Stimulus Effects Not Yet Seen in Economic Data

U.S. equity averages roared higher Monday on better than expected results from economic indicators including Income, ISM Manufacturing, and Construction Spending reports. Income rose, manufactured new orders popped above 50 for the first time since November, and construction spending surprised higher by 0.8% compared to the expected -0.8%. The average investor heeded positive headlines and bought everything synonymous with a boisterous recovery, from consumer discretionary to industrial transport shares.

The income report showed slightly decreased consumer spending (-0.1%) and increased income (0.5%) in April, largely due to the temporary stimulus supported increases in unemployment benefits. Construction spending continues to bounce along the bottom, where the month to month April increase in total spending of 0.8% can be deceivingly optimistic. Dissecting the report shows that commercial construction spending actually fell 2.6% (-24.4% yoy) in April, while private residential spending remains depressed by 34.4% compared to a year ago.

The report is by no means a victory for the Obama administration, which has dumped $850 billion into the economy. The administration has assured taxpayers that much of the money went to "shovel ready" public projects to create jobs, yet only $62.3 billion of the total package has been appropriated to housing, transportation and urban development. More discomfort comes from comparing highway construction spending as shown in the graph of stimulus appropriations below to the actual change in national highway projects.

According to the graph (provided by recovery.org) there was $1.6 billion, $12.7 billion and $6.5 billion appropriated to highway construction in the months of February to April. According to the Census Bureau the change in monthly highway construction spending was $273 million, $2.023 billion, and $-666 million in the same three months. How can investors endorse a temporary stimulus that is unable to keep certain sectors of the economy at a net zero change after $62 billion dollars have been injected to save it?

While the S&P 500 index charged higher to slightly above 940 (200 day SMA), the rise on light volume puttered out around 945. Buyers are flocking into many large cap stocks as more and more managers fear missing the recovery, yet the statistically relevant economic data doesn't fit the move in corporate share valuations. It is a relevant and cleansing exercise to read full economic reports and legislative bills (i.e. the Stimulus Bill) to gain a broad perspective of recent events, yet most have skipped this crucial step and "jumped on the caboose" while the proverbial train began leaving the station on March 9. This is a signal for savvy investors to take a step back at a minimum and to investigate contrarion views during this crucial period.

Disclosure: No positions

Comments

[H. T. Love:]

Thanks. That proves what everyone has been saying about the composition of the Pelosi-generated "stimulus package".

As pointed at in a post by another author today, the claimed 150K "jobs saved" is well within the range of just a statistical abberation, or "noise".

How long 'til the populace wakes up to all this.

Keep up the good reporting,
HardToLove

Jun 05 10:19 AM