The week ahead will be action-packed with interesting though distorted economic numbers. Wholesale and consumer prices will both be boosted by a mammoth 16 percent surge in gasoline prices between May and June – the biggest one-month increase seen since Hurricane Katrina roared ashore in the summer of 2005. This will also boost nominal retail sales figures – excluding this effect, both inflation and retail activity were weak in June.
Industrial production likely fell for the 17th month in the last 18 in June, partly reflecting continued extremely low levels of auto production, down roughly 50 percent from a year ago. However, auto analysts are predicting a significant pickup in production in the third quarter as GM and Chrysler emerge from bankruptcy and sales strengthen, partly reflecting the cash-for-clunkers scheme.
In the first half of this year, the fundamental investment question haschanged from financial meltdown to how deep will the recession be tohow slow will the recovery be. This in itself is a welcome change, andany signs of genuine economic momentum.
In addition, layoffs in the auto industry caused by the temporary shutdowns at GM and Chrysler facilities boosted unemployment claims this spring but are actually lowering them now, as workers who would normally have filed initial claims for benefits over the summer filed them earlier. This pushed initial claims below 600,000 for the first time in 23 weeks last week and this should be extended into this week.
Finally, on Friday, we get numbers on housing starts, which should show a continued slow improvement, in line with other indications of increased housing activity.
More broadly, on the employment picture, of the 6.5 million jobs lost in this recession so far 20 percent have been in construction and 30 percent have been in manufacturing, even though these two sectors combined account for just 14 percent of payroll employment. If, as in the rest of the world, manufacturing production begins to rebound this summer and housing starts continue to climb, overall payroll job losses should begin to retreat significantly over the next few months.
The earnings season gets going in earnest this week with reports due out from 31 S&P500 companies including Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup. Throughout the earnings season, the emphasis will be on “earnings visibility” – that is to say, what the firms see for themselves later on in the year and in 2010. In truth, however, companies will have no better idea of the macro environment than economists.
However, for the present, we enter earnings season with analysts predicting S&P 500 operating earnings coming in at about $14 – compared to $10.11 in 2009Q1 and -$0.09 in 2008Q4. After two brutal quarters at the end of 2008 and in early 2009, it appears the US economy shrank by much less in 2009Q2 and the global economy, led by Asia, probably grew.
For investors, the last four weeks have seen stocks give back a quarter of the gains achieved in the spring rally and there are plenty of reasons for caution. It is nevertheless worth noting that in the first half of this year, the fundamental investment question has changed from financial meltdown to how deep will the recession be to how slow will the recovery be. This in itself is a welcome change, and any signs of genuine economic momentum should be rewarded by good gains in risky assets in the months ahead.
David Kelly is chief market strategist for J.P. Morgan Funds