy.”

Price Pressures Worrisome But Not Dire

Darryl Terrel manages Eastside Service Gas Station on the Lower East Side. Business has suffered lately. On Wednesday, the price of gas exceeded $4.30 per gallon in New York City.

“It’s taking food from the babies,” Terrel said.

Like most consumers in the American economy, manufacturers fear rising inflationary pressures—but across the country, firms posted gains. Some even showed increased signs of hiring. Cost pressures are real, but materials make up a much smaller part of manufacturers’ cost structures than wages do. Interest rates remain low and wage pressures are minimal.

Economic activity improved in the 12 Federal Reserve districts in March. Most districts cited improved consumer spending—New York especially—according the Federal Reserve’s Beige Book. Outlooks for the near future were positive, although some worry about disruptions to sales or production due to the tragedy in Japan.

Uncertainty over conflict in the Middle East has weighed heavily on people’s minds with the surge of gas prices. Earlier this week Janet Yelen, Vice Chair of the Fed, mentioned a study that exhibits decreased confidence among consumers.

Oil settled above $108 a barrel on Thursday, according to Bloomberg.

While the US economy is especially vulnerable to rising oil prices, manufacturers have certain advantages. They generally use electricity for power instead of oil, said Geoffrey Heal, an economics professor at Columbia University. The country also has a glut of natural gas, which is only affected by North American demand, said Floyd Norris, Chief Financial Correspondent for The New York Times.

But for firms that purchase a lot of raw materials, times are tough.

Josh Hagen, Vice President of Operations for Prem Magnetics, Inc., uses copper and steel to manufacture volt adapters that bring 110 volt sources down to 12 volts.

For Hagen, business was slow last year, but things have been better lately. Hagen said that material prices have been an issue.

“We tried to hold off as long as we could,” Hagen said, “But we had to increase our prices a little bit this year.”

Demand for energy efficient cars may also be on the rise, as energy-conscious consumers scour for models that might lessen their sensitivity to gas prices.

“The more you have these spikes up and spikes down,” said Brian Benstock, General Manager of Paragon Auto in Queens, “People are going to be looking for long-term solutions.”

In the short term, Benstock said he expects shortages due to Japan’s earthquake and tsunami.

Gas prices can be a drag overall, but for manufacturing in the broad sense, other factors—like interest rates—are more important.

“I’d be more interested in what happens to interest rates and labor costs than what happens to commodity costs,” Heal said.

When manufacturers only consider gas prices, it can be nerve-wracking, even painful. According to Gary Greenfield, Secretary Treasurer for Macalaster Bicknell, Co., a glass-distributor in New Jersey, fuel costs are a big worry.

“I look at them [gas prices] everyday,” Greenfield said. “I don’t know why I do.”

CPI Expected to RIse for Third Straight Month

Over the last couple of months Americans have gotten used to the fact that dishing out a little more cash has become a common occurrence – April will be no different.
A recent Bloomberg News Survey indicates that economists are forecasting the third straight month of growth in the Consumer Price Index.
“We expect high overall inflation, but the core rate is relatively contained,” said Sean Incremona, Senior Economist at 4CAST Ltd.
Last month the core Consumer Price Index rose by 0.5 percent. The largest gain since June 2009.
The Bureau of Labor Statistics has attributed the recent rise in overall inflation rate to the still high cost of gasoline and food a trend that will most likely be repeated in the upcoming April release.  The overall rate can safely be forecasted to rise by 2.6 percent in March.
The core CPI rate, which excludes the volatile food and energy prices, is expected to increase by 0.3 percent, putting the core rate at 1.3 percent growth for the year.
A comforting thought for Federal Reserve Chairman Ben Bernanke who was been quoted on numerous occasions as saying that inflation is not a threat to the economy yet.  The Fed has set a preferred growth rate of 2.0 percent a year.
Despite the Fed’s position, consumers cannot ignore the upturn in prices of good since the start of 2011.
Gasoline prices have been the most volatile since the beginning of unrest in Northern Africa and the Middle East.  The conflicts have pushed the average cost of a gallon of regular past $3.50 and in some parts of New York City well past $4.00.

“Consumers are still paying a lot at the pumps,” said Incremona.
The prices are also impacting retailers and manufacturers alike. The higher food and energy prices are beginning to have a larger impact on how companies are doing business. Even if the inflation pressures don’t seep into the retail prices paid by citizens, higher wholesale prices could still be bad news for the economy.
“They could forces businesses to rethink their strategy’s as they ponder if they should absorb the increase and limit their profit margins,” said Robert Brusca of Fact and Opinion Economics
If businesses don’t think they can raise their prices to respond to higher wholesale costs, which could squeeze profits, leading to a drop in stock prices and weaker hiring going forward. A fact that is not too comforting with Americas unemployment rate at 8.8 percent.
Which helps illustrate a fact that the Fed is not paying attention to. As the prices increase Incremona explained, wages should increase in order to mitigate the sting. But due to the lack of bargaining power by workers many are seeing the higher cost of living slowly eating up savings or the increase provided by the Social Security Payroll tax cut.
The tax cut injected $112 billion in additional income into the wallets of citizens. But the money afforded by the tax break could be wiped out if high food and energy prices stay on this trend.
This is making Americans feel that inflation is here now. In a March 11th report on consumer sentiment the Conference Board reported that Americans think inflation will reach 6.7 percent.
“It comes for a lack of wage appreciation. It’s just not happening,” noted Brusca.
Both Incremona and Brusca feel that Americans afraid to request an increase in pay to afford these due to the soft job market and high unemployment rate a sentiment that is making Americans more afraid of inflation and if trends continue those fears may soon become reality.

Retail Sales Start to Run out of Fuel

Retail sales are expected to show modest gains for the month of March, as the rise in gasoline prices has slowed further growth.

As a whole, retail sales are expected to grow, but at a smaller rate than the 0.5 percent projected by a Bloomberg News survey.

While another gain would prove to be the ninth-straight month of retail sales growth, there is growing fear that a continued increase in gasoline prices would lower overall consumer spending.

Gasoline sales are expected to drop this month, a reflection of the 30 percent rise in gas prices over the past year and consumers who are staying away from the pump as a result.

Gasoline sales have shown a steady increase in the past few months’ retail reports, mostly reflecting the higher prices seen throughout the nation due to increased use and fear of shortages amidst political crises in oil producing nations.

But the March retail sales report, which will reflect revenues when the national gas price was over $3.50 for the entire length of the month, is expected to show a drop in sales. The current average price for a gallon of regular gas in the U.S. is $3.79, according to the AAA. This time last year, it was $2.86.

Gasoline sales were the only retail sector to see a decrease over the past month, according to SpendingPulse, an economic report released by MasterCard Advisors.

Continue reading Retail Sales Start to Run out of Fuel

Higher Exports in February May Narrow the Trade Deficit

The trade deficit likely narrowed in February due to growth in exports. A consensus survey of 71 estimates show a median trade gap of $44 billion, a 5 percent decrease from January’s $46.3 billion.

One indication that exports were strong in February is in the Institute for Supply Management’s (ISM) national report, which shows that exports for both manufacturing and non-manufacturing industries grew faster by 3.5 percentage points compared to steady growth for imports. The report surveys a sampling from each industry to gauge monthly changes in indicators like growth and inventory.

The ISM report is a good predictor for the trade deficit as long as the value of the dollar stays relatively stable, said Max Clarke, chief U.S. economist for IDEAGlobal. The dollar remained weak in February, which should encourage exports.

Imports are expected to have remained stable after a surprising spike in the previous month. That sudden increase may have been due to Chinese suppliers shipping their goods to the U.S. ahead of the Chinese New Year, a two-week long holiday in February. This rush of imports will have a significant impact since China is America’s second-largest trading partner after Canada, with whom we maintain the largest deficit with any single country.

“But that situation will reverse in February, so we’ll see imports stabilizing or maybe even declining,” said Russell Price, senior economist for Ameriprise Financial Inc.

Donald Ratajczak, consulting economist for Morgan Keegan and Co., disagrees. He believes the Chinese New Year will be accounted for by the seasonal adjustment. “Because it happens at the same time every year,” he said.

Ratajczak expects the deficit to widen to $48.7 billion due to higher imports. “What we’re buying is more expensive than what we’re selling. It’s an obvious one,” he said. “Crop prices and meat prices are moderately up, but oil prices have gone through the roof.”

Spiking oil prices earlier this year have caused worries that the trade deficit will widen in response to a larger oil bill. But petroleum imports had actually declined in February by 3.4 percent to 8.6 million barrels per day, according to the U.S. Energy Information Administration.

“It’s mostly because of bloated inventories,” said Price. “There was just nowhere to put the oil.”

Revised on April 14, 2011.

Supply Anxiety Drives Strong March Auto Sales

Toyota salesman Mitch Schechter made good money selling Prius hybrids in March, but he stands to make a killing in April.

The Prius is one of several models that suffered production shutdowns in Japan after the March 11th earthquake. Spurred by the fear of limited inventory, consumers then flocked to Toyota dealerships to snag a Prius before it was too late.

Now Schechter anticipates a spike in his commission checks not only because he’s been selling more cars, but also because he may soon be able to sell them at a higher price.

“If the cars are slower to get out to the market, they’ll go up a minimum of about $1,000,” said Schechter. “It’s a basic supply and demand situation.”

So far, inventory has kept up with demand. March sales were strong at a seasonally adjusted annual rate of 13.06 million, up from a revised 11.70 million in March of last year. Sales shrunk from February’s 13.38 million, largely due to the earthquake aftermath that April sales are expected to correct.

Production at Honda and Nissan, both based in Japan, also suffered from the earthquake’s effects. The two companies lost an estimated 46,600 and 42,000 vehicles respectively, according to statements.

But those losses may be recovered through record profit margins in April. A limited supply of their most popular models would allow dealerships to sell cars at sticker price, instead of haggling or offering incentives, said Nuno Pinto, a salesman for Toyota Hackensack in Hackensack, New Jersey.

“If we have to work with a low inventory, customers can’t bargain,” said Pinto.

If the shortage lasts, of course, Schechter will suffer, as will Toyota Motor Corp. A persistent lack of supply would mean losing customers to companies with available models.

The Prius is emblematic of the demand surge that April may see, as that hybrid has become increasingly popular since the unrest in the Middle East sent oil prices soaring and consumers searching for more fuel-efficient vehicles.

Most dealerships keep enough inventory on the lot to last them a month, and will likely cruise through any bumps in supply in the coming weeks. But specialty cars and hybrids like the Prius are already produced on a relatively limited basis, and already in such high demand, that they will be the first to take a hit from production slowdown if there’s one to be taken.

It’s too soon to know how much those production gaps will affect automakers’ business, said Peter D’Antonio of Citigroup Global Markets, who noted that inventory from before the earthquake will help dealerships keep up with demand for some time.

But if those dealerships do run short in April, he said, higher prices won’t be far behind.

“We haven’t really seen the effect yet, but that isn’t to say there won’t be one,” said D’Antonio. “If their supplies are short, they will raise prices.”


U.S. Farmers Rapidly Losing Market Share in Panama

For American farmers, the pending trade agreement with Panama is no longer about potential gains but about preventing the loss of existing export markets.

Since 2007, when the agreement was signed, U.S. share of Panama’s agricultural imports has steadily declined, to 38 percent last year from 60 percent, according to the Department of Commerce. The figure is expected to steadily erode as other countries, like Canada last year, finalize their trade agreements to lower trade barriers and make their products more competitive in Panama.

“It’s amazing that it hasn’t been passed yet. Out of the three bills, Panama is the least controversial,” said Charlotte Hebebrand, chief executive of the International Food and Agricultural Trade Policy Council. “We stand only to gain from these agreements.”

Panama mostly imports industrial goods, pork, beef and grains from the U.S. while exporting salmon, tuna and fruits. It is a small trading partner for the U.S., ranking only 56th in trade value, but the partnership has resulted in regular surpluses for the U.S. Last year, it amounted to $5.7 billion.

This is despite 99 percent of Panamanian agricultural exports entering the U.S. duty-free because of the Caribbean Basin Initiative and other trade preference programs, compared to less than 40 percent of U.S. agricultural exports to Panama. Once the trade agreement is implemented, 88 percent of U.S. exports will enter Panama duty-free.
Continue reading U.S. Farmers Rapidly Losing Market Share in Panama