Thursday, March 12, 2009

Today's economic report

Advance retail sales were down 0.1% in February, versus an expected drop of 0.5%, while January's advance was revised from 1.0% to 1.8%. Ex-autos, sales rose 0.7%, well above a projected decline of 0.1%. January was revised from 0.9% to 1.6%. If gasoline, autos, and building materials are removed, sales at retailers increased 0.5%, indicating that consumers have relatively stepped up spending for the second-straight month of the year despite the headwinds of the recession. The increase in spending is likely due to the pronounced weakness in holiday spending, and is likely the outcome of pent-up demand and discounted prices, where consumers shut down spending in 4Q in response to the shock of plunging stock portfolios and rapidly increasing job losses, and are out spending on the margin.

The stabilization of consumer spending is a positive, and if the trend continues it will likely be positive for manufacturers, who have been struggling to cut production fast enough to keep up with shrinking demand. However, we are unlikely to experience sustained rising consumer spending in the face of a deteriorating labor market and unhealthy consumer balance sheets. As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector Analysis, Brad Sorensen, CFA, note in their bi-weekly Schwab Market Perspective: Depression/Recession-Does it Matter? consumers are spending less in order to save more to reduce debt, build their retirement accounts back up, and increase their emergency savings to protect themselves in case of future job loss. We need to ratchet down the copious and oftentimes unsustainable debt we ran up during the past few years, which will take discipline and time. Read more on their market perspective at

Weekly initial jobless claims rose 9,000 to 654,000, versus last week's figure that was upwardly revised by 6,000, and above the Bloomberg consensus which called for claims to rise to 644,000. The four-week moving average rose 6,750 to 650,000, and continuing claims jumped 193,000 to 5,317,000. Treasuries gave up early gains and are slightly lower.

US Treasury Secretary Timothy Geithner is testifying before the Senate Budget Committee on the Obama administration's 2010 budget proposal. Geithner reiterated that the Obama administration is projecting a $1.75 trillion federal budget deficit for the current fiscal year and that it is determined to cut the deficit by half in four years. The Treasury Secretary said short-term deficits are necessary to combat a recession as well as strains in financial markets. He also noted that the US financial rescue "might cost more" than the $700 billion already approved by congress.

Liz Ann Sonders, and Brad Sorensen note in their bi-weekly Schwab Market Perspective that the Obama administration continues to throw multiple plans at the credit crisis in an attempt to stabilize lending. Unfortunately, the response of the market has been less than enthusiastic as credit spreads have stopped narrowing for the time being-with some even disconcertingly reversing direction. After the $787 billion stimulus package failed to excite investors, and the housing plan left something to be desired, the administration's proposed budget further ignited concerns regarding increased deficits in the future. Additionally, the budget proposal was broad in its scope of extending the reach of government, which added to the uncertainty. This followed previous disappointments coming from the new governmental leaders, helping lead to the market reaction and lack of confidence that we're seeing.

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