Weekly Economic and Financial Commentary

Upbeat, Downbeat or Simply No Rhythm

Mon, Mar 15 2010, 06:15 GMT
by Wells Fargo Research Team - Wells Fargo Investments, LLC | View company's profile

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U.S. Review

Upbeat, Downbeat or Simply No Rhythm

Economic news continues to come in mixed, with positive reports on retail sales and the trade deficit being offset by disappointing reports on small business optimism and unemployment claims.
Revised employment data for states show larger job losses during the recession and cast some doubt on January’s drop in the national unemployment rate.
Stronger retail sales and declines in imports led to surprising drops in inventories at retailer and wholesalers in January. Inventories rose slightly at manufacturers, however.

Still on Pace for a Modest Economic Recovery

February’s retail sales report was easily the best economic news released this week. Overall sales rose 0.3 percent during February, with strong gains reported across nearly every major category. Sales excluding gasoline, building material and automotive dealers, which is a category that tends to track the personal consumption data, rose 0.9 percent in February, following a 0.6 percent gain in January. The strong back-to-back gains suggest consumer spending will rise at a 2.2 percent pace or better during the first quarter, which is in line with our forecast, published earlier this week.

One complicating factor in the retail sales figures is that retailers have done a really good job at bringing inventories in line with sales and are discounting much less than they did in prior years. As a result, the better numbers reported for January and February may not reflect as much volume as they first appear. The lack of discounting is also apparent in the Consumer Price Index, which has shown larger price gains for core good prices. Prices for core goods are currently up 2.9 percent over the past year, which is their largest gain since the early 1990s.

One of the more disappointing reports released this week was the Small Business Optimism survey conducted by the National Federation of Independent Business. The survey fell 1.3 points in February and showed little to no improvement in most of its key components. Small businesses remain pessimistic about the near-term economic outlook and relatively few feel that it is a good time to expand their operations or hire additional staff.

The lack of improvement in small business optimism does not come as much of a surprise to those that follow the sector. Small businesses are often firms that are usually privately owned and the owners are intricately involved in the operations of their business. The owners likely hired the vast majority of the workers they currently employ, work side by side with them, and many had to let some of their workers go over the past couple of years. Most owners also have a great deal of the personal net worth invested in their business and are understandably cautious about putting their life’s work at risk. To further complicate matters, credit is harder to get for many firms, particularly those tied to the housing sector.

There were three key reports on the labor market this past week. One was slightly positive, while the other two pointed to continued trouble. The Job Openings and Labor Turnover Survey reported a sizable increase in job openings during January, with the job openings rate rising to 2.1 percent. The increase brings the number of job openings to 2.7 million. The ratio of unemployed to job openings fell a record 0.6 during the month to 5.5 workers per job opening.

The better unemployment rate data for January, which saw the nation’s jobless rate fall 0.3 percentage points to 9.7 percent, may have overstated the pace of recovery. Newly revised state data show the unemployment rate moving in the other direction, with increases reported in January for every major Census region.

Global Review

Brazilian Economy Surges on Domestic Consumption

The Brazilian economy surged during the last quarter of 2009 on the back of personal consumption expenditures and government expenditures. Given the faster-than-expected rate of recovery, we will likely raise our forecast for 2010 GDP growth.
For the full year, the economy slipped 0.2 percent in real terms during 2009 after growing 5.1 percent in 2008.
Our primary concern in Brazil going forward is inflation.

The Brazilian economy expanded substantially during the last quarter of 2009 on the back of personal consumption and government expenditures. Personal consumption expenditures jumped 7.7 percent during the fourth quarter of the year compared to the same period a year earlier, while government consumption posted a 4.9 percent growth rate over the same period. The growth in private and public consumption was largely engineered by the administration through very specific fiscal programs as well as a very accommodative monetary policy by the Brazilian central bank.

The economy dropped 0.2 percent in real terms during 2009 after growing 5.1 percent during 2008. It is clear that the Lula administration had to put some type of domestic package together during the year because exports remained very weak even as the world economy recovered. Exports of goods and services dropped by 4.5 percent year over year in the last quarter of 2009 and by 10.2 percent during the whole of 2009 after a decrease of just 0.7 percent during 2008.

After three miserable quarters for gross fixed investment, there was a welcome turnaround in the fourth quarter. This is an important dynamic because fixed investment spending is going to provide some sustainability to the current recovery, especially as the external sector comes back. Gross fixed investment grew by 3.6 percent during the fourth quarter of the year compared to the same quarter a year earlier but dropped by 9.8 percent for the whole of 2009 compared to the previous year.

Our main concern going forward is Brazilian inflation. The Lula administration will have to scale down government programs put in place during the last two years if it does not want to suffer another bout of accelerating inflation, especially during an election year, which is normally a very difficult time for inflation expectations.

Even though the country has advanced considerably in terms of productive infrastructure, it still needs to invest more to reduce productive bottlenecks that occur once the economy is growing at a fast pace. Thus, gross fixed investment will have to keep advancing at a much faster pace than it is today to help relieve some of the pressure on the supply side of the economy.

Given the faster-than-expected rate of recovery, we will likely raise our forecast for 2010 GDP growth. That said, there are still some risks attached to this forecast, and the fundamental risk is renewed inflationary pressures. We have already seen the first signs that inflation is coming back, and if domestic consumption continues to remain as strong as it is today, then the problems will worsen as the external sector continues to recover. Thus, the central bank will have to move sooner rather than later, and this could slow down growth during the second half of the year. For this reason, our forecast is likely to remain below the consensus forecast of almost 6 percent for 2010.

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Published On Mon, Mar 15 2010, 07:39 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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The Moderate Economic Recovery is Still Underway
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Mon, Jan 30 2012, 05:24 GMT
Good News on Manufacturing, Inflation and Housing
Fri, Jan 20 2012, 20:12 GMT
Week Two Brings a Little Less Enthusiasm
Mon, Jan 16 2012, 06:17 GMT

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There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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