Economic Hope Spring's Eternal, No Joke!
Spring is in the air, and stocks look bullish, no joke... Market sentiment is finally turning toward acceptance of recession and anticipation for recovery.
Some poor economic data and corporate news was brushed aside like a lazy fly ball this morning. Hope is eternal, and stocks are rising. Today's news flow was far from celebratory, and so we must wonder, have we finally accepted recession? Are we ready to look forward...
ECONOMIC DATA & ANALYSIS
ICSC-UBS Weekly Same-Store Sales
The retail environment could not have found worse news this morning than the weekly sales growth data from the ICSC. The measurement set a new low for recent history. At just 0.5% growth, coming off of a 1.0% increase last week, the consumer is threatening to close stores the nation over. Mall vacancies will rise, commercial REITS will suffer with poor profit trends and commercial real estate will collapse, or so we expect. But, this is all now accepted by the consensus, not like when we were first warning of the coming collapse of commercial real estate in mid-2007. Pundits were still pushing the commercial market as an undeterrable force.
We continue to dislike the department stores most, which unfortunately fall in the barren middle ground between discount and luxury. It's the no man's land of retail, so stay away! J.C. Penney's (NYSE: JCP) news last week should have been no surprise to Greek readers.
Construction Spending February
Construction spending fell 0.3% from a revised January figure, and was down 3.5% from the prior year period. No big surprise here in the trend, but the rate of decrease was not as bad as the consensus expected (-1.1%). Is this reason for hope? Probably not. Commercial construction is just getting into line now behind residential. The consensus was simply basing the rate expectation on recent results, as the rate of decline in December and January ran much higher than this. However, at least the measure did not offer reason for further panic, and at this point, we'll take that.
Nonresidential construction was only down 0.1%, but the report contradicted itself, with the table listing growth and the text calling it a decrease. Commercial construction rose 2.7% from January and 1.4% from last year. We would venture to guess that banks are still more freely lending to businesses and to producers of commercial property, than they are to residential anyway. Perhaps a level of speculation still exists within the commercial space.
My Anecdotal Evidence
I had a nice walk from the subway the other day with a New York area developer, and he was full of hope and promise. Now, maybe he was just testing to see if he could sell me some property, since I was wearing an expensive suit, but I think not. This individual, an extremely nice guy, spoke about a development of condos outside of Manhattan that was in process without the pre-sale of the units.
Commercial Real Estate is Due for Decline
The pain in retail will without doubt lead to serious consolidation of restaurant and retail establishments across the nation. This will inflict pain on the commercial operators of mall and strip, and on the developers. Haven't you noticed the vacant properties popping up yet? I have already noticed them within my Upper East Side hood, which is supposedly insulated from all this pain. In past years, on my way to the subway, I might pass one or two "available for rent" signs and now I pass about 3 or 4.
There is one other interesting point of focus in this report that we should review. Office construction decreased 1.8%, which we view as another indicator of the increasingly expense centric mindset of corporate managers. They are facing rising commodity and energy costs, and they have to squeeze their expense structure as well as possible now. But, you can only squeeze so far, before you have to start selling poor performing assets and laying off excess workforce to satisfy shareholders.
ISM Manufacturing Report
The Institute for Supply Managers reported its Business Index at 48.6, a level indicative of economic contraction. Still, the fact that the figure beat both expectations and last month's level, offered no reason to sell off further. This still marked the second consecutive month of economic contraction. Also, there was some anecdotal information of concern noted in a comment that European business demand remained strong. This is bad news, though perhaps a flawed source, for those hoping Europe suffers with us. We need Europe to feel some pain so that the ECB might cut rates and the dollar might stabilize or strengthen. On a positive note, the employment index improved to a level that is indicative of additive contribution to the Labor Department data that is on tap for Friday.