20 May 2002 Slowly, But Surely
Investors spent the week coming to terms with the increasing likelihood of a slow economic recovery, mixed corporate news, softer retail sales, renewed terrorist threats, and general apathy. The S&P was up two days and down two, not counting today. It was down 1.3% for the week. Our models were down only slightly though, due to the changes made over the last few weeks.
The reports released this week and last show improvements in many parts of the economy, but Federal Reserve governors and analysts remain very cautious in their outlooks about recovery. The Dallas Fed’s Robert McTeer said this week that the U.S. economy is growing more slowly than earlier anticipated and that the Fed may wait for some time before raising interest rates. He said that policy makers would likely hold pat while unemployment rates hover at their eight-year high of 6%. Gary Stern of the Minneapolis Fed said that the Fed sees continued low inflation that will allow for continued low rates and benefit the economy as it recovers.
Gross domestic product, a measure of all the goods and services produced in the U.S., expanded at a revised 5.6% annual rate in the first quarter. Growth was slower than the 5.8% first reported in April. However, growth is far stronger than the 1.7% rate recorded in the fourth quarter of last year. Consumer spending, as measured by personal consumption expenditures, rose at a revised 3.2% pace. Business investment, down for five consecutive quarters, fell a revised 8.2%, wider than the previously estimated 5.7% drop, as spending on equipment and software declined 2.3%. Government spending rose a revised 6.7% after previously being estimated as 7.9% gain.
A positive sign in the GDP report was that after-tax corporate profits increased after declining for all of 2001. Profits rose by 0.9% in the first quarter after a 10.6% plunge in the prior quarter. The report showed inflation continued to remain in check. The price index for personal consumption was revised up to 0.7% from 0.6%.
New home sales, just released, rose considerably more than expected to 915,000 homes in April, a pace that may make 2002 the second best on record. Low mortgage rates continue to fuel this red-hot sector. The strength helps boost the economy and those retailers that focus on household goods, such as Bed Bath & Beyond and Best Buy.
Durable goods orders showed that big-ticket items jumped 1.1% in April, with demand especially strong for cars, communications equipment and machinery. The solid advance came after orders for durable goods, items expected to last at least three years, edged up 0.2% in March. With April’s increase, orders for costly manufactured goods have gone up for five straight months, a good sign for the nation’s manufacturers, which had borne the brunt of last year’s recession and saw hundreds of thousands of jobs evaporate. But that trend may be slowing as the Labor Department reported a 9,000 decline in first-time jobless claims to 416,000 in the week that ended Saturday. The level is the lowest in eight weeks.
Thursday’s report provided further evidence that the manufacturing sector is recovering. The 1.1% increase was much larger than many analysts expected. They forecasted a 0.4% rise, according to a survey by Thomson Global markets. Orders for cars gained 12% for the month, the largest increase in nearly four years. Orders for computers and electronic products rose by 2.5%, the largest monthly rise in six months. But orders for defense goods plunged 33.3%, pulling back from the sharp gains in recent months.
The greatest drag on the market is no longer the economic recovery, but fear and uncertainty about terrorism and possible war between India and Pakistan. As you know, uncertainty provides the greatest challenge for investors. We watched the ripple effects on the stock averages all week as each official made his or her grim announcements. Markets were actually quite positive several times this week before succumbing to the fear of possible additional terrorist attacks this weekend. Today stocks will likely be weak as traders sell their positions in advance of the long Memorial Day weekend and volume will decline as investors take off early.
Next week will bring new challenges for the markets, but I hope and pray they will only be financial ones. These are difficult times and the financial markets reflect them so well, as they are excellent barometers of the world’s collective emotions.
We hope you have a safe and happy Memorial Day weekend and that our barometers provide better readings in the coming weeks.