First half of 2012
shows weakness bleeding into Q3 for U.S.
Q2 results look to be mirroring deterioration seen in Q1.
Where Q1 signaled slowing against Q4, 2011, Q2 results demonstrate a trend of
H1, 2012, perhaps bleeding into Q3. First half of 2012 is marked by volatility
across all asset classes, but most noted is progressing decline in global
economic performance. Apparent is U.S. influence on global propositions.
Emerging markets previously supported divergence in growth between developed
and developing countries.
Now, where emerging markets demonstrate signs of progressing
weakness starting in Q4 2011, Q1 and Q2 slowed for U.S., which magnifies
emerging market declines. Certainly associated with all slowing is the largest
economy in the world, the European Union (EU).
Liquidity and collateral insecurity originates in Europe,
highlighted by Dodd-Frank and Basil III, but is really pointed in EU’s resolve
to address the issue. Friday, June 29, showed unexpected EU cooperation driving
up equity values in dramatic fashion. With few details being provided, summit
talk at least took a direction wanted by markets.
Steepening EU commitment to its struggle is certainly
progressing U.S. economic sluggishness. Q1 GDP is settling in at 1.9% growth
against Q4’s 3% advance. From all indicators discussed on this space, Q2 opened
weak, and looks to be closing with progressing weakness.
Regional Fed
indicators deteriorated through Q2, and now ISM Index
Regional Fed indicators show Empire State taking a nose dive
for June down to 2.29 compared with May at 17.09 (above zero shows growth).
Where shipments were volatile through April and May, new orders trended weak,
but stable. In June, both considerably declined. Inventories fell into
contraction at -5.15 versus May’s 4.82 growth. Prices paid and received
declined through Q2 with June showing both at November 2011 levels. Overall,
index last saw such depressed activity during the European banking freeze which
ended with ECB’s LTRO.
Philadelphia Fed Survey reveals declines starting in March,
deepening in April and actually contracting in May. May saw the index down -5.8
and June a much deeper -16.8. Concern now is Empire will follow Philadelphia.
Empire has the indications, but Philadelphia’s potential for improvement is
M&A activity with their refineries and narrowing Brent/WTI spreads. Still,
Philadelphia manufacturing seems to have found a lead on global economic
slowing.
Richmond Fed Manufacturing Index has also been on a Q2
decline. April found Richmond at 14, May at 4 and June in contraction down to
-3. Component deterioration troubles when shipments are at 18 in April, 0 in
May and -2 for June. New orders saw April at 13, May 1 and June a stark -12.
Backlog of orders look bleak with April a nice 2, May a bad -18 and June -16.
Prices also weakened. On the good side, six months out, business expectations
remain very positive.
Kansas City Fed Manufacturing Index remains positive, but in
decline. April produced a 3, May showed 9 and June 3. Overall, volatility is
leaning toward weakness. Confirming
weakness are employment numbers. Sobering is Q2 work week showing April at -10,
May -2 and June -4. In the same period, number of employees declined
considerably with April at 12, May showing 8 and June settling at 3. New orders
have been volatile and mostly in contraction with April -8, May 10 and June -7.
Prices paid weakened through Q2 and prices received are at -4 for June.
Dallas Fed Manufacturing Survey is the only indicator showing
health, surprisingly. Where its business activity index slumped to -5.1 in May,
June is at 5.8. Production in May fell to 5.5 where June rose to 15.5.
Components of the index look strong except for prices. Prices paid for raw
materials fell from 20.2 in May to June’s 2.7 and prices received for finished
goods fell from -.5 in May to -5.8 for June. Curious is how general pricing
weakness, as seen in other regional indicators, isn’t translating into general
economic weakness for the Dallas Survey.
Moving into contraction is the ISM Manufacturing Index. For a
first time since July 2009, ISM data fell below 50 to 49.7. Numbers above 50
show growth, and numbers below show contraction. New orders are also underwater
at 47.8, first time since April, 2009. This index has demonstrated resiliency
to maintain above 50. From August 2008 through July 2009, results stayed well
below 50 while economic recession weighed. Now, index shows numbers reminiscent
of the down days.
Prices are also in dramatic decline with the index. March and
April saw prices paid for raw materials at 61.0 for both months. May pricing
fell to 47.5 and June to 37.0, which is the index’s lowest since April 2009.
Generally, Q2 saw progressing weakness ending out June with
weakness in prices and new orders, suggesting a slow July. Also suggested are
upstream and downstream declines in demand demonstrated by price weakness.
Cars contrast against
retail same store sales to show a contradiction
Contrasting with Fed regional indexes and the ISM index are
auto sales for June. For the first four months of 2012, sales showed an annual
sales rate of 14.5M units. May, however, witnessed a 4.4% decline to 13.8M
units. Given consumer confidence having declined for four months and disappointing
employment data, analysts expected June auto sales to remain flat at May’s
numbers. Surprisingly, June posted an actual result of 14.1M units.
Providing perspective for auto sales is April 2009 when sales
hit a recession low of only 6.9M units. Auto sales closed 2011 with an annual
rate reported in December of 13.6M units. Last time auto sales have experienced
such success was in August 2009 when the “cash for clunkers” program lifted
sales to 14.1M units.
June’s increase returns sales to previously seen 2012 levels,
but just shy of average 2012 rates. Still car sales lead lagging indicators
such as U.S. Census Bureau’s July 3 release of factory order data showing May’s
activity. For shipments, autos essentially have a lead with an increase of
26.9% over May 2011 levels. Contrasting is mining, oil and gas field machinery
showing only an 8.4% gain. New orders are even more revealing with mining, oil
and gas machinery down -31.6% where motor vehicle bodies, parts and trailers
have a 5.8% increase. Reality shows factory orders in steady decline since last
summer, but remaining positive and resilient. Industrial production also shows
influence of autos in a similar fashion.
Same store sales reported today with general disappointment
and lackluster performance. Costco, for example, came in with a 3% SSS increase
which disappointed by being a tiny short of analyst expectations. Gap, Walgreen,
Kohls and Macy all show slowed results.
Most telling are results from international operations among
car companies and retailers. Declining demand and a strengthening U.S. dollar
are weighing heavily on overall company performance. Strong dollar amid trends
of the last few years tell of obvious insecurity.
