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Farrell: The Empire Strikes Back

The New York State Empire Manufacturing Indexsurprised us with a nice jump in its monthly report. The Index registered 18.9 up from 12 last month and a mere .6 the month before. It's nice to have two months in a row of up readings and this is the highest the Index has been since November of 2007. It shows that, at least in the tech focused manufacturing area covered by this survey, that this arena is showing definitive signs of life. If this were the only number we had to use, you could extrapolate an ISM reading of 55. The last Institute of Supply Management (ISM) reading we got was the two year high in August of 52.9. Remember, below 50 is contraction and above 50 is expansion.

Another report that surprised was the Retail Sales report for last month. It registered a better than expected gain of 2.7% fueled by incentive driven auto sales (car sales up over 10%.) Ex autos the gain was still above expectations at + 1.1%. Most had been expecting a number for ex autos around +.4. The difference between the expectations and the actual is probably accounted for by tax holidays which drove back to school shopping. The clothing sub-sector gained 2.4% after a July reading of only +.2% and that would be the impact tax holidays would have. I don't think this marks by any means the beginning of a new round of consumer spending.

But the consumer situation is not all bleak. While unemployment is up and likely to go higher, and wages are at best stagnant, consumer net worth is off the floor. Net worth peaked at some $64 trillion in 2007 recounts my pal Jason Trennert of Strategas. It fell to about $50 trillion earlier this year and probably will hit $55 trillion when numbers are reported for Q3 due to a rise in the stock market. Consumer spending is most directly affected by income, but a rising net worth contributes as well.

The Producer Price Indexhad a big headline move of +1.7%. But the "core" was up only .2%, so no runaway inflation fears here. The year over year loss in the PPI is still -4.3% and the core reading is dangerously close to zero. I wouldn't put deflation fears to bed completely. Also, business inventories were of a more or less expected -1%. We are still waiting for the beginning of the inventory restocking boost.

News from around the automotive world is surprisingly good. In the U.S average wholesale auction prices of used cars are up for the fourth month in a row by about 4%. Higher used car prices are a leading indicator of new car sales. The higher trade in values make new cars more affordable. Additionally, new car registration is Europe was up 3%, the third straight month of increase. Michelin's CEO sees a recovery in passenger tire sales. BMW's CEO feels there is a good chance for a profit in 2009. Daimler sees the premium car market recovering sooner than later (it'll do it without me!), and Porsche executives are cautiously optimistic the bottom on the vehicle market has been reached. All good stuff.

President Obama stated there will be no trade war. Let's hope so. The indignant Chinese whose tires have been recently taxed are astonished that this is the touch point as tire shipments to the US are actually down in the year so far. The President addresses the annual AFL-CIO conference soon (I think Tuesday) and it's only logical that other industries will want their case heard for protection from overseas imports. This is a tough lid to put back on once opened.

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Reports due out Wednesday include the Consumer Price Index among others. The guess is for a .4% rise after a flat number in July. The core will be almost flat and the annual rate of headline decline should be about -1.5%. That would be better than July's pace of a -2.1% annual fall, the steepest since the early 1950's. Estimates for Industrial Production vary greatly but the auto business should propel the number above 1%. Capacity Utilization was 68.1% in June, an all time low. It crept back to 68.5% in July. If it manages to get to 69-69.5% it will still be more than 10 points below its five year average. The National Association of Homebuilders housing index- NAHB- was 17 in July, 18 in August, and, helped by the $8000 first time homebuyers credit (due to expire 12/1), should get to 20. That would be the highest reading since mid 2008. Lastly, net foreign purchases of securities needs to be pulled apart to see where foreign buying has gone in our Treasury market.

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