Automakers Throw Wrench in Economic Dashboard

Last week was exceptionally quiet for economic indicators. The few that were issued showed a slowing of economic decline, but no radical improvement. Unfortunately, it appears that the auto industry is going to continue to play havoc with our economic indicators and potentially the real economy. Wall Street's reaction to the indicators, which are likely to be less favorable than those of the last two months, is apt to be negative. However, we continue to believe that the economy is in the bottoming process and that the second quarter is likely to mark the low point of this recession. The week of May 25 should prove more interesting with several key housing reports due early in the week.

Automakers Drive Erratic Readings

We have always liked initial unemployment claims as an early economic indicator, but now this number has begun to act more erratically. Initial claims were up significantly the week ending May 9 when they were announced and were revised even higher last week. The number was back down again for the week ending May 16 (from 643,000 to 631,000). The ups and the downs were largely driven by the announced closings of many Chrysler dealerships. GM is going to have to go through a similar program that will have an even bigger impact (although the employment effects will come later and will be more spread out). We view some of the dealership-related closings as relatively benign to the real economy over the intermediate to longer term. Many of the laid-off workers will find employment at the remaining dealerships that will see increased volumes and will need more employees in both sales and service. Given all the turmoil, we doubt that many of the recently laid-off dealership employees were going on wild spending sprees over the last several months either. However, while these former employees make their transition, they will continue to sway our indicators and the economy in the short run.

This summer the automakers have already promised a longer-than-normal production shut down due to model change-overs. This could have a negative effect on the ISM manufacturing numbers, the monthly survey of purchasing managers, over the next three months. Like the initial claims data, this has been one of our more closely watched indicators. This summer's numbers will likely be received poorly by investors. However, in the long term, clearing out some inventory and taking excess capacity offline could set the stage for some better production later in the year.

Housing Starts

While housing will be an important factor in the economic turnaround, last week's new starts data was relatively meaningless. Housing starts for April remained under pressure with total starts at 458,000 units, falling 12% sequentially and more than 80% from their peak in 2006. The number is also far below normal demand, which we estimate at about 1.5 million units. The lack of starts is one positive factor that will help reduce the inventory of unsold houses. More important than the starts number will be new and existing home sales and inventories, which will be reported the week of May 25. We are optimistic that sales will continue to show an improving trend. Inventories will be a little harder to gauge as the end of some foreclosure moratoriums and seasonal factors could move inventories modestly higher.

Manufacturing

The Philadelphia Fed also reported last week their manufacturing data, which is sometimes a good precursor to the full ISM manufacturing survey due the first week of June. The index came in at -24.6, a two-point improvement from the prior month, but a lot less exciting than the 10% increase in the Empire State survey last week. A heavier weighting in autos may have hurt the Philadelphia number versus New York. Both surveys showed better shipments data, but new orders in both surveys showed some back-tracking in May. Therefore, it would not shock us to see an improving ISM index but a modest decline in new orders in June.