Weekly Economic Commentary: Week of May 21

WEEKLY ECONOMIC COMMENTARY

Stone & McCarthy Research Associates

WEEK OF MAY 21, 2012

If the financial markets like to climb a “wall of worry”, as pundits claim, they are having a field day. Like a bad penny, the Greek debt crisis continues to be a recurring nightmare for investors, with no endgame in sight. The odds of an eventual exit of Greece from the euro zone are climbing steadily, and experts have spent the past several weeks debating what the ramifications would be. Some believe the aftereffects can be contained while others fear a domino effect, with weaker members of the EU becoming victims of contagion. One thing is clear: The cracks are clearly showing up on the political front, spurring election upheavals in Greece, France and yes, even Germany, the bulwark of fiscal austerity.  

Clearly, the European fear factor is taking a toll on the stock market, where prices have fallen by more than 7 percent so far in May. But investors have more on their plate than just the European debt crisis. Although it is still early in the game, a homegrown crisis on the fiscal front is starting to brew as the national debt moves closer to its upper limit.  In a speech earlier this week, House Speaker Boehner said that when the time comes to raise the debt ceiling again, he would insist on "my simple principle of cuts and reforms greater than the debt limit increase." According to some members of the Washington punditry, Boehner's comments were aimed more at members of his own party, and were designed primarily to ensure that he keeps his job as Speaker, assuming Republicans retain control of the House after the election.

Who knows for sure? One thing that is clear, however, is that Treasury will hit the current debt ceiling later this year. And it's hard to imagine that the debt ceiling won't get tied up in battles related to the "fiscal cliff" looming at the end of the year. As Boehner noted in his speech "it's an action-forcing event in a town that has become infamous for inaction.” There is probably a small chance that Republicans and Democrats agree before the election to defer action on taxes and spending cuts until the new Congress and Administration convene next year. That could be done with temporary measures that avoid the cliff -- for example, current tax rates could be extended for the first few months of 2013. If last year's experience is any guide, however, we shouldn't hold out much hope that Congress will take the least disruptive course. Either way, the debt ceiling will have to be increased -- probably by the end of January.

We have prepared a preliminary forecast for when Treasury will violate the current $16.394 trillion debt ceiling. As of May 15, it had $720 billion in room left under the limit. Based on our projections, Treasury would hit the debt ceiling at the end of November, with the settlement of 2-, 5- and 7-year note auctions. If our projections are accurate, the administration would have to resort to its special measures to create more room under the debt ceiling starting in December. Those measures would provide Treasury with about $250 billion in extra borrowing authority, which we think would be sufficient for about two months. However, you can be sure that Republicans will shine the public spotlight on such budgetary shenanigans, intensifying the fiscal debate in the months leading up to the elections.

The risk is that businesses will defer spending and hiring until a clearer picture of how fiscal policy will impact the economy in 2013 emerges. If nothing is done and the economy bears the full brunt of the looming $8 trillion fiscal cliff (i.e. allowing all of the Bush and Obama tax cuts to expire, extended unemployment benefits to run out and mandated spending cuts to take place), as much as 5 percent of GDP could be at stake, which would surely put the recovery at risk. Such an irresponsible policy is not likely to happen, of course, and the business community will probably take the fiscal debate in stride, albeit operate with more caution than it otherwise would. Even the Federal Reserve took note in its latest FOMC meeting (according to the minutes released this week) of the downside risks that uncertainty over fiscal policy pose to the economy.

That said, amidst the prospective headwinds from the Greek debt crisis and the U.S. fiscal cliff, the economy is shaping up to be a beacon of light over the near term. Indeed, there has been a subtle shift in perceptions over growth prospects during the past few weeks. Yes, the revised estimate for the first quarter will probably result in a lower growth rate than the initial tally of 2.2 made last month. But the downshift is not spilling over into the second quarter. Indeed, the outlook for the April-June period has brightened somewhat, thanks to robust figures on production and better than expected reports on housing and consumer spending.

The most promising development was the muscular 1.1 percent increase in industrial production for April reported this week, matching the strongest monthly gain in nearly two years. While the auto industry was the main sparkplug, production gains were spread over a wide array of sectors, with sizeable increases by producers of computers and electronic products as well as business equipment and furniture. But automakers were the stars of the show last month, stepping up output by 3.9 percent. Nor is this a one-off event, as auto output has been a major growth driver since the year began, accounting for fully one-half of the 2.2 percent growth rate in the first quarter. The auto contribution stayed high as the second quarter got underway. Indeed, auto assemblies in April hit a 10.78 million annual rate, the highest since August of 2007.

Keep in mind that the auto industry has long tentacles that ignite increased activity across a broad swath of other industries – from makers of steel and glass who benefit from higher vehicle output, to truck haulers that transport the vehicles to their retail destinations to mom and pop stores around local dealerships that welcome more customers when traffic at showrooms increase. The National Association of manufacturers estimates that each dollar spent in the auto industry generates $2.02 of additional revenue for the overall economy. The open question is whether the revival in auto output reflects a genuine upswing in demand or is mainly a belated rebound from the extremely depressed sales during the 18-month recession that began in December 2007. The encouraging news is that there is potentially more room to grow; while the sales pace this year has risen to a 14.5 million annual rate, up from 10.4 million in 2009, it remains well below the 16.7 million pre-recession average that prevailed from 2002 through 2007.

But for the ramp up in production to be sustained, it needs support from the demand side. Clearly, the slowdown in job creation in April – the 115 thousand increase in nonfarm payrolls was the weakest in six months – is not a positive omen for continued sales of big-ticket items. But the labor market shows every sign of staying on a steadily improving path, as manifested by the ever-shrinking number of people filing for jobless benefits and a significant increase in job openings. The consensus estimate is for a meaningful rebound in job growth in May to about 175 thousand. As it is, households are not cutting back expenditures to any significant extent. While retail sales eked out a much smaller gain of 0.1 percent in April than the sturdy 0.7 percent gain posted in March, the early Easter holiday skewed the results by pulling forward sales of apparel and clothing as well as other goods at department stores usually associated with the holiday.

The more relevant perspective would be to average March and April results to smooth out the holiday distortion. What this shows is that the surprisingly strong 2.9 percent gain in real consumption expenditures registered during the first quarter was not entirely a fluke linked to the abnormally warm winter, as most economists surmised.  To be sure, April is only the first month of the quarter, but there was enough momentum implied by the retail sales report to support a 2.5 percent consumption increase for the second quarter. If that turns out to be the case, the weather-related payback will be much less than expected a few weeks ago. Even more promising is that households are set to enjoy a nice boost to discretionary incomes from the astonishing plunge in oil prices over the past several weeks, foreshadowing lower gasoline prices. Prices at the pump have fallen for six consecutive weeks, and another drop is baked in for this week as well. On Friday, crude oil prices slid to below $92/gallon, more than $8 less than a year ago.

Finally, there are more signs that the long-ailing housing sector is turning the corner. Starts posted a solid 2.6 percent increase in April to a 717 thousand annual rate, and revisions to past data show more strength this year than previously thought. Builders are more optimistic about future activity – the homebuilder’s sentiment index hit a five-year high in May – mortgage delinquencies are falling and home prices in many regions are stabilizing or even rising. Make no mistake, the industry is far from healthy – the normal pace of starts is over 1 million units and the foreclosure pipeline is still huge. But the sector is no longer as much of a drag on the overall economy as it had been over the past five years, and construction workers are actually finding jobs. The question is whether the economy can stay on its firmer footing in the face of gathering storms from overseas that is clearly roiling the financial markets and has the capacity to undermine consumer and business confidence. 

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J.P. Turner Voted Top 100 in “Best Places to Work in the Global Financial Markets”

For the third consecutive year, J.P. Turner is ranked in the top 100 Best Places to Work in the Global Financial Markets by Here is the City News (a London publication).

J.P. Turner & Company, LLC was once again voted one of the top 100 best places to work in the global financial markets for 2012, according to a poll conducted by Here is the City, a London-based financial news publication.

"Those of us that work for J.P. Turner aren't surprised that the firm would rank so highly," commented Tony Mowrer, branch manager for their Atlanta office. "The company was founded by two independents, Tim McAfee and Bill Mello, and they truly understand the support we need to grow thriving businesses. They take a proactive approach - expanding services and products as reps, investors and the marketplace demand so we remain competitive and generally ahead of the curve."

About J.P. Turner & Company, LLC:

J.P. Turner & Company, LLC (Member SIPC) is an independent broker/dealer headquartered in Atlanta. Advisory and financial planning services are offered through its affiliate, J.P. Turner & Company Capital Management. Founded in 1997 by Bill Mello and Tim McAfee, the company has grown to more than 200 independent branch offices throughout the United States and has been voted one of the top independent broker/dealers in the country annually by Investment News, Top 50 Independent Broker-Dealers by Financial Advisor Magazine and Best Places to Work in Georgia by Georgia Trend Magazine. To learn more about the firm and its services, please visit www.jpturner.com.

Weekly Economic Commentary: Week of May 14

WEEKLY ECONOMIC COMMENTARY

Stone & McCarthy Research Associates

WEEK OF MAY 14, 2012

After a relentless stream of disappointing reports, it's nice to receive a dollop of good news for a change.

Make no mistake; nothing that came out of Washington's data mills this week can be considered a game-changer. But at least the negativity that has been overhanging the economic landscape in recent weeks has been lifted a bit, offering a kernel of hope for optimists who believe that the softness portrayed in some key indicators is nothing more than a temporary blip on the road to better times.

To be sure, we are not factoring in the European debt quagmire, which seems to sink into deeper quicksand with each passing day and is no doubt playing havoc with investor psychology. If the new Greek government, whenever it is formed and whatever shape it takes, continues to play chicken with Europe's policy makers, dominated by Germany, and is willing to rupture the single-currency union to achieve debt relief, then all bets are off. Under those circumstances, it would be almost impossible to guess what the financial fall-out in the U.S would be, and the knock-on effects it would have on investor and public confidence. That said, we have seen this tug-of-war drama before; each new tremor causes the financial markets to buckle but not break, reflecting perhaps the tenacious view that rational minds will eventually prevail and arrive at a sensible compromise.

Absent a confidence-shattering blow from oversees, the U.S. is showing signs of emerging from its latest soft patch. Paradoxically, there is a good chance that the first quarter's growth rate, initially pegged at a sluggish 2.2 percent, will be revised lower when the second tally is released at the end of this month if only because of a slower than expected pace of inventory restocking by wholesalers in March reported this week. But that's looking through the rear view mirror at conditions ending more than a month ago. Of more relevance is what's happening now and what the forward-looking indicators tell us will happen in coming months. Here's where this week's reports - admittedly a slim package - come into play. Put simply, the signs of an improving labor market, business and consumer sentiment and credit conditions were clearly on display.

Let's start with small businesses, the backbone for job creation, which have been severely hampered throughout the recovery by an array of forces, some unique to smaller firms and some shared by the general business community. In April, the National Federation of Independent Business (NFIB) small business optimism index recovered 2 points to reach 94.5, regaining its upward movement after briefly dipping lower to 92.5 in March. The April reading equaled the 94.5 in February 2011, which was the highest since December 2007 - the last month of the previous expansion. Contributing to the April rise were solid gains in earnings and increased plans for hiring and capital expenditures, as well as improved expectations for the economy and credit conditions.

As the chart shows, the NFIB index also got off to a good start in 2011 before getting derailed by a series of disruptions -- natural disasters and geopolitical events - that restrained growth in the broader economy and increased uncertainty in the outlook. Although the divisive political environment in the US remains and financial conditions in Europe are volatile, the US economy appears to be more stable. Without the drag from a series of natural disasters here and abroad, prospects for growth in 2012 are more upbeat. It appears that the March dip in the index reflected primarily the spike in gasoline prices, which receded in April and continues to slip in May. With the easing of this immediate pressure on budgets, businesses are able to once more allocate spending for payrolls and infrastructure improvements.

The largest change in the components of the index was in the earnings trend, up 11 to -12% in April - the highest reading since prior to the onset of the recession. This is a hopeful development, and suggests that businesses may be both more able and more inclined to hire new workers and to invest in infrastructure for their operations. Possibly contributing to higher earnings were higher prices. In April, 23% of respondents reported plans to increase prices, up 2 points from March. This index has been rising steadily since January, along with gasoline prices. The next largest change was in plans to increase employment, which was up 5 to 5%. This was a return to a modest upward trend after the neutral reading in March. Although the index remains below its pre-recession levels, the general direction is for modest, steady gains.

There was also a decent rise in plans to make capital outlays of 3 points in April to 25%, the highest reading since 26% in June 2008. The April number was not far off the levels seen in the early stages of the recession. This component has been hovering between 20% and 25% for over a year. Plans for capital spending remain fairly steady, but could accelerate if the earnings trend remains firmer. Finally, the expected credit conditions component rose 3 to -8%, which was consistent with levels seen at the start of the recession and before the credit crunch took hold in earnest. Significantly, The availability of loans is returning to levels generally prevailing during periods of expansion.

To be sure, the recovery will not gain much traction unless the big guys start to do more of the heavy lifting. Thus far, the large corporations have shown a willingness to replace ageing machinery and software and rev up operations in response to solid gains in exports. But investment spending in general has not been as much of a growth catalyst as it usually is during upturns. Instead, companies are hoarding their ample cash inflows, holding a record $2.23 trillion in liquid assets at the start of the year. However, the nascent revival in small business prospects could be a positive omen that ultimately unlocks the cash trove and spurs stronger increases in capital spending. That's because the behavior of small business owners mirrors that of households in general. If household demand picks up, business investment will follow.

Granted, the behavior of households has been anything but decisive, as the 2.2 percent growth rate in real personal consumption expenditures over the eleven quarters of the recovery is more than a percentage point below the long-term average dating back to 1960. But recent signs have been promising. One of the bright spots of the first quarter's disappointing GDP report was the sturdy 2.9 percent increase in personal consumption expenditures. While the quarter ended on a weak note, households may have regained their mojo in April. At the very least, they are spending the second quarter in a much better mood than was the case during the earlier months of the year.

According to this week's reading by Reuters/ University of Michigan, the consumer sentiment index took a surprisingly upward turn, rising to the highest level since January 2008 in early Mary. The 1.4-point increase to 77.8 included a much more upbeat feeling about current conditions, whereas the expectations component actually slipped from April. The divergent paths probably reflected some relief from the drop in gasoline prices (the current conditions component) and rising trepidation over how the looming political battle over expiring tax cuts will impact the economy next year (the expectations component). However, perceptions of current conditions correlate more closely with spending, so the nice bounce there will hopefully presage stronger consumer spending in April and May.

We will be getting retail sales figures for April next week and it will be interesting to see if the solid 0.8 percent gain posted for March will hold up in light of the expected weather-related payback (the weakness in overall personal consumption in March reflected primarily soft spending on services). One promising note that is shared by the small business segment is the easier access to credit that households appear to be enjoying. What's more, they are showing a much stronger willingness to take on new debt. That is strikingly illustrated in this week's consumer credit report, which revealed an astonishing $21.4 billion surge in credit in March, the strongest monthly increase since a $28 billion rise in November 2001. Nor was the March increase a one-off event, as credit growth has been accelerating since last fall. Indeed, the $48 billion gain in the first quarter was the largest for any quarter since 2000. No doubt, some fraction of the borrowing increase is being taken to plug the shortfall in income growth, enabling households to maintain living standard. But restrictive credit conditions have been a major growth impediment throughout most of the recovery and the reopening of the credit spigot should be regarded as a welcome development.

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Clint Gharib to Serve as Panelist During Financial Advisor Magazine’s Retirement Symposium

J.P. Turner’s Clint Gharib is scheduled to serve as a panelist for the “Big Retirement Investing Challenge” at the 3^rd Annual Financial Advisor Retirement Symposium in Weston, Fla. on May 7-8.

Clint Gharib, national sales manager for J.P. Turner & Company, LLC, will participate in a panel discussion that focuses on retirement challenges during the Financial Advisor Retirement Symposium, hosted in Weston, Fla. on May 7-8, 2012. The conference will assemble key industry experts and prominent advisors to share their insights and strategies. The symposium provides advisors with a forum to hear and share ideas on the realities of retirement, issues they face with clients and the latest top-level strategies that address client goals.

Clint joined J.P. Turner in 1998 and served as Director of Insurance and Managed Products until he was promoted to his current position as Director of National Sales in 2012. Under his direction, from 1998 to 2003 J.P. Turner expanded to offer bonds, mutual funds, insurance products and managed money programs. As a result, the company has grown its mutual fund and managed money programs to over $1 billion, the firm's bond desk to some $60 million/month, and insurance products to $500 million.¹ As a Certified Financial Educator with 20+ years of industry experience he advises both clients and financial representatives. He provides investment advice to the financial representatives of J.P. Turner as well as individual and institutional clients in some 40 states. He’s been quoted in numerous media outlets including Dow Jones and WSJ.com, as well as appeared on an ABC news affiliate.

J.P. Turner & Company, LLC (Member SIPC) is an independent broker/dealer headquartered in Atlanta. Advisory and financial planning services are offered through its affiliate, J.P. Turner & Company Capital Management. LLC. Founded in 1997 by Bill Mello and Tim McAfee, the company has grown to more than 200 independent branch offices throughout the United States and has been voted one of the top independent broker/dealers in the country each year since 2003 by Investment News and Financial Advisory Magazine and Best Places to Work in Georgia by Georgia Trend Magazine. To learn more about the firm and its services, please visit www.jpturner.com.

1.     Mutual funds involve investment risk, including fluctuating returns and possible loss of principal. 

Weekly Economic Commentary: Week of May 7

WEEKLY ECONOMIC COMMENTARY

Stone & McCarthy Research Associates

WEEK OF MAY 7, 2012

Is it deja "blues" all over again? This Friday's employment report certainly conjured up that unwelcome prospect, as the 115 thousand nonfarm jobs created in April was disappointingly weak. It was the second consecutive month of weaker than expected results, reinforcing the view of many pessimists that the economy is poised to repeat the spring/summer slowdowns that followed surprisingly strong data in each of the past two years. At the very least, the latest job numbers provide more fodder for spin masters of opposing views on the economy to present their case.

Clearly, the ones espousing a downbeat view of the economy would seem to have the upper hand at the moment. After all, the consensus of economists expected an increase of about 165 thousand jobs in April, representing a modest bounce back from the disappointing 120 thousand originally estimated for March. Nor was the weak jobs report an isolated event. Other data in recent weeks have portrayed a slowing economy, including new durable goods orders, home sales and consumer spending. With regards to the latter, the decent increase in retail sales reported for April was not confirmed by the broader measure of personal consumption that includes services as well as goods. Prior to the jobs report this week, the Commerce Department reported that personal consumption expenditures, adjusted for inflation, eked out a tepid 0.1 percent increase, the slowest since December. The spending slowdown reinforces the perception that the first quarter ended on a weak note. If the April jobs report is any indication, the second quarter started with little momentum as well.

As was the case last year and the year before, the economy is no doubt experiencing some payback from the strength seen over the winter months. In the six-month period from last September through February, job growth averaged 204 thousand a month, so the drop off over the past two months has been palpable. To be sure, the unemployment rate fell again, this time to 8.1 percent from 8.2 percent in March. But the decline can hardly be spinned as a positive development, although the headlines will certainly portray it as such. Most of the decline was due to workers leaving the labor force, which fell by 341thousand in March and reduced the labor force participation rate to 63.6 percent, the lowest since 1981. Needless to say, Republicans will have much ammunition to criticize the administration for its handling of the economy, and the party's front-runner Mitt Romney predictably declared that the jobs report was "terrible and very disappointing".

But the Obama camp is not without defenses. Yes, the report was disappointing, but it hardly was terrible. For one, the payback from earlier strength is not as pronounced as it was in both 2010 and 2011, as the chart demonstrates. Admittedly, the steep fall-off in 2010 was an artifact mainly of the wild swings in temporary Census worker hiring by the Government. But job growth in the private sector has held up much better this year than in either of the previous two. What's more, the latest fall-off in hiring has to be seen with a somewhat jaundiced eye, if only because the odds are big that the April data will be revised higher in coming months. This is something that cannot be overemphasized. In 23 of the past 25 months, the government has revised up its initial estimate of job creation in subsequent months.

This month's report was no exception. The March increase in nonfarm payrolls, originally estimated at 120 thousand, was revised up to 154 thousand and the February gain was boosted from 259 thousand to 275 thousand - a combined 53 thousand upward revision for the two months. If this increment were added to the 115 thousand estimate for April, the result would be a gain of 168 thousand - not great, but not too shabby either. From our lens, when back data are continuously revised higher, it suggests there is more underlying momentum that is not being fully captured by current data. Given recent history, it would not be a stretch to expect an upward revision to the April estimate in next month's report.

For another, at least part of the giveback in job creation is related to weather distortions, which we have discussed many times in recent commentaries. The unusually mild winter pulled forward activity that would ordinarily have taken place in the spring, thus imparting an artificial heft to the winter numbers even as it detracts from the spring. The most obvious weather-sensitive sector is construction, where this influence can clearly be seen in the numbers. Construction workers have lost jobs in each of the past three months, following sturdy gains in December and January totaling 44 thousand. Our calculations show that all weather-sensitive industries added 34 thousand jobs in April and 51 thousand in March, following an average gain of 70 thousand in the four months ending in February. That accounts for a fairly sizeable chunk of the jobs slowdown.

Another one-off influence that appears to have depressed April figures is the timing of the Easter holiday, which fell smack-dab in the middle of the week the government took its employment survey. This included school closings, which removed 11 thousand education workers off of payrolls. Likewise, a surprising 17 thousand drop in warehousing and transportation jobs during the month reflected, according to the Labor Department, the temporary layoffs of 11 thousand school bus drivers. Taking everything into consideration (except the likelihood of prospective upward revisions), we believe that the average increase of 176 thousand jobs over the past three months is more indicative of the underlying trend. That may seem like a decent enough trend, but not when viewed in the context of the vast number of jobs lost since the Great Recession started in late 2007. A nifty tool developed by the Hamilton Project, an arm of the Brookings Institution, tracks how long it would take to recapture all of the jobs lost since then plus an assumed growth in the labor force of 88 thousand a month. At a pace of 176 thousand a month, it would take 10 years and eight months to close the gap - not an alluring prospect by any means.

It would be hard to deny that there were more negatives than positives in the April jobs report. Indeed, the financial markets clearly latched onto that interpretation; the S&P 500 index suffered its steepest one-day drop since April 10 and the second largest of the year while the "risk-off" trade returned in full force, with Treasury yields falling further below 2 percent to 1.88 percent at the end of trading on Friday. To be sure, investors had a bucket of worries to fret over besides the jobs report. Key elections in Greece and France are being held over the weekend, which could influence how European policy makers address the never-ending debt crisis. At last count, 11 of the 17-euro zone countries have already fallen back into a recession, and the continued push for fiscal austerity is stirring up social unrest as well as intellectual critics far and wide. Add the political bickering in the U.S. that is sure to heat up as the campaign season unfolds, and the stage is ripe for some confidence-shattering events in coming months.

But just as it was a mistake to extrapolate the economy's artificial strength over the winter into the future, it would be just as risky to assume that the recent weakness is the start of a pronounced slowdown. Even the April jobs report taken in isolation does not support that notion. The 115 thousand increase in nonfarm jobs, for example, masks a larger 130 thousand gain in private sector jobs. That includes another respectable 16 thousand increase in manufacturing jobs - the fifth consecutive month of double-digit gains totaling 167 thousand. What's more, the upward revisions to previous private sector jobs were larger than for all nonfarm jobs. Indeed, the Obama camp can claim one accomplishment on the jobs front: private sector jobs finally surpassed the level that prevailed during his first month in office in January 2009. Of course, there is still a gaping shortfall of 4.6 million jobs relative to the peak level in January 2008.

Then there is the fall in the headline-grabbing unemployment rate to 8.1 percent, which is the lowest since January 2009 and a full percentage point below last summer. Critics point out that the decline is more a reflection of discouraged workers dropping out of the labor force than of new hiring. As noted, the labor force participation rate, at 63.6 percent is the lowest since December 1981. Clearly, there is some merit to this notion, but less so since the pace of job growth has picked up late last year. Indeed, a closer examination of the figures for April indicates that it may not even apply for the latest drop. The Bureau of Labor Statistics puts out an experimental set of data - known as Gross Flows data - that gives more context to this phenomenon.

What the BLS gross flows show is that of the 341 thousand drop in the labor force in April, the largest fraction consisted of 244 thousand workers who held jobs in March before dropping out. These workers could have voluntarily retired, gone back to school or left the labor force for some other reason than being discouraged. On the other hand, the decline in the labor force stemming from people who were unemployed in March and then dropped out was just 39 thousand. Put simply, the argument that most of the decline in the labor force participation rate is a product of unemployed workers giving up hope is not supported by the Gross Flows data.

Again, we don't want to heap praise on the latest jobs report. Hiring needs to pick up significantly to heal the deep wounds in the labor market created by the Great Recession. Long-term unemployment remains a formidable problem, which requires more than just conventional policy actions to solve. And wages are still growing far to slowly to support a pace of consumer demand that would put the recovery on a desirable growth track. That said, we don't view the recent job numbers as the start of a particularly worrisome trend yet. Nor will they prod the Fed into taking new action to stimulate activity. That said, another few months of disappointing job reports could well spur the Fed into action. Stay tuned.

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J.P. Turner Promotes Daniel Forbes to Area Vice President

Daniel Forbes was recently promoted to Area Vice President for J.P. Turner and will assist in supervising J.P. Turner’s national network of independent offices.

J.P. Turner & Company, LLC appointed Daniel “Danny” Forbes as Area Vice President in their Supervision Department. Danny joined J.P. Turner in 2005 and most recently served as Operations Liaison in the firm’s Operation Department where he built effective and successful relationships with the firm’s network of branches across the country. His promotion to Area Vice President will allow him to continue with those relationships and move from a task-oriented role to a supervisory one.

“Danny is a self-motivated professional with a strong work ethic,” commented his former supervisor Adam Simon, vice president of operations. “This is a great next step for Danny’s career. He will excel as a supervisor.”

Danny got his start in financial services in 1997 when he joined Bear Stearns’ Management Training Program. From there, he worked for companies such as Goldman Sachs, JP Morgan, Fortress Investment Group, and Liberty Tax. Danny completed his undergraduate studies at Pace University in New York, where he earned a Bachelor of Science in Finance. He holds series 7, 63, 24 & 79 registrations.

J.P. Turner & Company, LLC (Member SIPC) is an independent broker/dealer headquartered in Atlanta. Advisory and financial planning services are offered through its affiliate, J.P. Turner & Company Capital Management. Founded in 1997 by Bill Mello and Tim McAfee, the company has grown to more than 200 independent branch offices throughout the United States and has been voted one of the top independent broker/dealers in the country each year since 2003 by Investment News and Financial Advisor Magazine and Best Places to Work in Georgia by Georgia Trend Magazine. To learn more about the firm and its services, please visit www.jpturner.com.

Weekly Economic Commentary: Week of April 30

WEEKLY ECONOMIC COMMENTARY

Stone & McCarthy Research Associates

WEEK OF APRIL 30, 2012

Remember the Goldilocks economy, those halcyon years of the mid-1990s when conditions were neither too hot nor too cold? On the surface, it would be easy to conclude that we are enjoying such as condition today. After all, the economy is growing at about its optimal pace, neither fast enough to increase inflation nor slow enough to raise the unemployment rate. Of course, such an assessment would be a misreading of actual conditions. Goldilocks may have found the porridge suitable to her taste, but in the real world the recipe being cooked for this economy is hardly flavorful.

Yes, the U.S. economy has turned in a respectable performance over the past six months, growing at an average annual rate of 2.6 percent. That's close to its long-term potential growth rate, determined by the normal increase in the labor force and productivity changes. But this would be an optimal condition only if the economy were operating at or close to its potential, which is clearly not the case. Thanks to the Great Recession and the tepid recovery that followed, there remains a yawning gap between what the economy is producing and what it is capable of turning out. Likewise, there is a huge amount of slack in the labor force, with more than five million workers dropping out over the past four years and another 7.7 million being forced to work part time because they can't get full time positions. Then there are the 12.7 million on the unemployment lines, constituting 8.2 percent of the shrunken labor force.

Clearly, the economy has a big hole to climb out of, and a 2.6 percent growth rate will not do the job. Even worse, the recovery appears to be losing momentum. According to Friday's GDP report, the growth rate slowed to 2.2 percent in the first quarter from 3.0 percent in the previous quarter. Not only was that below expectations - which hovered between 2.5 percent and 3 percent in recent weeks - it resurrected the ominous perception that the economy was about to repeat the spring/summer swoon that followed temporary growth spurts in both 2010 and 2011. Many of the signals that characterized those years are present. The March employment report was the weakest in six months, production faltered and orders for capital goods took a steep dive during the month, all of which described a slowing growth trajectory as the quarter ended.

It would be disingenuous to argue with the headline-grabbing data in recent weeks, including the latest GDP report. There is little question that the economy lost some momentum in March and the odds of a brisk snapback in April are not very high. At the very least, the recent data may well provide a stark wake-up call to optimists who got ahead of themselves earlier in the year when the economy appeared to be more robust. A lowering of expectations would seem to be a realistic response to emerging developments. That said, there is no need to adopt an opposite mind-set, one that embraces a doomsday scenario. From our lens, the economy is not in danger of hitting a wall unless it is buffeted by some harsh external shocks, reminiscent of those that rocked the nation in each of the past two years.

For one, the data are prone to revisions, and most key ones recently have seen upward adjustments to previous months. The latest example can be seen in this week's housing report. New home sales in March were reported to have fallen sharply during the month. But the 7.1 percent decline to 328 thousand units was more than offset by a startling upward revision in sales for February. Instead of the 313 thousand sales total originally reported, the revised figures for that month now put sales at 353 thousand units. Hence, while the headline was a decline from the prior month, the revisions leave the level above expectations for March. Year-over-year sales of new single-family homes rose 7.5% compared to the year-ago month. Indeed, over the last five or six months, new home sales finally appear to be breaking away from 300,000 level that persisted since mid-2010 until late 2011. It is possible sales are starting to respond to improvements in the labor market and historically low mortgage rates, as well as seeing some activity related to the unusually warm winter months that allowed the completion of new construction and encouraged consumer activity.

For another, the data are prone to a number of distortions that may take another quarter or so to completely wash out. The aforementioned weather that has clearly influenced housing tops the list. Indeed, housing activity made a surprisingly strong contribution to the economy's growth rate in the first quarter, increasing by an eye-opening 19.1 percent annual rate during the period. No doubt, a sizeable portion of that surge represented activity pulled forward by the mild winter, which will unwind as more seasonal weather patterns return in the second quarter. Another, albeit less significant, distortion reflected the year-end expiration of special tax credits to businesses for capital investments. Like the weather, the bonus depreciation pulled forward investments into the latter half of 2011. Accordingly, equipment and software spending in the first quarter increased by a miniscule 1.7 percent, down from a 12 percent average gain over the last six months of last year and the weakest quarter since the recovery's onset in mid-2009. What's more, new orders for capital goods declined in March, indicating that a swift revival may not be in the cards.

Finally, the headline slowdown in the economy's growth rate in the first quarter masks some positive trends. First and foremost is that consumers displayed more muscle than expected. Personal consumption increased by a solid 2.9 percent annual rate, up from 2.1 percent in the previous quarter and tied for the second strongest pace of the recovery so far. Over the previous ten quarters of the upturn, the increased in PCE averaged 2.1 percent. The consumer-spending spike accounted for more than 90 percent of the gain in real GDP during the January-March period. Another positive development is the ebbing of the drag from state and local governments. In the first quarter, state and local spending slipped by another 1.2 percent, but it was the smallest drop since the third quarter of 2010. That's consistent with the fewer number of layoffs among public workers in recent months, and is a strong indication that the bleeding of state and local finances is finally being stanched. Indeed, most of the contraction in the public sector during the first quarter came from the Federal side, where spending fell by 5.6 percent. Most of the cuts were in national defense, down 8.1 percent following a large 12.1 percent plunge in the fourth quarter. Those quarterly declines far exceeded the projections in the federal budget, suggesting some snapback may take place in the second quarter.

But just as the first quarter slowdown in growth may overstate the economy's weaknesses, it would be a mistake to extrapolate the positive trends included in the GDP report. True, the strength in consumption was as surprising as it was welcomed. The question is, will that strength be sustained in coming months? Most likely it will not, if only because the first-quarter acceleration in spending was not supported by income gains. Real disposable incomes eked out a slim 0.4 percent increase during the period, meaning that households had to spend a larger fraction of their paychecks to finance their expenditures. In fact, the personal savings rate fell from 4.5 percent to 3.9 percent, the lowest quarterly rate since the recovery began. What's more, purchases of motor vehicles and parts accounted for an outsize 70 percent of the increase in personal expenditures during the first quarter. This is a highly volatile spending component that probably received a major boost from pent-up demand accrued during the recession.

After accounting for the positive and negative influences, we are inclined to view the economy's performance as somewhere between the last two quarters, putting it squarely on a 2.5 percent growth trajectory. But the critical point is that it headed into the second quarter losing momentum, which understandably brings the Federal Reserve back into play. For its part, the Fed is giving no indication that it is inclined to move off the sidelines, most likely because it too is not sure what course the recovery will take in coming months. The latest policy-setting meeting this week yielded no change in strategy, which hardly came as a surprise to the markets. Nor was the language of the policy statement after the meeting much different than the previous ones. The FOMC reiterated its intention to keep the federal funds rate at its exceptionally low level at least through late 2014, albeit its assessment of economic conditions was a tad brighter than before.

But it was at chairman Bernanke's press briefing after the FOMC meeting that journalists could push hard for answers on the topic of asset purchases - so-called QE3 - and whether the Fed would offer more accommodation in light of recent weaker economic data. Bernanke was quite specific that the FOMC is prepared to take further easing action, if appropriate, as well as to tighten policy if the economic data point in that direction. However, he did not indicate that any such action was in the works. We note that he brought up a point he has made previously, that it is the size of the Fed's holdings that provide accommodation, not the purchase of securities. He also said that markets are forward-looking, and that the end of the current Maturity Extension Program (MEP) -- popularly referred to as "Operation Twist" -- should be well-anticipated and not result in a sharp rise in interest rates. Some increase in rates could follow at the end of the program, but these were likely to be small.

The Chairman also noted that the FOMC's next steps would be based on the needs of fulfilling the dual mandate, not market expectations. He said some rise in interest rates that were a result of stronger economic fundamentals and less volatility in global financial markets would be a healthy development. The Chairman stressed that the Fed is committed to maintaining its credibility as an inflation fighter, and for the medium-term "Our projections still have inflation very close to our 2% target." Since inflation expectations have been stable, the modest uptick in prices due to some "transitory sources" should fade. He referred to a recent speech by Vice Chair Janet Yellen, which included models that showed that growth and lower unemployment could be achieved without inflation above the 2% target.

In the end, Bernanke had reiterated the Fed's commitment to pursuing monetary policy that would continue to address the frustratingly slow recovery, keep the focus on lowering unemployment, and maintaining inflation and inflation and expectations. Although it is clear that in the near-term the FOMC would more likely need to provide additional accommodation than to tighten, the available data does not indicate that such an action is necessary. We agree, particularly as the available data provide mixed signals as to where the economy is heading. For the time being, the Fed's firm commitment to maintain the considerable support it has already provided to the economy should be sufficient in the current environment.

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