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Farrell: It's a Nice Headline, But...

Wednesday's Wall Street Journal had a banner headline that read "Business Spending Looks Up." The story said "Big companies that sell to corporate customers are growing more bullish about their prospects for 2010, a sign that a revival of business investment could buoy the sluggish U.S. economy in coming quarters." It read well and looked great but business investment accounts for about 10% of the economy whereas the consumer is around 70%. An uptick in business spending would be great but 60% of jobs are created by small businesses that are still struggling. 80% of new businesses rely on the founders credit cards as their source for credit and that is being choked off. Big businesses are finding the capital markets open to them but the small business-job creator is struggling.

I would tone down the headline, Rupert.

The producer price index was reported the other day. The headline number showed a decline of -.6%. The "core" was also off -.1%. Year over year, the headline PPI has declined -4.8%. The year over year core PPI has shown a gain of +1.8% but the weakness in the consumer price index in recent months indicates that even this anemic price increase can't be passed through. Reading this data by itself could create the fear that inflation can fall too far. San Francisco Fed President, Janet Yellen, emphasized in a speech the other day there would be "certainly" no interest rate tightening in the near future. Inflation seems a distant threat and numbers like this reinforce the safety of the carry trade that borrows in dollars to buy higher yielding currencies. The dollar/euro traded above 150 on Wednesday and the dollar shows no signs of halting its decline.

  • No Tightening in Next Several Months: Fed's Yellen

Housing starts were reported at 590,000 and new permits at 573,000. We have been around these levels for the past 4 months. These levels are also about 75% below the peak of just a few years ago. Mortgage applications declined almost 14% last week even though the average 30 year fixed rate mortgage interest rate is still around 5%. It's clear the coming expiration of the $8,000 first-time home buyer tax credit has a lot to do with current housing activity.

The Fed's Beige book was released Wednesday afternoon and showed generally stable to modestly better conditions across the 12 Federal Reserve Districts. Residential real estate and manufacturing have improved across most districts although residential construction is still struggling. Loan demand is reported as weak, but I wonder if the demand is weak or if the willingness to lend is just not there (maybe both, I suppose). Consumer spending is mixed and labor markets are mixed to weak. All 12 districts report no wage or price pressures. While reports of gains slightly outnumbered declines, all the good news items came with "qualifications." The biggest area of weakness is commercial real estate. That weakness was emphasized by the statement that accompanied Wells Fargo's earnings release. The bank said, "Credit losses to peak not until later in 2010 in their commercial and commercial real estate portfolio." Commercial real estate losses are showing up in the earnings reports of the regional banks and are, so far, in the range of expectations but look to be worsening.

  • Leading Economic Index Hits Two-Year High

There were a host of economic releases from China late Wednesday night. Q3 GDP grew 8.9% year over year. Fixed-asset investment in urban areas rose 33.3 per cent in the first three quarters and retail spending increased by as much as 15.5%. China and the rest of the emerging markets have been leading the recovery and look to continue to do so. _______________________________________