Monster Employment Survey & Railcar Loadings

So far, there isn’t much evidence that Europe’s troubles are slowing the US economy. There’s no recession in my forecast for the US, just “muddling” growth. I continue to expect that real GDP will be up by about 2% during both Q3 and Q4. While I expect that there may be earnings disappointments in the coming reporting season for Q3 results, I also see some industries that should have good news:

(1) Construction equipment and farm machinery industries are rolling along. Shipments and exports in US capital goods industries are a bright spot for the US economy. Much of that strength is attributable to construction equipment and farm machinery. Orders for these goods along with heavy trucks rose 70% (saar) during the three months through August (using the three-month moving average). That’s the best growth rate in the history of the series dating back to 1992. It augurs well for the Q3 profits of these industries.

(2) The auto industry is back on the highway. During September, retail auto sales totaled 13.1 million units (saar). That’s up from a recent low of 11.5 million units during June, and back near its high for the year of 13.2 million units in February. The industry’s production is recovering from parts shortages following Japan’s earthquake during March. In addition, the national average pump price of a gallon of gasoline was back down to $3.50 a gallon during the final week of September from a high this year of $3.96 in mid-May. That might explain why light truck sales jumped to 6.0 million units during September, the best rate since March 2008.

(3) Retailers doing well despite weak consumer macro numbers. September saw strong sales as the 23 retailers tracked by Thomson Reuters reported a 5.1% y/y rise in stores open at least a year for the month, beating expectations, for a gain of 4.6%. Both large discounters and high-end retailers beat expectations. This may reflect survivor bias, as they have less competition. The average vacancy rate at malls in the top 80 US markets ticked up to 9.4% in Q3 from 9.3% in Q2, according to data released Friday from real-estate research company Reis Inc. The vacancy rate marked the highest that Reis had on record since the firm started tracking mall data in 2000. September’s Monster Employment Index of online job ads showed the retail industry’s index edging up to the best reading since September 2008 (chart above). Retailers’ payrolls rose 13,600 during September.
 

(4) The transportation and warehousing industries are preparing for a good holiday season. September’s Monster Employment Index showed the transportation and warehousing index rising to the highest since October 2007. Payrolls were little changed during September in these two industries. Railcar loadings rose to a new cyclical high during the week of October 1, led by a new record high for intermodal containers (chart below).

(5) Help is wanted in the IT industry. The macroeconomic indicators on orders, shipments, and production for the Information Technology industries are mixed. During August, orders for computers and electronic products remained in a flat trend, which started late last year. Industrial output of computer and peripheral equipment during the month rebounded back to the record high at the beginning of this year. However, production of both communications equipment and semiconductors have been flat for several months. Yet September’s Monster Employment survey showed a sharp increase in the IT industry’s index, to the best reading since October 2008.

US Purchasing Managers Indexes

It’s official: The next recession hasn’t started yet. It certainly didn’t start in September based on the latest available batch of economic indicators. Most encouraging is that private-sector payrolls rose 91,000 during the month, according to ADP. While the non-manufacturing purchasing managers (NM-PMI) edged down from 53.3 in August to 53.0 in September, that’s still a positive sign. September’s survey of nonmanufacturing purchasing managers shows that the new orders index for this sector increased for the second straight month to 56.5. That contrasts with the comparable M-PMI index, which remained under 50 for the third consecutive month. The NM-PMI business activity index (production) rose to a six-month high of 57.1. The backlog of orders index recovered to 52.5. The bad news is that the NM-PMI’s employment index slumped to a 17-month low of 48.7, the first reading below 50 since last summer.

US Auto Sales



In recent weeks, the ECRI Weekly Leading Index has declined sharply. It did so last  summer too, supporting the dire forecasts of the Double Dippers. But it recovered during the fall, and the economy continued to grow albeit at a slow pace. The ECRI’s warning on Friday that a recession is imminent doesn’t jibe with the monthly indicators that have been coming out for the third quarter. Indeed, many of them suggest that real GDP should be up by around 2%. That’s not strong enough to lower the unemployment rate, but it beats a recession.

Among the strongest sectors of the economy right now is the auto industry. Auto sales rose during Q3, averaging 12.5 million units (saar), up 2.5% from Q2’s pace of 12.2 million units. That doesn’t seem like much, but it is boosting production. More importantly, sales ended the quarter very strongly at 13.1 million units. If they hold at that pace during Q4, then auto sales will also boost the current quarter’s real GDP. They might even do better given the decline in gasoline prices. That seems to be boosting demand for light trucks, which rose to 6.0 million units (saar) during September, the best pace since March 2008.

Another strong sector is the capital goods industry, where orders, shipments, and exports rose to new cyclical highs in August. Orders for machinery rose to a new record high during the month, led by construction & farm machinery. Also rebounding strongly are civilian aircraft orders and mining, oil field, and gas field machinery shipments. On the other hand, orders for electrical equipment have been stalled around cycle highs since late last year.

Selected Stock Market Indexes

That was a bad break yesterday. The S&P 500 dropped 32 points, or 2.89%, to 1099.23. That’s a new closing low for the year, breaking below the previous 2011 low of 1119 on August 8. That increases the likelihood that last year’s low of 1022 on July 2 will be retested. There are many stock markets around the world that have already dropped below their 2010 lows and seem to be heading towards retests of the lows of the previous global bear market in early 2009:

(1) European bourses plunged without any hesitation through their 2010 lows during August as investors concluded that the July 21 rescue plan was badly flawed. The MSCI Europe stock price index is down 17.5% since then, led by a 26.2% drop in Germany’s DAX. The major European indexes are getting closer to their March 2009 lows: Germany (46.6% above), France (16.2), Italy (16.0), and Spain (17.7).

(2) Among the major EM stock indexes, the following are trading below their 2010 lows: Hong Kong, Taiwan, and Israel. Currently retesting their 2010 lows are China, South Korea, India, and Russia.

(3) Financial stocks are also rapidly heading towards their previous bear market lows in early 2009. The FTSE Eurofirst 300 Banks Euro Index is down 33.6% ytd, and only 47.8% above its March 9, 2009 bottom. In the US, S&P 500 Other Diversified Financial Services and Investment Banking & Brokerage are down 46.3% and 47.4% ytd, respectively. The former is 76.8% and the latter is 34.3% above their respective previous bear market lows.

European markets have been slammed by concerns that the failure of European leaders to clean up the Euro-Mess will cause a recession over there. That scenario would be bad news for emerging economies that export goods and commodities to Europe. The S&P 500 has held up relatively better since early August because consensus earnings estimates have remained resilient. That may be starting to change.

2012 Earnings Estimate For Financials & Materials

Earnings and guidance are likely to be disappointing during the upcoming reporting season. Real GDP rose only 1.3% (saar) in the US during Q3, with consumer spending edging up just 0.7% (also an annualized rate!). European economic growth might have turned negative during the quarter after stalling close to zero during the first half of the year. The yield curve has flattened in recent weeks. Industrial commodity prices fell 10.8% from the end of June through the end of September. The price of a barrel of Brent is down 8.0% over this period.

Odds are that there will be lots of disappointments in the earnings season ahead, most likely led by the Financials and Materials sectors. Of course, the bad news for the quarter may have been discounted already. However, there could also be lots of cautious guidance about Q4 and 2012. Industry analysts are already trimming some of their earnings estimates for next year, particularly in the Financials sector.

As of the week of September 22, the Financials sector’s 2012 earnings has fallen 9.8% since the start of 2011, led by a 23.0% drop for Investment Banking & Brokerage (ETFC, GS, MS, SCHW) and a 17.2% drop for Other Diversified Financial Services (BAC, C, JPM). These earnings estimates have been mostly falling since the beginning of the year, but have been doing so at a faster clip recently.

 

 

The sector that is most likely to provide lots of negative earnings surprises is the S&P 500 Materials sector, where 2012 earnings have risen 10.6% since the start of 2011, led by a 17.5% increase in Diversified Metals & Mining (FCX, TIE). That’s a stretch given the recent plunge in the price of copper. Steel (AKS, ATI, CLF, NUE, X) has risen 14.0%, though Aluminum (AA) has edged down by 0.7%. The forecasts for Diversified Chemicals (DD, DOW, EMN, FMC, PPG, up 9.9%) and Specialty Chemicals (ECL, IFF, ROH, SIAL, up 1.9%) may be more realistic because the cost of their feedstock is dropping along with the price of oil.