Farrell: But What About the Little Guy

The news was deservedly dominated by Tuesday's better than expected Intelreport and then by the superb earnings announcement from J.P. Morgan. Jamie Dimon knows how to run a financial company. But as good as the earnings news is shaping up to be, at least in these early stages, the area that produces over 60% of jobs in America is still struggling. The National Federation of Independent Businesses released its report away from the JPM glare. It said only 8% of its members have job openings now (which I think is an all time low), and more are planning to shed jobs than not. Most say credit is still hard to get and they, on balance, fear they will need to cut prices of their goods and services in the near future. One hopeful sign was that for the first time in three years most independent business owners say their inventories are not excessive.

That's interesting to note in light of the fact that business inventories fell -1.5% in August. The July inventory number was revised slightly to -1.1% from an originally reported -1%. Waiting for the inventory destocking to end is getting frustrating. But, perversely, the inventory number holds out hope. With the recent gain in retail sales (more on that in a second), it looks like third quarter GDP will show a solid gain of 3% or more. While that is less than you usually see after a steep downturn, if we were offered that as the outcome last March we all would have been glad to take it. If the economy can do reasonably well with inventories being liquidated then there is hope that the expansion might have some legs. There is the worry that an overextended consumer will not be able to shoulder a normal burden and spend us out of the slump. But if inventories just stop being liquidated it could mean a nice jump to GDP of close to 1.5% on an annual basis. Even nicer would be a restocking of what must be near depleted inventories. Most of the government stimulus will be spent between now and the end of 2010 and an inventory restocking phase, if it were to develop, would be good news.

Headline retail sales showed a sharp decline of -1.5%, but if you exclude autos, there was a gain of .5% in what is called "core" retail sales. The end of the cash for clunkers program and the subsequent fall in auto sales of 11.8% accounted for the decline in the headline number. If you also take out the highly volatile gas sales component, then retail sales rose .4%. That is far better than anyone had expected. And it was done without any "back to school" tax break incentives. But with household debt still about 125% of income (30 year average is about 93% and don't things usually revert to the norm) and with rising unemployment I don't think it is likely that retail sales will stay robust.

What is robust is the Chinese economy. Chinese exports fell -15% in August versus a year ago but that was a big improvement from the -21% recorded the prior month. Imports fell only -3.5% a significant gain from last month's decline of -15%. The trade surplus consequently fell to a +$12.9 billion from +$15.7 billion. Chinese iron ore imports were unexpectedly large rising almost 30% to a record 64 million tons. The ore seems to be needed as steel exports rose 19% month on month to 2.47 million tons. Trade in the emerging markets seems to be picking up and there is still chatter going on that there will be some interest rate hikes before the end of the year ala Australia's recent rate move.

The news out of Europe continues to be mixed. For every piece of good news there is an offsetting negative, or less than stellar piece of data. Euro zone industrial output rose .9% for the fourth straight monthly gain. Industrial output in Germany, France and Italy, the areas three biggest economies, has been on an uptick. But housing prices fell in Spain and consumer prices did the same in France. I doubt there will be too many rate hikes in the Euro community soon and it looks increasingly like the emerging markets are muscling their way onto the world stage.

I do like one line especially from Intel's press release that accompanied the earnings report. Intel, it said, "Remains primarily consumer driven with broad based demand across all geographies." Multinational companies should fare better in this environment as they can take advantage of pockets of geographic strength. but if you take this sentence at face value it implies pretty good business around the globe.