Friday, April 24, 2009

Weekly Macro Observations

David Rosenberg punching the table on the little noticed fact that the Detroit production shutdown will have profound negative ripple effects on the economy. Zero Hedge still believes that fundmantals are more important to report than ongoing wholesale market short squeezes, so we present David Rosenberg's latest weekly observations.


This financial crisis and deep recession has the economic outlook shifting so rapidly that the economic data flow, no matter how timely, is being rendered old news before it is even released. No piece of data exemplifies this more than today’s durable goods report for March. While it was far from a good report, the fact that orders ‘only’ fell by about half of what was expected fed the greenshooters’ case that we are starting to turn the corner. But this info is now stale news given GM’s tape bomb: a complete shutdown of production for the balance of the second quarter.

20% of vehicle production to be shuttered

What this means is the ISM could retest the 32.9 cycle low in May or June, even though the April ISM figure could well move higher when it is reported next Friday. In all, we are expecting vehicle production to be down 45% compared to last year, even factoring in Ford’s news that it would up production by 25%. The GM shutdown does not just mean more layoffs at their assembly plants; it will ripple across the parts industry as well. If parts manufacturers take similar production hits it could reduce motor vehicle payrolls by 140k. Chrysler has not released any new production intentions but with the specter of bankruptcy looming, could trim their 2Q production plans as well.

No confidence in home values

If there was to be a month where home-buying activity was to turn up it should have been March, but instead both new and existing home sales dropped. Rates were an enticing and record low of 4.77% for a 30-year fixed mortgage, points and fees stayed low, and the stock market jump had pundits believing it was clear sailing from here on. However, these signs of thaw in credit conditions proved no match for the 5-million-plus jobs lost in the past year and counting, massive wealth destruction and the concern that residential real estate will not provide a decent investment return any time soon.

Doing time

Continuing unemployment claims jumped another 93k in the April 11 week and are up 570k since the mid-March survey week. Even with this record number of people on UI, the exhaustion rate (workers whose regular UI benefits have run out) rose to a record high of 45.6% in March.

The 9% marker…

Come May 8th, the US economy will have the dubious honor of boasting a 9% unemployment rate, according to the tally of jobless claims so far in April. Another 670,000 nonfarm payroll losses are in store, which will bring the cumulative losses close to 6 million. We expect these types of major job cuts to continue for at least the next several months and the unemployment rate will attain a doubledigit handle by June or July.

…and on to 10%

Though this is not a controversial call at this time, where we differ from consensus is our expectation of a sluggish pace of economic activity that will restrain job creation. Given that by our estimate the economy needs to create more than 100k jobs per month on a sustained basis to move the unemployment rate lower, we expect the unemployment rate will remain at a deflationary double digit level though to the end of 2010.
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