Ali Mogharabi's  Instablog

For the week ending July 3, both the purchase and refi indexes showed week/week growth with no change in mortgage rates.  We note that this increase is from last week's YTD low.

It is becoming pretty tough to answer yes to this question, especially after Alcoa's Q2 earnings release.

We won't go through the earnings results as everyone is aware that they came in better-than-expected, driven by cost reduction and strong demand in China.  Another pleasant surprise was the Company's revenue figure, which was nearly $300MM higher than what the analysts were looking for.

With that said, from a macro standpoint, nearly everything else mentioned on the call was negative.  It appears that the Company's well-being is in China's hands.  We do not view the better results as a signal for an economic turnaround in the U.S. anytime soon.

It appears that it will take some time for consumption to rebound in the U.S., which could lengthen the recovery of this latest recession.

In order for consumption to rebound, we need some stabilization in the declining consumer revolving credit, combined with increase in consumer confidence.  However, both continue to decline.  We note that the increase in consumer confidence since April '09 is likely due to what we believe to be a non-warranted 33% increase in the equity market since the March lows.

What we are looking for is a combination of deleveraging, higher savings rates followed by stabilization in unemployment, all of which represent a slow recovery.

There were no surprises in the Michigan Consumer Survey published this morning.  The overall index increased to 70.8 in June, from May's 68.2.  This figure was the highest since September of last year.  However, the increase was mainly driven by the Present Conditions index, which includes the rally that we have seen in the equity market.  In fact, the Expectations index actually declined slightly to 69.2, from 69.4, indicating that consumers remain doubtful.  The decline in June reversed a three month increase which had begun in March.

We believe the American consumer is taking the right steps to survive the current crisis - deleverage and increase savings.  Of course, these steps do not help stimulate the consumer spending dependent economy in the short-term; and that's fine with us.  As mentioned in our June 17 article, "The Savings Rate Must Increase", savings rate must increase in order to reduce consumer debt, restore long-term consumer confidence, and provide capital for overall economic growth.

May's Personal Income and Outlays report, which was published earlier this morning, indicated consumers may be thinking along the same lines.  While personal income increased 1.4%, much higher than expected mainly due to government payouts, personal consumption expenditures (PCE) were only in-line with expectations, at 0.3%, which resulted in a 6.9% savings rate, the highest in 15 years.  We must note that such a high rate is driven by the higher 'government sponsored' income, which we believe (and hope) will not continue.  In fact, wages and salaries (excl. govt. payouts) decreased 10bps for the month.  That decline could have been higher if it were not for a 20bps increase in wages and salaries of government jobs.  Without government assistance, we may have seen a decline in consumption. 

While we view this morning's report as positive, we believe in order for the economy to benefit from higher savings rate, consumers will have to maintain savings rates above 6% for another 3 - 9 months.