Spying the Green Shoots--Page 2

Housing Showing Some Improvements at Last
Housing was the key area to drive the economy into a recession, so we are watching housing metrics very closely, looking for any signs of improvement. Although the housing data remain mixed, we are relatively confident that things are on the mend. Housing statistics are volatile and hard to read. There are large seasonal factors, and they can be affected by weather. That said, inventory levels of unsold single-family homes as reported by the National Association of Realtors peaked last summer at 4.5 million units and subsequently declined in fits and starts to 3.7 million. This compares with a more typical inventory level of 2 million units. The Wall Street Journal recently reported inventories in key markets were down substantially from peak levels, with many markets reporting decreases of 20%-40%. We are also beginning to hear stories, especially from California, of bidding wars breaking out. A combination of record affordability (median house payments to median income) and an $8,000 first-time homebuyer tax credit are beginning to work their magic.

Our housing team, led by Eric Landry, is also optimistic that we may be nearing an end to the large price decreases in some markets. The team's analysis of data from Housingtracker.net suggests median listing prices (not actual selling prices) have begun to increase in many key markets. Early work suggests that these listing prices can lead the closely watched Case-Shiller pricing numbers by at least a couple of months. Also, the Federal Finance Housing Authority House Price Index showed small sequential increases in both January and February as did the National Association of Realtors Median Sale Price Index.

Financial Markets Turning
The financial markets are also beginning to show signs of life. In the first quarter of 2009, corporations raised more than $840 billion in the global bond market. That is more than double the issuance in the first quarter of 2008. Although much of this is investment-grade and government-guaranteed, it is still good to see corporations raising money outside the banking system. A number of the new issues were used to retire bank debt.

Lenders are also willing to take on more risk because rates have fallen from their October highs. The rate that banks lend between themselves fell from more than 4% to less than 1%, below where it was before the Lehman Brothers collapse last fall. Although the Fed has nudged the overall rate structure down, we like that rates, including those of mortgages, car loans, and corporate bonds, have fallen a great deal.

Consumer Confidence Is Bottoming
Usually we don't put much stock in consumer-confidence figures because they are coincident indicators, not leading. However, aside from banking-system issues, the lack of consumer confidence has been the major driver of this recession. For a time in late 2008 it was in a lot of people's interest to talk down the economy. For example, Barack Obama highlighted the economy's plight to further his election campaign. The auto industry had to talk up its troubles in an attempt to get bailout money. Furthermore, the Treasury Department painted a bleak picture of the economy to get the TARP program through Congress. These factors certainly influenced consumers to save more.

Earlier we noted that this is one of the worst recessions based on three of four key metrics. The lone near-average marker was real income. Either because consumers were scared by the factors noted above or because of lack of financing, they didn't spend nearly as much as their income levels might have suggested. Consumer spending was off 3.8% in the third quarter and 4.3% in the fourth quarter of 2008 (on a seasonally adjusted annual rate). However, consumer expenditures jumped 2.2% in the recently released first-quarter report. The strong increase was not enough to offset dismal investment spending numbers, and as a result first-quarter gross domestic product numbers showed a 6.1% decline. The good news is in seven of the last nine recessions, consumer spending led investment spending by one quarter.

The spending data is consistent with the University of Michigan Consumer Sentiment Index, which also shows signs of bottoming. This index plumbed a low of 55.3 in November 2008 and then bounced around a bit. But it was up in March, at 57.3, compared with February. The report for April was even better at 65. In my view, consumer confidence (and the broader economy) is on the mend after the trauma of late 2008.

A version of this article appears in the May issue of Morningstar StockInvestor.Click hereto learn more about StockInvestor.

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