Comstock Partners, Inc.
Misleading Indicators
We continue to believe that the better numbers we are seeing in some segments of the economy are attributable to the bounceback from the depressed activity following the September 11th attacks, and to the zero rate financing that pumped up auto sales to record levels. Although the Conference Board’s Consumer Confidence Index for December jumped to 93.7 from 85, the number remains well below the pre-attack level of 114 and far below the 144 registered in May 2000. In this regard the index is similar to the Michigan index, discussed previously, that also rose, but remained well below its August level. The ABC News/Money Magazine Consumer Comfort Index fell to new lows for the cycle, indicating that not all of the confidence surveys are in agreement. The proof of the pudding, however, is actual retail sales, and these have been tepid at best.
Durable goods orders declined 4.8% in November, but this was more than accounted for by a big drop in defense orders following the issuance of a major fighter plane contract in the prior month. Non-defense orders were up 2.7% after a 4.8% rebound in October. Despite the gains, however, nondefense durable goods orders are still below pre-attack levels, and remain about 27% below a year earlier. A poor outlook for consumer and capital spending does not bode well for durable goods orders in the period ahead.
A smaller than expected rise in unemployment claims for the week ended December 22 is also being hailed as a harbinger of recovery ahead. Again, we believe that this is only a natural comeback from the heavy round of layoffs immediately after September 22. Corporations are cutting back labor and other expenditures as a result of the profit squeeze, and we expect continuing layoffs in coming months. In addition jobless claims may have been restrained by a special factor in California. The state will offer more generous benefits beginning in January, and some newly laid-off workers may have delayed filing until the start of the new year. This should add to the claims numbers in the first week of next month.
In our view the severe imbalances resulting from the financial and economic bubble are still in the process of being corrected. The pace of layoffs is still quite strong while the savings rate remains extremely low and consumer debt is at record levels. Corporate debt, too, is at historic highs while companies are being squeezed by major excess capacity, weak demand and a poor pricing environment. The recession is not likely to end soon. |
