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Markets Swoon while the Economy Surges
By Louis Navellier
Last week's major market swoon was arrested late Friday as traders simply refused to let the Dow close below the psychological support level of 10,000. Until that late surge, the Dow had fallen 530 points (over 5%) in two trading sessions, on fears of sovereign debt defaults in Europe - and another $3 billion in deficit spending projected for the 2010-11 federal budgets at home. However, the economy continues to recover on pace, with some startling gains in factory manufacturing, productivity and retail sales.
The Economic Recovery is on Schedule
The Commerce Department announced last week that real consumer spending, adjusted for inflation, rose by a seasonally adjusted 0.1% in December after a 0.4% gain in November. The same report said that - due to strong spending in October - fourth quarter real consumer spending increased at a 2% annual rate. In addition, personal income rose 0.4% in December and the net domestic savings rate rose to 4.8%.
This trend seems to be accelerating in January, since a survey of 29 retailers released last Thursday reported that January same-store sales rose 3.3%, the strongest monthly gain since April 2008 and higher than analysts' expectations of a 2.5% rise. Department stores delivered a surprising 2.5% rise, while analysts were looking for a 0.9% drop! Apparel retailers posted an impressive 7.3% rise vs. 3.9% expected. Discounters reported a 4.5% rise in sales, with Costco leading the way with an 8% surge.
U.S. car sales are also surprisingly healthy. On Tuesday, Ford and GM reported strong January sales of 24.4% and 13.6%, respectively. Ford said that fleet sales to its corporate, government and rental car customers more than doubled from a year ago. Not surprisingly, due to its gas-pedal problems and brake issues in some Prius models, Toyota posted a January sales decline of 15.8%. But other foreign brands - like Hyundai, Nissan and Volkswagen - posted 24%, 16% and 41% January sales gains, respectively.
Manufacturing activity also increased, as the Institute for Supply Management (ISM) reported that its index rose to 58.4 in January, the highest monthly reading since August 2004 and substantially higher than the 54.9 reading in December. The ISM survey also said that new orders and production rose above 60, reaching their highest levels since 2004. Fully 13 of 18 industries surveyed were growing in January.
Productivity in the business sector increased at a 6.2% annualized rate in the fourth quarter, after a torrid 7.2% annualized rise in the third quarter. Business output rose 7.2% while hours worked increased 1.0%. (Getting more output per hour means higher productivity.) In the manufacturing sector, productivity rose 7.8% in the fourth quarter, while unit labor costs fell 7.4%! Meanwhile, the modest (1%) increase in hours worked was the first rise since the second quarter of 2007, raising hopes for potential job growth.
So, between surging factory output (strongest since 2004), soaring productivity and rising same-store sales, it appears that the U.S. economy is on track to report very strong first quarter GDP growth.
Stat of the Week: 9.7% U.S. Unemployment
In Friday's monthly payroll report, we learned that the unemployment rate fell from 10% in December to 9.7% in January. However, the Labor Department said that 20,000 payroll jobs were lost in January, so the jobless rate mostly fell due to a shrinking labor force. What's even more stunning is that the 2009 annual revisions showed that employment in December was nearly 1.4 million lower than first reported.
On the brighter side, the broader measure of unemployment, including those who want to work but have stopped looking, declined nearly a point to 16.5% in January, down from 17.3% in December. Another silver lining in the payroll report was that temporary employment continues to expand, rising 52,000 in January. Rising part-time jobs is a harbinger of rising full-time jobs - which is usually the last statistic to recover. Also, the average workweek expanded to 33.3 hours in January, up from 33.2 in December.
The Dollar Soars 7% to the Euro
The most stunning international news last week was that the euro fell 7% to the dollar last week, capping a 10% decline in the last 10 weeks. Put another way, the dollar now buys 0.73 euros vs. 0.68 last Monday. The reason for the euro's swoon was fear of sovereign debt default in Greece, now spreading to Spain and Portugal. Credit default insurance now costs 4.13% for Greek bonds, while Portugal's burden hit 2.19% and Spain reached 1.64%. In 2009, Spain's deficit rose to 11.4% of GDP, while Portugal's rose to 9.3%. Spain also suffers from a 19% jobless rate, making its budget problems worse each month.
The global stock-market panic began last Wednesday, when Portugal scaled back its bond auction due to soaring yields and a lack of demand, which ignited fears that Greece, Portugal and Spain will not be able to fund their budget deficits without a bailout from the European Union (EU) or the European Central Bank (ECB). So far this year, European governments have had to borrow a record 110 billion euros ($150 billion, pushing up borrowing costs for all euro-zone countries, as governments crowd out businesses and fight each other for space in the credit markets. Also, strong unions and civil service groups have staged walkouts and threatened strikes to prevent salary or benefit cuts. Ironically, these failures to raise capital are striking hardest in Europe's most socialist regimes: Greece elected the "Pan-hellenic Socialist Party" last October, while Portugal's Socialists were re-elected to a second four-year term in September.
Credit Concerns Rising in the U.S., Too
At the recent World Economic Forum at Davos, Switzerland, some investors suggested that it might be helpful if the credit rating agencies were to step up their threats about a potential future downgrade in the euro-zone, Britain and the U.S., since that would force politicians to debate deficits as an election topic.
It appears that Moody's was listening to these investor concerns, since Moody's Investors Service warned last Wednesday that the U.S. Treasury's AAA credit rating may come under pressure soon. Steven Hess, senior credit officer at Moody's, said: "Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the AAA Treasury bond rating."
Last week, the Obama Administration forecasted a $1.565 trillion budget deficit for 2010, meaning that the annual deficit will top 10% of GDP for the first time since World War II. Congress raised the U.S. government's debt ceiling last week by $1.9 trillion, to $14.3 trillion, to cover current spending needs. Although the White House forecasted that the budget deficit would fall to 4% of GDP in 2013, their estimates are far more optimistic than the Congressional Budget Office and private economists.
"Snowmageddon" Hits Washington, DC
Following their meetings in Davos, Switzerland, many world leaders made their way up to the Arctic Circle to stage some more fireside chats. Late last week, hundreds of members of the global financial community, including press and government officials, joined financial leaders like U.S. Treasury Secretary Timothy Geithner, Britain's Alistair Darling and other G7 finance ministers, on the southern tip of Baffin Island in the Canadian town of Iqaluit, which is about a three-hour flight north of Montreal.
Iqaluit only has 300 hotel rooms, so it's a mystery where everybody stayed. Canada's Finance Minister, Jim Flaherty, who acted as host, served the assembled gnomes generous portions of caribou and arctic char, but the diners drew the line on consuming seal meat. Citing crowded schedules, they all turned down Flaherty's invitation to a community feast on seal meat at the closing session on Saturday.
I haven't yet seen whether or not Treasury Secretary Geithner got stranded in Iqaluit by the closed airports in Washington, DC. But it was clear that any eastern-based U.S. representatives would have a difficult time returning home, since a record weekend snowstorm closed all the airports in the area. On Saturday alone, 27 inches fell on Philadelphia. President Obama called the situation "snowmageddon," as even his staff had trouble moving his motorcade through the snow. Today, Congressional staffers could probably snowboard down Capitol Hill - if they can get out of their driveways and get to work.
Maybe a snow-out is what Washington needs right now, but it's not snowing where they need it the most. Olympic organizers in Vancouver, BC are concerned that the Alpine skiing events starting next weekend in Whistler, BC, won't have sufficient powder. Maybe that's why Canada summoned the "snow gods" to Baffin Island. Either way, next weekend is packed - with Valentine's Day falling on the Chinese New Year and our President's Day weekend, while the NBA All-Star weekend in sunny Phoenix competes with the sunny Vancouver Olympics. Enjoy your week. I'll see you next Tuesday. - Louis Navellier
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