No Double-Dip Deja Vu Seen for U.S. Economy
Deja vu it ain’t.
The U.S. looks unlikely to suffer the same sort of swoon this year as the one in 2011: Household, bank and company balance sheets are stronger, and the shocks hitting the economy so far are weaker, with retail sales rising more than forecast as gasoline prices show signs of slipping from an early-year increase.
Consumer-loan delinquencies fell across the board in the fourth quarter, the first time that’s happened in eight years, according to the American Bankers Association in Washington. Banks have reduced leverage, with financial-institution debt as share of the economy at its lowest level in a decade. And corporations are flush with cash: The ratio of liquid assets to short-term liabilities is the highest since 1954, based on data compiled by the Federal Reserve.
“It feels eerily similar to last year, but fundamentally it’s quite different,” said Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities in New York. He sees the economy growing 3 percent in the fourth quarter from a year earlier, compared with 1.6 percent in 2011.
That’s good news for the stock market and for companies such as Discover Financial Services. (DFS) Net income for the three months ended Feb. 29 rose 36 percent to a record $631 million, or $1.18 a share, the Riverwoods, Illinois-based credit-card issuer said March 22.
‘Grow Their Spending’
“Consumers are continuing to gradually grow their spending,” Chairman and Chief Executive Officer David Nelms said in an interview. “They’ve finished a lot of the deleveraging that they’re going to do on credit cards and auto loans.”
BlackRock Inc., the world’s biggest asset manager, remains bullish on the U.S. stock market in spite of lower-than-forecast March payroll growth, according to Bob Doll, chief equity strategist of the New York-headquartered company. Job creation fell to 120,000 from 240,000 in February.
“We do not believe that fundamental macro conditions have changed enough, or at all, to warrant a downgrade of our view toward equities,” he said in an April 9 note to clients.
Doll has said he sees a “double-digit” gain for the Dow Jones Industrial Average in 2012. It was 12,849.59 (INDU) at 4:00 p.m. on April 13 in New York, up 5.2 percent since the start of the year, though 3.1 percent off the 2012 high set on April 2.
“We have much better momentum this year than we did last year,” said Chris Varvares, senior managing director of Macroeconomic Advisers LLC. “We’re a year further along in terms of improvement in lending terms and household balance sheets.”
The St. Louis-based company last week raised its forecast for first-quarter growth to 3.1 percent from 2.6 percent, following news of a smaller-than-expected trade deficit in February. Gross domestic product increased by an annualized 0.4 percent in the first three months of 2011.
“The recovery may be finally establishing a somewhat firmer footing,” Federal Reserve Bank of New York President William C. Dudley told business leaders in Syracuse, New York, on April 12. Even so, “it is still too soon to conclude that we are out of the woods, as underlined by the March labor-market release,” he added.
The deceleration in payroll growth last month invited comparisons to last year, when an abrupt slowdown in job creation during April led to speculation in financial markets about an economic double-dip.
This year looks different, said Jonas Prising, president of the Americas at Milwaukee-based ManpowerGroup, the world’s largest provider of temporary workers.
“The recovery seems more broad-based in the U.S.,” he said. “I see it across industries and I see it across geographies.” Risk also is lower, he added. “The external environment and the factors that affected it last year are a lot less severe this year.”
Gasoline prices have risen about 20 percent since Dec. 31, compared with about 30 percent in the first four months of 2011, and they already may have peaked, according to Trilby Lundberg, publisher at Camarillo, California-based Lundberg Survey Inc., which polls filling stations weekly. The average price for regular unleaded gasoline was $3.91 (3AGSREG) a gallon on April 15, down from $3.94 on April 5, according to AAA, the nation’s largest motoring group.
Even with this year’s increase, retail sales in the U.S. rose more than forecast in March, showing consumers are weathering the jump. The 0.8 percent gain in sales was almost three times as large as projected and followed a 1 percent advance in February, Commerce Department figures showed today in Washington.
CKE Restaurants Inc. (CKE) hasn’t seen “a significant impact” yet on its business from higher gas prices, Chief Executive Officer Andrew Puzder said on an April 11 teleconference call with stock-market analysts. The Carpinteria, California-based operator of the Hardee’s and Carl’s Jr. restaurant chains recorded net income of $88,000 in the 12 weeks ended Jan. 30 versus a loss of $5.05 million a year earlier.
Signs that gasoline prices have topped out may be good news for President Barack Obama, whom Republicans have tried to tie to a climb in energy costs.
“The lower they go, the less they will be an issue,” said Bruce Oppenheimer, a professor at Vanderbilt University in Nashville, Tennessee, who has studied energy and politics.
Europe’s sovereign-debt crisis also seems less threatening now than it did late last year, even though the region’s economy may be heading into recession and the problem hasn’t been resolved, said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania.
He credits a shift in strategy by the European Central Bank for allaying some of the concerns. By flooding banks with more than 1 trillion euros ($1.3 trillion) and returning interest rates to a record low 1 percent in December, the ECB helped calm fears of a disorderly break-up for the 17-nation currency union.
While Spanish bond yields rose last week in a sign that the region’s financial troubles are intensifying, they still were below levels hit last year. The yield on government 10-year debt was 5.98 percent at 4:36 p.m. in London April 13, up from 5.76 percent at the start of the week, but below 2011’s high of 6.7 percent.
“The markets are starting to get worried,” Bruce Kasman, chief economist for JPMorgan Chase (JPM)& Co. in New York, said in a video e-mailed to clients on April 13. European policy makers ultimately may have to show that the financial “firewall” they’ve put in place to contain the crisis will work with Spain, he added.
Financial markets also were rocked at the end of last week by fears of a hard landing for China’s economy. Growth slowed to 8.1 percent in the first quarter, the least in almost three years, from 8.9 percent in the previous three months, according to data from the National Bureau of Statistics in Beijing. The news helped drive the Standard & Poor’s 500 Index down 1.3 percent on April 13 to 1,370.26 (SPX) at 4 p.m. in New York.
Japanese growth, in contrast, is picking up as the nation recovers from last year’s earthquake and tsunami that left almost 20,000 people dead or missing, disrupted global supply chains and curbed U.S. growth. The world’s third largest economy will expand 2 percent this year, said David Hensley, director of global economics at JPMorgan Chase in New York. GDP contracted 0.75 percent in 2011.
The U.S. is better able to withstand shocks from abroad because of the progress consumers, companies and banks have made in buttressing their balance sheets, said Susan Lund, a principal at the McKinsey Global Institute in Washington.
“We have more resilience in the economy,” she said. “Households are in somewhat better shape to take a rise in gas prices because they aren’t so stretched with debt payments.”
Their financial obligations -- everything from mortgages and rents to property taxes and car-lease payments -- fell to a 28-year low in the fourth quarter, when measured against disposable income, according to Fed data. That ratio stood at 15.9 percent at the end of 2011, down from a record 18.9 percent in the third quarter of 2007, just before the start of the 18- month recession that ended in June 2009.
Private-sector debt as a share of the economy fell to 201 percent at the end of last year from 207 percent in the first quarter of 2011 and a high of 236 percent in 2008, according to calculations by the institute, which is the research unit of consultants McKinsey & Co.
Financial companies have done the most deleveraging, while about two-thirds of the reduction in household debt was caused by defaults on mortgages and other consumer loans, Lund said.
JPMorgan Chase and Wells Fargo & Co. (WFC), the two most profitable U.S. banks last year, reported first-quarter earnings that topped analysts’ estimates on a surge in mortgage fees. JPMorgan’s earnings per share climbed to $1.31 from $1.28 a year earlier, while Wells Fargo posted net income of 75 cents a share, up from 67 cents.
“We’re in better shape than we were last year,” said Allen Sinai, chief executive officer of Decision Economics Inc. in New York. “Household financial conditions are healthier and the banks are lending more.”
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