Third Quarter 2009 Economic Review

Third Quarter 2009 Economic Review

Economic Review

The semi-annual enclosure "Economic Review and Market Perspective," which provides a longer-term interpretation of economic and market data and trends, will be presented in January. An abbreviated economic review follows.

While the National Bureau of Economic Research (NBER) has not yet determined the official end date of the current recession, the continued progress in the economy and the securities markets suggests that the contraction may be over, or is at least approaching the end. Key economic data on a variety of fronts – including productivity, manufacturing, and housing – continued to show improvement for most of the period. Meanwhile, toward the end of the quarter Ben Bernanke took his optimistic “green shoots” statement one step further by saying that the recession is very likely over and that growth probably resumed during the summer.

The U.S. Government’s initiatives, such as the Troubled Asset Relief Program (TARP), the Public-Private Investment Program (PPIP) and the Term Asset Backed Securities Loan Facility (TALF), which are designed to stabilize the securities markets and heal the economy, seem to have achieved their desired short-term effects. The U.S. economy continued to improve in the third quarter with growth in GDP likely occurring during the summer months, according to Fed Chairman Bernanke. During the second quarter, GDP contracted by 0.7% on an annualized basis, which marked a substantial improvement over the 6.4% contraction experienced in the first quarter. The second-quarter GDP improvement relative to the previous quarter primarily reflected much smaller decreases in nonresidential fixed investment and in exports, an upturn in government spending (federal, state and local), and smaller decreases in private inventory and residential fixed investment.

Meanwhile, the Federal Reserve also painted a considerably improved picture of the U.S. economy for the months of July and August through their Summary of Commentary on Current Economic Conditions (“Beige Book”). The tone of this report was relatively positive and included words like “stabilize”, “improvement”, and “moderating”, which is in contrast to the prior release, which emphasized weakness and used words such as “slow”, “subdued”, and “weak.” However, the Fed’s comments about the employment market were not nearly as positive. Specifically, the Fed stated that labor market conditions remained weak across all districts.

The Fed’s comments above are consistent with the Bureau of Labor’s most recent economic news releases suggesting the labor market is still weak, as 276,000, 216,000, and 263,000 non-farm payroll jobs were lost in July, August, and September, respectively. The job losses therefore totaled about three-quarters of a million in the third quarter. The losses in September were troubling because they reversed an improvement trend begun earlier in the year and led to an increase in the unemployment rate to 9.8%, its highest level since June of 1983. As a result, the number of total unemployed persons increased to about 15 million. Since the recession began in December 2007, the number of unemployed persons has risen by approximately 7.6 million and the unemployment rate has increased by 4.9 percentage points.

As further evidence of a halting, fragile recovery, the Institute for Supply Management reported in early October that it’s ISM Index, which measures manufacturing activity, declined slightly to 52.6 in September from 52.9 in August, although the current level still indicates expansion.

The continued weakness in the labor market, however, does have a silver lining in that slack labor markets have historically been associated with limited wage pressure, which is typically a key component of inflation. The Fed also noted in the Beige Book that wage pressures remain low across all districts.

The U.S. Labor Department’s consumer price index rose a seasonally adjusted 0.2% in September. Energy prices rose, but food and rent prices fell. The so-called core index, which excludes volatile food and energy prices, also rose by 0.2% in September. Prices had increased 0.4% in August. The price index is down 1.3% from a year ago.

On the real estate front, the U.S. housing market continued to show substantial signs of improvement in July with existing home sales rising by an annualized and seasonally adjusted 7.2%, the largest one-month increase in 23 years. However, the results for August were surprisingly disappointing with sales declining 2.7% after four consecutive months of improvement. Economists had been expecting another increase. Still, even after including the weaker than expected August results, the total number of units sold (5.1 million on an annualized basis) remains 3.4% above that in August of last year. With regard to new construction, single-family housing starts rose for a fifth consecutive month in July, with an annualized 3.3% increase compared to June’s revised numbers. However, that momentum was cut short in August when single family starts declined by a preliminary 2.5%. It is important to note that the Fed recognizes there can be no substantial economic recovery without a rebound of the housing market.

Meanwhile, the financial sector continued to be in the news, but mostly for improving earnings results. Many companies in the sector exceeded earnings estimates or produced sizeable gains. However, these improvements were relative to very weak prior periods.

Outside the U.S., economic conditions have also improved considerably as key countries are beginning to emerge from deep recessions. Markit Economics reported that the Euro-zone Purchasing Managers Index (PMI) rose from 47 in July to 50 in August, its highest level in 15 months. PMI readings of 50 or above suggest growth, while readings below 50 indicate contraction. The improvement in the PMI followed a significant improvement in second-quarter European GDP, which fell by only 0.1% in the 16-country Euro area (EA16) and by 0.2% in the EU27 area on a quarter-to-quarter basis, according to Eurostat, the statistical arm of the European Union (the EU27 expands the EA16 to include UK, Sweden, Finland, and various smaller countries of eastern and southeastern Europe). During the first quarter, GDP had contracted by -2.5% and -2.4% in the EA16 and EU27, respectively. Germany and France were major contributors to the improvement in the Eurozone’s GDP, with both countries growing 0.3% during the second quarter. At the same time, the Japanese economy experienced even greater progress with GDP rising by 0.9% versus a contraction of -3.1% for the first quarter. Further, China’s GDP continued to rebound, rising 7.1% in the first half and at the same rate in the third quarter on a preliminary basis at a minimum.

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		Third Quarter 2009 Economic Review

		Economic Review The semi-annual enclosure "Economic Review and Market Perspective," which provides a longer-term interpretation of economic and market data and trends, will be presented in January. An abbreviated economic review follows. While the National Bureau of Economic Research (NBER) has not yet determined the official end date of the current recession, the continued progress in the economy and the securities markets suggests that the contraction may be over, or is at least approaching the end. Key economic data on a variety of fronts – including productivity, manufacturing, and housing – continued to show improvement for most of the period. Meanwhile, toward the end of the quarter Ben Bernanke took his optimistic “green shoots” statement one step further by saying that the recession is very likely over and that growth probably resumed during the summer. The U.S. Government’s initiatives, such as the Troubled Asset Relief Program (TARP), the Public-Private Investment Program (PPIP) and the Term Asset Backed Securities Loan Facility (TALF), which are designed to stabilize the securities markets and heal the economy, seem to have achieved their desired short-term effects. The U.S. economy continued to improve in the third quarter with growth in GDP likely occurring during the summer months, according to Fed Chairman Bernanke. During the second quarter, GDP contracted by 0.7% on an annualized basis, which marked a substantial improvement over the 6.4% contraction experienced in the first quarter. The second-quarter GDP improvement relative to the previous quarter primarily reflected much smaller decreases in nonresidential fixed investment and in exports, an upturn in government spending (federal, state and local), and smaller decreases in private inventory and residential fixed investment. Meanwhile, the Federal Reserve also painted a considerably improved picture of the U.S. economy for the months of July and August through their Summary of Commentary on Current Economic Conditions (“Beige Book”). The tone of this report was relatively positive and included words like “stabilize”, “improvement”, and “moderating”, which is in contrast to the prior release, which emphasized weakness and used words such as “slow”, “subdued”, and “weak.” However, the Fed’s comments about the employment market were not nearly as positive. Specifically, the Fed stated that labor market conditions remained weak across all districts. The Fed’s comments above are consistent with the Bureau of Labor’s most recent economic news releases suggesting the labor market is still weak, as 276,000, 216,000, and 263,000 non-farm payroll jobs were lost in July, August, and September, respectively. The job losses therefore totaled about three-quarters of a million in the third quarter. The losses in September were troubling because they reversed an improvement trend begun earlier in the year and led to an increase in the unemployment rate to 9.8%, its highest level since June of 1983. As a result, the number of total unemployed persons increased to about 15 million. Since the recession began in December 2007, the number of unemployed persons has risen by approximately 7.6 million and the unemployment rate has increased by 4.9 percentage points. As further evidence of a halting, fragile recovery, the Institute for Supply Management reported in early October that it’s ISM Index, which measures manufacturing activity, declined slightly to 52.6 in September from 52.9 in August, although the current level still indicates expansion. The continued weakness in the labor market, however, does have a silver lining in that slack labor markets have historically been associated with limited wage pressure, which is typically a key component of inflation. The Fed also noted in the Beige Book that wage pressures remain low across all districts. The U.S. Labor Department’s consumer price index rose a seasonally adjusted 0.2% in September. Energy prices rose, but food and rent prices fell. The so-called core index, which excludes volatile food and energy prices, also rose by 0.2% in September. Prices had increased 0.4% in August. The price index is down 1.3% from a year ago. On the real estate front, the U.S. housing market continued to show substantial signs of improvement in July with existing home sales rising by an annualized and seasonally adjusted 7.2%, the largest one-month increase in 23 years. However, the results for August were surprisingly disappointing with sales declining 2.7% after four consecutive months of improvement. Economists had been expecting another increase. Still, even after including the weaker than expected August results, the total number of units sold (5.1 million on an annualized basis) remains 3.4% above that in August of last year. With regard to new construction, single-family housing starts rose for a fifth consecutive month in July, with an annualized 3.3% increase compared to June’s revised numbers. However, that momentum was cut short in August when single family starts declined by a preliminary 2.5%. It is important to note that the Fed recognizes there can be no substantial economic recovery without a rebound of the housing market. Meanwhile, the financial sector continued to be in the news, but mostly for improving earnings results. Many companies in the sector exceeded earnings estimates or produced sizeable gains. However, these improvements were relative to very weak prior periods. Outside the U.S., economic conditions have also improved considerably as key countries are beginning to emerge from deep recessions. Markit Economics reported that the Euro-zone Purchasing Managers Index (PMI) rose from 47 in July to 50 in August, its highest level in 15 months. PMI readings of 50 or above suggest growth, while readings below 50 indicate contraction. The improvement in the PMI followed a significant improvement in second-quarter European GDP, which fell by only 0.1% in the 16-country Euro area (EA16) and by 0.2% in the EU27 area on a quarter-to-quarter basis, according to Eurostat, the statistical arm of the European Union (the EU27 expands the EA16 to include UK, Sweden, Finland, and various smaller countries of eastern and southeastern Europe). During the first quarter, GDP had contracted by -2.5% and -2.4% in the EA16 and EU27, respectively. Germany and France were major contributors to the improvement in the Eurozone’s GDP, with both countries growing 0.3% during the second quarter. At the same time, the Japanese economy experienced even greater progress with GDP rising by 0.9% versus a contraction of -3.1% for the first quarter. Further, China’s GDP continued to rebound, rising 7.1% in the first half and at the same rate in the third quarter on a preliminary basis at a minimum.
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