THOUGHTS ON THIS MORNING’S DATA

Are investors beginning to notice the weekly negative trends in retail?  ICSC came in at -0.5% on the week and -0.7% year over year.  Redbook came in -4.1%.   The strong negative trend in consumer spending cannot be ignored forever.  At some point this is going to take a grip on the economy and the stock market. This is a very bad sign for back to school sales….

The strong trend in housing continued as pending home sales rose 3.2%.   Construction spending was down marginally, but also points to stabilization in housing demand.  We continue to believe the data is stabilizing primarily due to seasonal strength.

The ISM surprised to the upside this morning with a strong reading of 52.9.  Of course, this “surprise” was more of a surprise for the analysts as opposed to the actual market which rallied almost 1% heading into the data and immediately sold the news.  The strength in the underlying data is attributable to stimulus and cash for clunkers.  Investors are clearly looking ahead to late 2009 and 2010 when the stimulus wears off and consumers are forced to fend for themselves without government assistance.  The retail sales data doesn’t bode well….Econoday has the ISM details:

The ISM’s manufacturing index burst over the dead-even 50 level for the first time since the beginning of the recession, at 52.9 in August vs. 48.9 in July. New orders led the advance, at 64.9 vs. August’s 55.3 and pointing to rising business activity in the months ahead. Production was also very strong in August, at 61.9 for a 4 point gain and pointing to gains in durable goods shipments and total manufacturing sales. Backlogs also increased, at 52.5 vs. 50.0 in July. But manufacturers are not stocking up, instead they continue to draw down inventories where the index is a very weak 34.4 vs. 33.5 in July. Note that future gains in the inventories index, a seeming necessity given rising production needs, will help give the overall index a big boost. Respondents in fact think inventories at their customers’ firms are too low, with the customer inventories down 3.5 points to 39.0. Deliveries slowed substantially, up more than 5 points to indicate that current production needs are stressing what has become a pared down supply chain. Production activity and the gain in orders has yet to boost employment where the index only inched forward to a still sub-50 level of 46.4.

All the strength here is flowing through to prices where the prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials. No doubt boosted by cash-for-clunkers and gains in transportation, the manufacturing recovery is on the way and together with the gain in the pending home sales index indicate that two key sectors are on the acceleration. Stocks jumped in immediate reaction to today’s 10 o’clock data.

WHAT RESPONDENTS ARE SAYING …

• “Production is picking up as demand [for] orders is being accelerated.” (Nonmetallic Mineral Products)
• “Demand from automotive manufacturers increasing thanks to ‘Cash for Clunkers.'” (Fabricated Metal Products)
• “In addition to improved business come the complications of a supply chain drained of inventory.” (Paper Products)
• “The sudden increase in customer demand, plus the low inventories held at services centers, is causing a shortage in the supply of raw steel.” (Transportation Equipment)
• “[It] appears customers’ inventories are getting low, and they are cautiously placing orders.” (Apparel, Leather & Allied Products)

All in all, it’s hard to take this data at face value as consumers continue to deteriorate and the stimulus continues to play a large role in the economic recovery.  Cash for clunkers is over and the first time home buyers credit is ending.  If these programs aren’t extended can the market continue to surge higher?  The consumer data says no.