compass financial - weekly economic commentary - june 1, 2009

8/14/2019 Compass Financial - Weekly Economic Commentary - June 1, 2009

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Last week, global financial markets braced for the bankruptcy of GM, cheered

for a quick end to Chryslers bankruptcy, all while trying to gauge the impact

of the automakers meltdown on the U.S. economy. The news on housing last

week suggested that the bottoming process in that sector continued, while

the release of the regional manufacturing surveys offered hope that the pain

of the auto bankruptcies may be contained.

This week, markets will digest the details of the GM bankruptcy, which

will allow market participants to begin to more accurately assess what the

impact to the economy will be. As the week progresses, attention will turn

to the employment picture in May, with the release of the ADP employment

report on Wednesday, the jobless claims data for the week ending May 30 on

Thursday, and the May nonfarm payroll jobs report on Friday.

Also of great interest to the market, will be the release of the weekly chain

store sales data for the week ending May 30 on Wednesday, the chain

store sales data for the month of May, due on Thursday, along with the April

personal spending report, which was released as this publication was being

written. This data will provide a sense of the pace of consumer spending

(two-thirds of gross domestic product) in the early-to-mid part of Q2 2009.Spending rose at a 1.5% annualized clip in Q1 2009 versus Q4 2008, but we

expect spending to fall in Q2 versus Q1, but only by about 1.0%.

The news on the housing market last week continued to suggest that the

long-suffering housing sector may be in the bottoming process. Why?

Existing house sales have been moving sideways since last Fall, rising to

a better than expected 2.9% in April versus March

New house sales have been moving sideways since early 2009, rising

0.3% in April versus March

The inventory of existing and new homes for sale has dropped

dramatically, with existing home sales inventory down 18% from their

July 2008 peak, and new home inventories down 48% since peaking inJuly of 2006 [Chart 1]

Soaring affordability (falling prices, historically low mortgage rates, relatively

stable incomes), along with the governments foreclosure mitigation program

have all helped. We still have a long way to go before housing can be a plus

for GDP growth, but at least it has stopped getting worse.

GM and Chrysler passed each other in bankruptcy court, with Chrysler likely

to emerge this week from a month long stay in receivership after filing on

Will the Auto Sector Turmoil Detour theEconomys Road to Recovery?

June 1, 2009

John Canally, CFAEconomist

LPL Financial

LPL F INANCIAL RESEARCH

Weekly Economic Commentary

ECONOMIC CALENDAR

Monday, June 1

Personal SpendingApril

Personal IncomeApril

ISM MfgMay

Construction SpendingApril

Tuesday, June 2

Domestic Car/Light

Vehicle SalesMay

Pending Home SalesApril

Wednesday, June 3

ADP EmploymentMay

Challenger Job CutAnnouncementsMay

ISM Non ManufacturingIndexMay

Factory OrdersApril

Thursday, June 4

ProductivityQ1

Initial Claimswk 05/30

ICSC- Chain Store Sales

(YoY)May

Friday, June 5

Unemployment RateMay

Nonfarm PayrollsMay

Consumer CreditApril


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LPL Financial Member FINRA/SIPC Page 2 of 3

WEEKLY ECONOMIC COMMENTARY

May 4, and GM filing on June 1. The question for the market is, what impact

the bankruptcies will have on the broad economy over the next few months.

First some background. U.S. auto and light truck output is now just 1.5%

of GDP, after accounting for roughly 3.5% of GDP on average since 1970,

and accounting for as much as 4.5% of GDP for much of the early 1970s.

Thus, the bulk of the auto sectors pain has probably already been felt in the

economy over the past several years. [Chart 2] In terms of jobs, auto related

employment accounts for roughly 2% of all employment. Thus far, the impact

of the Chrysler bankruptcy has been negligible on a national scale. First,

jobless claims stood at 605,000 the week Chrysler filed for bankruptcy on

May 4, and in the latest week (May 23) claims stood at 623,000, an increase

of 18,000. While, unwelcome, a rise of that magnitude suggests that the

labor market outside of autos is not experiencing any further deteriorating due

to the Chrysler bankruptcy.

In addition, the Institute for Supply Managements Survey of Manufacturing

Index rose to 42.8 in May from 40.1 in April, beating expectations of a42.3 reading; a reading below 50 signals contraction, while an index above

50 signifies growth in manufacturing. A reading on the ISM in excess of

41.2, over a period of time, generally indicates an expansion of the overall

economy. Therefore, the May ISM indicates growth in the overall

economy in May following seven months of decline, but continuing

contraction in the manufacturing sector. Note that the impact of the GM

bankruptcy (and related plant shutdowns) will also impact the June ISM data,

as will the lingering effects of the Chrysler plant shutdowns.

Regionally however, the impact has been quite large, judging from the big

drop in the Chicago Area Purchasing Managers Index in May versus April.

Much of the nations auto production occurs in the Midwest. Notably, it was

the only regional manufacturing survey to deteriorate between April andMay, thus we can conclude that in May, the impact of the auto sector turmoil

hasnt spread to other sectors of the economy. [Chart 3]

Overall its unfortunate that auto bankruptcies will muddle the economic

picture, just as the markets are trying to assess when the recession will end

and how robust the recovery might be. Our view is that the bankruptcies

at GM and Chrysler will cloud the economic picture over the summer, but

wont do enough damage by themselves to run the economy off the road

to recovery. The question is can markets look past the auto impact to the

underlying health of the economy?

As the week progresses, markets will begin to focus on the labor market

reports for May, which include:

The ADP and Challenger layoff data for May on Wednesday, which often

provide an early look into the governments jobs report

The jobless claims data for the week ending May 30 on Thursday. As

noted above, the impact of the Chrysler bankruptcy on the claims data

has been muted, with the impact from the GM shutdowns looming

The nonfarm payroll jobs report on Friday, which provides the most

comprehensive look at the nations labor market in May

1 Housing Market Bottoming Process Continues

2 Auto Sector Share of GDP has Already DeclinedMarkedly

3 ISM Suggests the Economy is Emerging fromRecession; Little Impact from ChryslerBankruptcy

Source: Realtor/Census Bureau/Haver 06/01/09

Source: Haver 06/01/09

Source: Institute for Supply Management/Haver 06/01/09

6400

6000

5600

5200

4800

4400

4000

1400

1200

1000

800

600

400

200

99 00 01 02 03 04 05 06 07 08

Existing 1-Family Home Sales: United States (left scale)SAAR, Thous

New 1-Family House Sold: United States (right scale)SAAR, THous

5.25

4.50

3.75

3.00

2.25

1.50

0.7570 75 80 85 90 95 00 05

Motor Vehicle Output as a Percent of GDP

Above 41.2% Economy Expanding

Below 41.2% Economy Contracting

80

70

60

50

40

30

20

75 80 85 90 95 00 05

ISM Manufacturing: PMI Composite IndexSA, 50+ = Increasing


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compass financial - weekly economic commentary - june 1, 2009

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