Economic Update for March 5, 2012

THE MONTH IN BRIEF
Were soaring oil and gas prices threatening the recovery? Was a new European recession exerting a drag on the global economy? In February, these questions barely dented the prevalent optimism on Wall Street. The Dow gained 2.5% for the month and settled above 13,000 on February 28; it hadn’t closed that high since June 2008. Energy futures set the pace in the commodities sector. The housing market offered some hopeful signals. Our economy seemed to be clearly on the mend, although the economies of China and certain EU nations appeared poised for soft landings or mild recessions. It was a strangely calm month, one in which the stock market behaved like a mature bull market.^1,2

DOMESTIC ECONOMIC HEALTH
Consumer spending accounts for around 70% of the U.S. economy, so it was nice to see the biggest rise in that category in four months in January: a 0.2% increase. Consumer incomes were up 0.3% as well. Other Commerce Department statistics showed a 0.4% January gain in retail sales and a 4.0% January drop in durable goods orders (the expiring 2011 tax break on capital investment likely had something to do with that decrease). With consumer spending up, retail sales up and the jobless rate descending to 8.3% for January, the big picture of the economy looked positive.^3,4

So how did consumers feel? In a word, better. The University of Michigan’s consumer sentiment survey improved for the sixth straight month, coming at a final mark of 75.3 for February. (The gauge has not posted six consecutive months of gains in 15 years.) The Conference Board’s survey also improved in February, coming in at 70.8.^3,5

While concerns abounded about foreign manufacturing, our factory sector looked comparatively healthy, even if our premier purchasing managers index decreased in February. The Institute for Supply Management’s manufacturing PMI fell 1.7% to 52.4, but it was above 50 for the 31st consecutive month. ISM’s non-manufacturing index had come in at 56.8 for January; the 25th straight month of service sector growth.^6,7

The Labor Department noted a 0.2% January advance in consumer prices. This was only the second rise in CPI in four months. Core CPI also rose 0.2% in January. Producer prices rose 0.1% in January with a 0.4% gain in core PPI. All this looked moderate, but one spike in prices got the attention of all Americans: the price of a gallon of regular unleaded gasoline soared 8.36% in February, settling at a national average of $3.73 a gallon on February 29.^1,8

GLOBAL ECONOMIC HEALTH
As February wound down, Greece was in line for a third EU/IMF rescue package of €237 billion to attack the nation’s €350 billion in sovereign debt – €107 billion in haircuts to bond investors followed by €130 billion in loans. Was it another temporary fix to a lingering problem? If it was, it wasn’t the only continuing economic dilemma in the EU. In February, Eurozone unemployment hit a euro-era record high of 10.7% (Spain’s jobless rate is currently above 20%). The Markit Eurozone PMI came in at 49.0 for February; it hasn’t been above 50 since July. Many economists believe the EU is now in a recession.^9,1o

China’s apparent soft landing was corroborated by its latest PMI readings. Its official PMI was but 51.0 in February, up from 50.5 in January but not far from the 49.0 reading last November. Fresh data showed that Chinese consumer inflation rose 0.4% in January to 4.5% while its GDP lessened to 8.9% in Q4 2011. India’s GDP slipped to 6.1% in Q4 but its PMI remained strong at 56.6 in February; its inflation rate hit a two-year low in February.^10,11,12

WORLD MARKETS
Key benchmarks did well. In fact, gains occurred on all continents. Looking at data from Morningstar calculated in U.S. dollar terms, we see that the Nikkei 225 led the way, going +10.46% last month. Other February performances: DAX, +6.16%; Hang Seng, +6.04%; Shanghai Composite, +5.93%; CAC 40, +4.67%; FTSE 100, +3.34%; Sensex, +2.88%; TSX Composite, +2.20%; Australian All Ordinaries, +1.44%. The MSCI World Index rose 4.66% last month while the MSCI Emerging Markets Index climbed 5.89%.^13,14 

COMMODITIES MARKETS
Oil ended the month at $107.07 a barrel (and it would climb higher to open March). Oil futures posted an 8.72% monthly gain, but that paled next to the 12.67% advance for RBOB gasoline. Natural gas even rose 4.51% on the COMEX in February. Gold actually had a losing month, with futures slipping 1.52% to $1,711.30 at the close on February 29. On the other hand, silver went +4.15% and copper went +2.36%. In crops, cotton fell 4.31%, coffee retreated 6.77%, corn gained 2.97% and wheat rose 0.30%. The U.S. Dollar Index retreated for a second straight month, going -0.78%.¹

REAL ESTATE
Existing home sales had improved again in January, and a slight decline in new home sales was offset by upward revisions to the Census Bureau’s December figures. Residential resales improved by 4.3% in the first month of the year while new home sales were down 0.9%. Both the new and existing home inventories were reduced to a 6-month supply (6.1 months for existing homes, 5.6 months for new homes), which is characteristic of a normal, healthy housing market. The National Association of Realtors said pending home sales rose 2.0% in January. In yet another positive sign, the Mortgage Bankers Association reported that there had been a 28% reduction in foreclosures in 2011. On the downside, it turned out that the S&P/Case-Shiller Home Price Index had dropped 3.8 % for December.^15,16,17

From February 2 to March 1, average home loan interest rates shifted as follows in Freddie Mac’s Primary Mortgage Market Survey: 30-year FRMs, 3.87% to 3.90%; 15-year FRMs, 3.14% to 3.17%; 5/1-year ARMs, 2.80% to 2.83%; 1-year ARMs, 2.76% to 2.72%.¹⁸

LOOKING BACK…LOOKING FORWARD
The first sixth of 2012 saw the best year-opening advance in some time for the major indices. The year-to-date numbers below represent the Dow’s best start since 1998, the NASDAQ’s best start since 2000 and the S&P’s best start since 1991. At February’s end, the Dow had settled at 12,952.07, the S&P at 1,365.68 and the NASDAQ at 2,966.89.^1,2,19

Sources: online.wsj.com, bigcharts.com, treasury.gov – 2/29/12^{2,20,21,22,23} Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

While some analysts think things are weirdly calm on Wall Street, others feel that most of the economic signs hint at a better year for the consumer, the worker and the stock market investor. Q4 GDP was recently revised up to a decent 3.0%; the jobless rate has fallen 0.7% since September; consumer spending rose in January by the most since October; the real estate market is showing signs of improvement. Hopefully, headwinds from overseas will lose some velocity and exert less drag on our economy this spring and summer.²⁴

UPCOMING ECONOMIC RELEASES: Scheduled news items across the balance of March are as follows: January factory orders and the February ISM service sector index (3/5), the February jobs report (3/9), February retail sales, January business inventories and a Federal Reserve interest rate policy announcement (3/13), February’s PPI (3/15), February’s CPI and industrial output and the initial University of Michigan consumer sentiment survey for March (3/16), February housing starts and building permits (3/20), February existing home sales (3/21), a new Conference Board Leading Economic Indicators index (3/22), February new home sales (3/23), February pending home sales (3/26), the January Case-Shiller home price index and the Conference Board’s March consumer confidence poll (3/27), February durable goods orders (3/28), the third and final estimate of Q4 GDP (3/29), and February consumer spending along with the final March University of Michigan consumer sentiment survey (3/30).