NEW$ & VIEW$ (9 APRIL 2013)

U.S. employment growth slows along with small biz mood. Participation rate influenced by social security issues. Fed’s impact on economy, markets. Gas prices decline some more. Beware Slovania. Car loans. Chinese inflation eases. Inflation warning. China wages. U.K. economy. German, Chinese exports. arnings watch.

 

Employment Index Signals Modest Gains Ahead

The Conference Board said its March employment trends index fell 0.2% to 111.20 from 111.43 in February, first reported as 111.14. The latest index is up 3.7% from a year ago.

Small Business Optimism Down in March

After three months of sustained growth, the March NFIB Index of Small
Business Optimism ended its slow climb, declining 1.3 points and landing
at 89.5. (…) Of the ten Index components, two increased, two were unchanged and six declined. Among the greatest declines were labor market indicators, inventory investment plans and sales expectations.

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Workers Stuck in Disability Stunt Economic Recovery

(…) Michael Feroli, chief U.S. economist for J.P. Morgan, estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences. (…)

[image]Payments, tied to a worker’s wage history, average $1,130 a month, which totals $13,560 a year. That is about $2,000 a year more than the federal poverty level for a single person and about $2,000 less than full-time wages at the federal minimum of $7.25 an hour. After two years, people on disability are eligible for Medicare health insurance—another government benefit that encourages recipients to stay put.

Between December 2007, when the recession started, and June 2009, when it ended, the number of Americans receiving federal disability benefits grew to 7.6 million from 7.1 million. Then the rolls swelled, reaching 8.9 million in March, about 5.4% of the civilian workforce ages 25 to 64, according to J.P. Morgan estimates. That compares with 1.7% of the U.S. workforce in 1970.

Economic growth is driven by the number of workers in an economy and by their productivity. Put simply, fewer workers usually means less growth.

Since the recession, more people have gone on disability, on net, than new workers have joined the labor force. Mr. Feroli estimated the exodus to disability costs 0.6% of national output, equal to about $95 billion a year. (…)

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Easy Money: Fed Policies Spur Corporate Spending

CFOs at 202 firms, about 45% of the survey respondents, said low interest rates had led them to increase borrowing.

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BlackRock urges Fed to rein in QE3
Money manager says ‘dull hammer’ tactics distort market

(…) “Fed policy has had a distorting effect on capital allocation decisions of all kinds at virtually every level of the economy,” he told the Financial Times. “It is a very large and dull hammer for markets.” (…)

BlackRock estimates that interest rates on 10-year Treasuries are about 100 basis points below where they would be normally. Mr Rieder said that as such interest rates normalise, “losses that occur to fixed-income portfolios will be more and more acute”.

Gasoline at U.S. Pumps Drops to Lowest for Season in Three Years

 

Regular, unleaded gasoline at the pump declined 3.7 cents, or 1 percent, to $3.608 a gallon, the U.S. Energy Information Administration said on its website yesterday.

Retail gasoline prices have retreated for six straight weeks and are 33.1 cents a gallon below year-earlier levels.

Gasoline “probably has another 6 or 7 cents a gallon to fall in the short-term as the decline in crude prices last week flows through from refining operations,” James Williams, president of energy consulting firm WTRG Economics in London, Arkansas, said by telephone yesterday. “The drops should continue for several days to a week.”

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Pointing up  OECD Warns on Slovenia Banks

Slovenia’s government may exceed its estimate of the €1 billion ($1.3 billion) needed to boost the capital of the country’s ailing banks because it has based its cost estimates on a “most likely already outdated” analysis, the OECD said.

“The authorities evaluate recapitalization needs at up to 3% of GDP (€1 billion),” the OECD said in its latest report on Slovenia. “Yet, capital needs are uncertain and could in fact be significantly higher.” (…)

Three state-owned Slovenian banks, which together account for about two-thirds of the country’s banking sector, are saddled with large amounts of nonperforming loans. This has added pressure to Slovenia’s economy, which shrank 2.3% last year.

Another template coming?

Introducing the 97-Month Car Loan

Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month.

The average price of a new car is now $31,000, up $3,000 in the past four years. But at the same time, the average monthly car payment edged down, to $460 from $465—the result of longer loan terms and lower interest rates.

In the final quarter of 2012, the average term of a new car note stretched out to 65 months, the longest ever, according to Experian Information Solutions Inc. Experian said that 17% of all new car loans in the past quarter were between 73 and 84 months and there were even a few as long as 97 months. Four years ago, only 11% of loans fell into this category. (…)

Experts say there is an appetite for more risk because banks see limited downside in auto lending. The delinquency rates on car loans are near record lows, and used car values are at record highs. And if a buyer defaults, the bank can repossess and sell cars with limited losses.

Chinese Consumer Inflation Eases

China’s year-to-year consumer inflation fell to 2.1% in March, a lower-than-expected result that suggests the threat of inflation in the world’s No. 2 economy is ebbing.

Rises in food prices have been moderating, up 2.7% year to year in March after a 6% year-to-year rise in February.

The producer-price index, which measures wholesale prices, remains in negative territory, falling to 1.9% in March, against expectations of a drop of 2%.

The average increase in consumer prices in the first quarter was 2.4 per cent, up only a little from the final quarter of 2012.

The CPI fell 0.9 percent from February, the biggest drop in seven years.

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image(Charts from China Daily)

ADB Issues Inflation Warning

[image]Asian policy makers should carefully monitor inflation and beware of asset bubbles as money flows into the region and local economies grow strongly, the Asian Development Bank said. (…)

The Manila-based lender noted that production in most Asian economies is already near capacity, which raises the risk of inflation taking off. The ADB also said fuel-subsidy cuts—while beneficial from a fiscal perspective—would push up prices.

“Currently inflation remains in check, but we are concerned that pressures are building up,” ADB Chief Economist Changyong Rhee told The Wall Street Journal. “If these trends continue unchecked, then asset bubbles with rising capital inflows can be an issue in the near future.” (…)

Inflation in developing Asia should pick up to 4.0% in 2013 and 4.2% in 2014 from 3.7% last year, the ADB said, with growth also accelerating to 6.6% in 2013 and 6.7% in 2014, from 6.1% in 2012. But the ADB warned central banks they should be ready to act.

China Surging Wages Threaten Economy’s Competitiveness, ADB Says

Average inflation-adjusted wages have more than tripled in a decade and non-wage costs for procedures such as hiring and firing have risen since the introduction of a 2008 labor law, the ADB said in a report published today.

The labor market is being squeezed across the nation as the pool of working-age people shrank last year.(…)

China’s labor productivity has grown quickly even as it remains less than 10 percent of the level in Singapore and the U.S., and about 20 percent of South Korea’s rate, Niny Khor, a Beijing-based economist for the ADB, said at the briefing.

Rising wages and other costs are being exacerbated by restrictions on workers’ mobility through the household registration system known as hukou, the ADB said.(…)

China’s pool of 15- to 39-year-olds, which supplies the bulk of workers for industry, construction and services, fell to 525 million last year from 557 million five years earlier, according to data compiled by Bloomberg News from the U.S. Census Bureau’s international population database. The number employed in industry rose to 147 million from 117 million in the five years through September.

U.K. Housing Market, Retail Sales Pick Up

Activity in the U.K.’s housing market and on the high street picked up in March despite unseasonably cold weather, giving the economic outlook a boost for the first quarter and suggesting the U.K. may avoid a triple-dip recession.

German Exports Fell in February Amid Euro-Area Recession

Exports, adjusted for working days and seasonal changes, dropped 1.5 percent from January, when they gained 1.3 percent, the Federal Statistics Office in Wiesbaden said today.

Shipments from Germany to the euro area dropped 4.1 percent in February from a year ago, while those to the European Union decreased 3.4 percent. Exports to non-EU members fell 1.9 percent, today’s report showed.

China Export-Data Skepticism Deepens From Goldman to Nomura

China’s unprecedented run of better- than-forecast export growth has spurred deeper skepticism of the data at banks including Goldman Sachs Group Inc., casting doubt on the strength of the recovery.

 

EARNINGS WATCH

Alcoa Net Rises 59%

Excluding special items, earnings per share came to 11 cents, up from 10 cents a year before. The result for the latest quarter exceeded the Wall Street forecast of eight cents per share, according to FactSet.

What’s the big deal? Here’s how the WSJ’s Market Beat column treats AA’s results this morning:

Studies have shown that how the aluminum maker performs relative to analysts’ expectations over the past decade has been a good gauge of the market’s short-term performance.

Consider these stats, courtesy of John Butters, senior earnings analyst at FactSet: Over the past 10 years prior to Monday’s results, Alcoa’s quarterly figures have exceeded analysts’ expectations 50% of the time (20 out of 40 quarters). When Alcoa beats, the S&P 500 has averaged a 4.4% gain over the ensuing three months and has been positive 80% of the time. When it misses, the S&P 500 has averaged a 0.9% decline and has been positive only 44% of the time.

But Factset also says:

Since 2009, Alcoa has reported earnings above the mean EPS estimate 56% of the time (9 out of 16 quarters). In the nine quarters that Alcoa reported actual EPS above the mean EPS estimate, 73.6% of companies in the S&P 500 reported earnings above EPS estimates for the quarter on average.

In the seven quarters that Alcoa reported actual EPS below the mean EPS estimate, 72.6% of companies in the S&P 500 reported actual EPS above the mean EPS estimate for the quarter on average.

While there is a slight difference in the numbers, it appears that Alcoa’s earnings performance relative to estimates has little predictive value in determining the earnings performance of the remaining companies in the index.

 

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