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Eye on the Market | April 9, 2012
J.P.Morgan

Q&A on the USA, with a watchful eye on the risk of giant man-eating plants; Spain

Our view for 2012 was that economic and equity market conditions in the US and Asia ex-Japan would be better than in Europe. So far, that view is on track. Spain in particular is in difficult shape (see page 5); its banks and government may have to borrow 1.5 trillion Euros over the next 12 months while in recession. Both the ECB and EU will need to keep the spigot open to prevent Spain from becoming a bigger problem. This week, some Q&A on the US recovery, flows into bonds and stocks, profits and P/E multiples, municipal bonds, and the long-term US fiscal situation.

The Fed appears to be saying that no additional monetary easing is needed unless the economy worsens further. Are there any signs that the US recovery is becoming self-reinforcing?
Durable goods consumption, equipment & software spending, vehicle sales, bank loans to companies, manufacturing payrolls (even after Friday’s disappointing report) and housing stats (building permits, multifamily housing starts) have improved over the last few months. While delinquency rates are in better shape (credit card delinquencies are back to 2007 levels), household credit growth is still weak. However, homebuilders are seeing stronger demand, and nationwide remodeling continues to rise. We see opportunities in retailing and building products companies that may benefit from a continuation in these trends.

Publicly-held builders reporting stronger demand
Percent change, YoY in latest fiscal quarter
[Chart showing percentages for Lennar, KB Home, Toll, Hovnanian, DR Horton, NVR, Pultegroup]
Source: Corporate Reports. Empirical Research Partners.

Residential remodeling index
Number of homes, millions, 3-month moving average
[Line chart showing index trends from 2001 to 2011]
Source: BuildFax. Empirical Research Partners.

Has the data really been that good? I heard better US economic data has a lot to do with the weather.
Parts of the US experienced the warmest March in recorded history. Measured from December to February, the winter was the 4th warmest on record. I don’t think there are reliable models to estimate the impact of demand being pulled forward, so we will have to see how consumer spending, housing and payrolls behave in the months ahead. As our Chief Economist Michael Vaknin reminds me, other distortions come from the “catch-up” effect from Japan’s tsunami. As shown below, some strength in auto sales came from pent-up demand for Japanese cars, a process which now seems complete.

US auto sales in the wake of Fukushima
MoM change in SAAR auto sales, millions of units
[Bar chart showing Japan vs US+Other auto sales from Jan-11 to Jan-12]
Source: BEA/Wards, DB, J.P. Morgan Private Bank. Box indicates impact of Japanese earthquake.

It looks like pent-up demand for Japanese cars has caught up, SAAR million units
[Line chart showing U.S. and other vs Japan auto sales]
Source: DB, J.P. Morgan Private Bank. Shadings indicate Cash for Clunkers and Japanese earthquake, respectively.

So where does that leave the US payroll and growth picture?
The weakness in the payroll report was almost entirely concentrated in retailing. Net of distortions and seasonal adjustments, it looks like payroll growth is running at 150-175k per month, and GDP growth is running at a 2.25% trend pace, both below prior recoveries. While 2.25% is a barn-burner compared to Europe, it only corresponds to a modest improvement in employment. That’s why 2013 US fiscal policy is so important: this is not a recovery that can withstand much tighter fiscal conditions.

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