Improving credit picture bolsters recovery case

Last week's data and company news continued to show signs of improvement in manufacturing and housing, supporting my case that the US economy will see 3%-4% growth in the second half of 2009. Data last week also showed that general inflation appears to be well under control. Still, initial unemployment claims went the wrong way (up) for the second week in a row, and earnings reports from Sears, Lowe's and Home Depot did nothing to dispel the notion that consumers are still clinging tightly to their hard-earned cash.

The best news of the week came out of the financials sector. Our banks team is beginning to see signs of improvement in both mortgage and credit card delinquencies. This could bode well for housing prices and consumer spending over the next several months. My biggest worry remains the continued slowing in commercial real estate. I am also still keeping an eye on interest rates, though last week rates on the 10-year bond continued to move down to 3.56%.

Credit trends improving
While I want to talk about manufacturing and housing, the new news last week was the report of an improving trend in both credit card and mortgage delinquency rates. Improved credit card and mortgage statistics are good news for bank earnings and hopefully banks' propensity to lend. Although delinquencies overall are showing improvement, its particularly interesting to note that it is the delinquencies in the 30- to 60-day bucket (versus longer delinquencies) that are showing the most improvement. This should bode well for the overall credit statistics in the months ahead. The credit card companies are also seeing improvement in their charge-off rates, with five of the six major credit card companies reporting improved results in July, versus only three of the six companies showing improvement in June.

Over the past several months, I have been pleased to see the job losses getting smaller, but it hadn't turned into any positive news on the consumer front; both retail sales and consumer sentiment have failed to get better. This data explain where some of consumers' cash is going--toward paying off loans and improving personal balance sheets.

Data from the Mortgage Bankers Association announced last week showed a much slower rate of growth in mortgage payments more than 90 days late. While the most common headline discussing this release was the new record rate (9.2%), most articles failed to note that this was a very small increase compared with the prior month. For the past several months, the past 90-days number had been growing between 0.5% and 1% each and every month. While the headline number is still scary, the same "not getting worse as fast" phenomenon is what marked the early signs of a turnaround in other sectors, manufacturing in particular.

Manufacturing, housing, and jobs
The news in manufacturing was also good last week, with two regional manufacturing surveys (New York and Philadelphia) finally showing signs of out-and-out growth, not just slower rates of decline. Many of these types of surveys stopped going down so fast earlier this year, then showed actual improvement in the new orders component of the indexes this spring, and now the composite indexes are showing overall improvement as the production, employment, and inventory sectors of the reports begin to get better. Given tight inventories and planned production increases announced this week by the automakers, I believe there is still better news ahead for manufacturing. The manufacturing sector has been hard hit this recession and is responsible for a lot of the dramatic job losses (only construction has been worse). So as production begins to ramp up, employment, especially higher-paying manufacturing jobs, should begin to improve.

Unfortunately, the initial claims for unemployment were up for a second week in a row, increasing by 15,000. The more important four-week moving average was also up. The seasonal adjustment factor was particularly large last week; this week the factor doesn't change much, so I believe we will see a more pleasing number this week. Looking at past recessions, it is not unusual to see some noise in this statistic after it makes its peak. In the past two recessions, initial claims rose twice before making their final descent.

The housing market also continues to show improvement as existing home sales were surprisingly strong, with unit sales increasing 5.24 million versus an expectation of about 5 million. This represents sequential growth of just over 7%. As important as the raw number is, it is also important that we have now seen this statistic improve over four straight months. Housing starts were also a little better, potentially indicating that housing will not make its usual highly negative contribution to gross domestic product in the September quarter.

On tap
Looking ahead this week, on Tuesday the Case-Shiller price index will be announced, and our housing team is expecting the number to show some sequential improvement. Increasing prices in some low-end markets, combined with attractive interest rates and the potentially expiring first-time buyers' credit, should provide some additional impetus to the housing market in the months ahead, though we are entering a seasonally slower period.

The second release of the June quarter GDP number is also due. My guess is the number originally reported as -1.0% will be revised modestly worse. Inventory build is likely to be higher than originally reported, but the retail sales component was revised somewhat higher, potentially cancelling each other out.

Personal income data is due on Friday, and I am hopeful that incomes will be up modestly as hours worked and average hourly wages, both reported earlier, were up in July. The savings rate that is also reported with the income data should not show much change from the previous month's level of 4.6%.