Woo Street's  Instablog

The Department of Labor Statistics reported seasonally adjusted initial claims came in 10,000 lower from the prior week to 390,000. The 4-week moving average decreased to 400,000.    The labor market, for the past couple of months, has shown a trend of super slow, yet consistent improvement. Insured unemployment rate remained unchanged at 2.9%. 

The U.S. trade deficit contracted from $44.9 billion to $43.1 billion in September. The driver was increased exports as they totaled $180.4 billion (up from $177.9 billion). Imports also increased to $223.5 billion. Industrial supplies, consumer goods, autos, and capital goods exports all increased. The stronger than expected exports will likely lead to stronger Q3 GDP numbers and momentum for Q4.

On the other side of the pond, China reported slowing export growth. Their exports decreased to 15.9% in October from 17.1% in September. I think this is fairly consistent with the world economy. Europe and the U.S. are dealing with sovereign debt crises. Debtor nations don’t have the capacity to consume like they did in the past and will gradually cut back. 

President Obama meets with Chinese President Hu Jintao this weekend and will likely talk about the exchange rate between China and the USD. Given China is an export driven economy and its exports are slowing, I doubt President Jintao will concede and let the Yuan appreciate. If China let the Yuan appreciate, exports would be more expensive to foreign (U.S.) consumers and decrease demand. This would further hurt China and its economy during a time when some economists are calling for a hard landing. Also going against President Obama is the fact China’s inflation rate cooled slightly to 5.5%. One of the U.S.’s arguments is that by keeping the Yuan pegged to the USD, China cannot control inflation because the U.S. keeps printing money. This is true, but I think the Chinese government would rather deal with inflation problems than a collapse in exports.

The U.S. Bureau of Labor Statistics reported the U.S. economy added 80,000 net new jobs in October. Further, the unemployment rate dropped .1% to 9%. August and September numbers were revised upward by 47,000 and 55,000, respectively. Also encouraging was the increase in labor force participation to 64.2%. As Americans become more confident they can find work, they re-enter the labor force and hopefully generate some sort of income. Also, the U-6 measure declined from 16.5% to 16.3%. Average workweek remained unchanged at 34.3 hours and average hourly earnings increased 5 cents. 

The U.S. Census Bureau reported new durable goods orders decreased .8% MoM for September. This measure came in negative for three of the last four months. Still, stripping out the volatile transportation component, new orders actually increased 1.7%. On the flipside, excluding defense, new orders decreased 1.1%. It’s certainly true the economy will benefit from defense spending right now and in future months, but the reason I pointed it out is because I believe defense spending will gradually be cut back. President Obama announced U.S. troops will be out of Iraq by year-end, which signals lower need for military equipment. Further, there is political pressure to cut back spending on almost everything and the military is no exception. On the consumer side, core capital goods increased 2.4%. Unfilled orders increased .8% which suggests manufacturers have a backlog of demand to meet. Looking forward, capital expenditures have improved in recent months and suggest manufacturing will remain a strong point.

The advance estimate of Q3 GDP came in at 2.5%. Personal Consumption Expenditures increased 2.4%, which is at odds with consumer confidence levels. The price index increased 2% (Q2 saw a 3.3% increase), which doesn’t bode well for low- and middle-income Americans. Real disposable income decreased 1.7%. I am quite worried about inflation eating away at Americans’ purchasing power and already low disposable income. Further worrisome, the personal savings rate decreased to 4.1%. Americans are drawing down their savings which is providing a temporary stimulus to the economy. This cannot last, however, because at some point their savings and ability to borrow will run out. It seems counter-intuitive to think about but our economy needs consumers to spend more in the short-term to jump start our economy but also to save more in the long-term. Nevertheless, this report quelled many economists’ fears of slipping back into recession, for now. Momentum for Q4 performance remains strong.

The ISM October report came in at 50.8, down from 51.6 in September. The headline number is weak, mostly because of the inventory component decreasing 5.3%. However, given the decreasing inventory, looking ahead, businesses will need to ramp up orders to replace their lower stock. This is favorable for coming months and is consistent with the Durable Goods report. Prices decreased 15%, which may provide a clue to the direction of future inflation. The employment component decreased .3% but remained about the 50% threshold that signals manufacturing employment remains healthy.