INO.com News - Growth Vs. Fiscal Discipline (rtt)

Growth Vs. Fiscal Discipline

(RTTNews) - The economy has returned to growth after an extended period of contraction. Nevertheless, the data proved inadequate to instill confidence in the minds of investors, as it is a well know fact that the expansion has come at the expense of ultra expansionary fiscal policy, which has placed enormous strain on the nation's coffer. However, the government, if opting to gradually bring about fiscal prudence, may inflict more damage than benefit due to the fragile state of the economy. Private households are grappling with the problem of wealth erosion, the economy is continuing to lose jobs and the banking sector is still in a delicate state.

The warning sounded by President Barack Obama last week seems relevant, with the president warning that the U.S. economy faces the threat of a "double-dip recession" unless the government carries out fiscal austerity measures designed to slash the mounting public debt. The government debt now stands at a record $12 trillion, suggesting higher interest burden, as the government had to spend lavishly to bail out some of the storied Wall Street banks to prevent a collapse of the financial system.

Uncertainty about how sustainable the recovery is likely to persist for quite some time and therefore, the Federal Reserve will be at a loss to determine how soon it can change its policy course. Although there is no imminent threat of pricing pressures, as reflected by falling unit labor costs, ultra-expansionary monetary policy, if maintained too long, should lead to a sharp increase in inflation expectations. The development has the potential of pushing up bond yields, which would necessitate a tightening move from the Fed.

Commerzbank expects the Fed to begin hiking rates by the middle of 2010, by which time the firm expects the unemployment rate to have fallen from its first quarter-peak. The firm expects the savings rate to have reached 6% by the timeframe. Although downside risks would not have been fully overcome, it is likely that the financial markets show some uneasiness if the Fed did not do anything in response to evidences pointing to some stability in the economic environment. An interest rate of around 1%-2% will still be considered highly expansionary.

Among the economic reports released in the week ended November 20th, the October retail sales print showed a better-than-expected 1.4% increase in sales following the revised 2.3% decrease in September. Excluding a 7.4% increase in auto sales, retail sales increased by a much more modest 0.2% in October compared to the 0.4% increase in the previous month. Strength was visible in general merchandise and food retailing, helping to offset the weakness in spending on building materials and furniture and electronics.

Core retail sales, excluding autos and building materials, showed a healthy 0.4% increase, which points towards a good gain in personal consumption in October. However, soft building material sales suggest weakness in residential investment.

The industrial production report released by the Federal Reserve on Tuesday showed that industrial production rose 0.1% month-over-month in October compared to expectations for 0.4% growth. The slowdown in industrial production growth compared to the previous month reflected a 1.7% decline in the production of motor vehicles and parts. Mining output fell by 0.2%, while utility output climbed 1.6%. Capacity utilization increased two-tenths of a percentage point to 70.7%.

The Labor Department's producer price inflation report showed a 0.3% month-over-month increase in producer prices in October, while the core producer price index fell by 0.6%. Economists had estimated a 0.5% increase in total prices and a 0.1% increase in core prices, which exclude food and energy prices. Intermediate good prices rose 0.3%, although they fell 0.2% excluding food and energy.

At the same time, the consumer price index increased by 0.3% in October following an unrevised 0.2% increase in September. Economists had been expecting a somewhat more modest increase of 0.2%. Core consumer prices, which exclude food and energy prices, increased by 0.2% in October, matching the increase seen in the previous month. The modest increase in core prices came in slightly above economist estimates of a 0.1 percent increase.

Meanwhile, the National Home Builders Association's housing market index remained unchanged at 17 in November, while economists had estimated a 2-point increase to 19. The index measuring sales expectations for the next 6 months rose 2 points to 28, while the indexes gauging current sales conditions and prospective buyer traffic rose 2 points each to 17 and 13, respectively.

However, the association noted that the readings reflect confidence levels that were prevalent at the beginning of the month, when homebuilders were facing the imminent expiration of the $8,000 first-time homebuyer tax credit.

Another housing report released last week showed that the rate of housing starts unexpectedly declined in October, although analysts pointed to uncertainty about the first-time home buyer tax credit as a possible reason behind the drop.

Housing starts fell 10.6% to an annual rate of 529,000 in October from the revised September estimate of 592,000. The drop surprised economists, who had expected starts to edge up to 600,000 from the previous month's initial estimate of 590,000.

Separately, the Conference Board reported that its leading indicators index rose 0.3% in October following a 1.0% gain in September and a 0.4% increase in August. While the index rose for the seventh consecutive month, economists had been expecting a 0.4% increase.

The manufacturing readings released during the week pointed to continued expansion in the sector, although they showed varying rates of expansion. The Federal Reserve Bank of Philadelphia said its index of regional activity in the manufacturing sector rose to 16.7 in November from 11.5 in October, with a positive reading indicating growth in the sector. Economists had been expecting a much more modest increase by the index to 12.2.

The New York Fed's manufacturing index fell to 23.51 in November from 34.57 in October. However, the index has been in positive territory for each of the past five months. The drop comes after the index rose to a 5-year high in October.

Although the unfolding week is shortened by the 'Thanksgiving Day' holiday on Thursday, the economic calendar for the week is pretty heavily loaded. Given the lackluster housing readings released in the bygone week, traders may closely watch the existing and new home sales reports for October to gauge the strength of the housing market recovery. Additionally, the S&P Case-Shiller house price index and the Federal Housing Finance Agency house price index, which is compiled by the data provided by Fannie Mae and Freddie Mac and due to be released at 10 AM ET on Tuesday may also be in the spotlight.

Other economic reports, which could have a significant impact on the market, are the Conference Board's consumer confidence report for November, the Commerce Department's durable goods orders report for October, the jobless claims report for the week ended November 21st and the personal income and outlays report for October. The week will also see the release of the preliminary third quarter GDP report.

The minutes of the November FOMC meeting and the results of the Treasury auctions of 2-year notes (due at 1 PM ET on Monday), 5-year notes (due at 1 PM ET on Tuesday) and 7-year notes (due at 1 PM ET on Wednesday) may also be important from the point of the view of the market participants, as they attempt to piece together the jigsaw puzzle regarding the economic environment.

The durable goods orders for October is likely to show growth in orders, as inventory depletion continues to support order growth. Although the October industrial production data was a bit of disappointing, regional manufacturing surveys point to continued expansion in the manufacturing sector, offering promise for durable goods order growth.

Going by the gains in the pending home sales index, existing home sales for October is likely to show an increase. Sales could receive a shot in the arm from very good affordability and the recent extension and expansion of the first-time homebuyer tax credit.

The FOMC minutes are unlikely to reveal any radical change in Fed policy, given the fact that all members of the committee seem to be reconciled to the idea that the outlook for growth and inflation remains subdued. Therefore, there is likely to be unanimous support from the committee members for holding rates at exceptionally low levels for an extended period. The minutes may reveal discussions about any future unwinding of alternative easing measures.

Gains in retail sales for October suggest an increase in personal spending, while at the same time personal income may also rise due to the support provided by wage growth arising out of strong productivity growth. According to BMO Capital Markets, the core price consumption expenditure deflator will increase modestly due to higher prescription drug costs, which could offset the impact of lower rents. Meanwhile, the second estimate of third quarter GDP is expected to be revised down due to a less positive impact from change in inventories, foreign trade and consumer spending.

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The National Association of Realtors is scheduled to release its report on existing home sales for October at 10 AM ET. Economists estimate existing home sales of 5.70 million for the month.

Existing home sales rose to a seasonally adjusted annual rate of 5.57 million in September, up 9.4% from the previous month. Single-family sales as well as condominiums/co-ops sales increased month-over-month, with the upside aided by the first time home buying tax credit, which will expire by the end of November

Inventories of existing homes fell to 3.63 million units from 3.92 million units in the previous month, with the September reading marking the lowest since January. Meanwhile inventories, measured in terms of months supply, fell to 7.8 in September from 9.3 in August. The median sale price of an existing house was $174,900, down 1.4% month-over-month and down 8.5% year-over-year.

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The Bureau of Economic Analysis is due to release its preliminary third quarter GDP report at 8:30 AM ET. The report is likely to show that the U.S. economy expanded at a 2.9% rate in the quarter.

Advance estimates revealed that the U.S. economy expanded at a 3.5% rate in the third quarter compared to a 0.7% contraction in the second quarter. Economists had expected a more modest 3.2% GDP growth.

The upturn in the GDP reflected upturns in PCE, in private inventory investment, in exports and in residential fixed investment and a smaller decrease in non-residential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending and a deceleration in federal government spending.

The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 9.05% year-over-year decline in the 20-city composite house price index for September.

The Conference Board is scheduled to release its consumer confidence report for November at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index edged down to 47.5 in November.

The consumer confidence index fell to 47.7 in October from 53.4 in September. The present situation index fell to its lowest level since February 1983 and the expectations index declined 8 points to 65.7. Weak labor market conditions are apparently behind the sinking confidence, as reflected by a 0.2 percentage point dip in people who said jobs were plentiful and a 2.6 point increase in people who said jobs were hard to get.

The Federal Reserve is scheduled to release the minutes of its November 3rd-4th meeting at 2 PM ET.

At its November meeting, the FOMC decided to hold the key fed funds rate unchanged at its historically low levels, a decision that was widely expected. Contrary to the expectations of some analysts, the central bank retained the phrase 'extended period' while referencing its views on maintaining the fed rate at exceptionally low levels, given the current economic conditions.

The central bank noted that economic activity is continuing to pick up and while discussing various sectors, the central bank said financial markets conditions remained unchanged after stating that conditions improved further in September. With respect to household spending, the committee sees expansion as opposed to the stabilization noted in September.

The commentary on inflation was retained, with the central bank expecting inflation to remain subdued for some time.

The central bank also said it would purchase a total of $1.25 trillion of agency-backed securities and about $175 billion of agency debt, a scale back from the $200 billion target it had initially. Both these transactions will be executed by the end of the first quarter of 2010.

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The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET. Economists look forward to a 0.5% increase in durable goods orders for October.

In September, new orders for manufactured durable goods rose 1.4% to $166.2 billion following a 2.7% decline in August. The increase was aided by a 7.9% jump in orders for machinery. Shipments of durable goods rose 1.1%, while unfilled orders continued to drop, declining 0.4%. Inventories were down 1%.

The Bureau of Economic Analysis is due to release its personal income & outlays report for October. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income as well as personal spending rose 0.1% in the month.

Personal income remained unchanged in September compared to a downwardly revised 0.1% growth in the previous month. At the same time, personal spending fell 0.5%, reversing some of the 1.4% growth in the previous month. Both readings were in line with expectations. The PCEI, excluding food and energy, rose 1.3% from a year-ago in September, the same rate as in the previous month.

The Labor Department is due to release its jobless claims report for the week ended November 21st at 8:30 AM ET. Economists expect a slight rise in claims to 500,000.

First-time claims for unemployment benefits in the week ended November 14th, showing that initial jobless claims came in unchanged. Jobless claims for the week came in at 505,000, unchanged from the previous week's revised figure. Economists had been expecting jobless claims to edge up to 504,000 from the 502,000 originally reported for the previous week.

The Reuters/University of Michigan's final report on the consumer sentiment index for November is scheduled to be released at 9:55 AM ET. Consumer confidence is expected to edge up in the month, with economists forecasting an increase in the index to 67 from the mid-month reading of 66, although expecting it to dip from the October reading of 70.6.

The Commerce Department is also due to release its new home sales report for October at 10 AM ET. The consensus estimate calls for an increase in new homes sales to 405,000.

New home sales fell 3.6% to a seasonally adjusted 402,000 in September from the previous month's 417,000, with the September figures representing a 3-month low. On a more negative note, sales for the previous months were revised down by a net of 26,000.

The month supply remained unchanged at 7.5 months, as new home inventories dropped to their lowest level since November 1982. The median price of a new home declined 9.1% year-over-year to $204,800, although it was up 2.5% compared to the previous month.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended November 20th at 10:30 AM ET.

Crude oil inventories rose by 0.9 million barrels in the week ended November 13th to 336.8 million barrels- a level slightly above the upper limit of the average range. However, distillate fuel inventories and gasoline inventories fell by 0.3 million barrels and 1.7 million barrels, respectively. Both distillate and gasoline stockpiles remained above the upper limit of the average range. Refinery capacity utilization averaged 80.4% over the four weeks ended November 13th compared to 80.8% in the previous week.

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No economic reports are scheduled to be released on Thursday due to the 'Thanksgiving Day' public holiday.

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