U.S. stocks lost ground for the first session in four yesterday after beginning the day meaningfully higher.  While the news that a U.S. Navy Seal team eliminated bin Laden sparked the early-session rally, a bounce in energy prices (from the day’s low), concerns over the EU bailout fund and Israeli/Iran tensions seemed to offset that great news. 

Yesterday’s economic releases were positive, but even the strongest aspect of this economy – manufacturing – has to deal with the challenges of rising input costs. 

The areas of safety pretty much ruled the day (although the cyclical consumer discretionary was thrown in with the leaders).  Health care, consumer discretionary, staples and utility shares were the only groups to close higher.  Energy, basic material and tech were the biggest losers. 

After sliding in early trading on the bin Laden news, both crude and gasoline began to rally again just after the trading session for stocks opened.  The two vital commodities ended the day lower but above session lows -- crude closed at $113/bbl (was as low as $111), while gasoline traded down just 5 cents to $3.34/gallon (intraday low was $3.30).  That price on wholesale gasoline is just 6% below its all-time high hit in the summer of 2008. 

The national average for retail gasoline inches closer to the $4 mark, hitting $3.97 this morning – that’s within 14 cents of the highest recorded national average (7/17/2008).  A guy I know who owns a landscaping company told me last night that he’s getting hit with cancelations for his lawn service, which one expects is a function of what people have to pay at the pump right now, causing them to shed non-essential outlays. 

In the latest twist regarding the EU’s desperate attempt to kick the debt can further down the road by delaying the inevitable restructuring, Finland’s latest election appears to be crimping that effort.  The newly elected True Finns Party stated it cannot support Portugal’s bailout package, and that means that there’s no consensus for the EFSF, which is providing funds to Greece and Ireland too. 

Market Activity for May 2, 2011

Sector Activity for May 2, 2011

ISM Manufacturing

The Institute of Supply Management’s gauge of nationwide manufacturing activity cooled just a bit for April, but not nearly as much as most of the month’s regional reports showed.  The figure printed a reading of 60.4 after the 61.2 in March – this cycle’s peak (thus far) is the 61.4 hit in February. 

The sub-indices were mixed as some dipped and others increased, but all remain at solid-to-strong levels.   New orders, supplier deliveries (which is probably somewhat affected by the Japanese production problems) and employment all eased.  Production, inventories, backlog of orders, new export orders (which jumped six points to 62.0, one of the highest readings on record) and price paid all rose. 

And on prices, this is what respondents to the survey were saying:

“Rapidly rising raw material costs putting extreme pressure on profits.”  (Food & Beverage Industry)

“Plastic resin product prices are climbing so fast that suppliers are attempting to increase prices on orders already accepted but not yet delivered.”  (Chemical Industry)

Customers are rebuilding safety stock levels of inventory, and also trying to buy ahead of material price increases.”  (Plastic & Rubber Industry)

So the manufacturing sector continues to roll along, driven by auto assemblies (as low interest rates and a higher stock market boosts car sales), federal spending on infrastructure (just now beginning to tail off), higher depreciation allowances (that incentivize businesses to push forward machinery purchases), and Asian economic activity.  Nevertheless, rising prices are beginning to create problems.    Manufacturing is far and away the bright sport of this economy, yet still not enough to provided even average overall GDP growth.  When you closely watch everything that is occurring, I don’t think it’s wise to dismiss the possibility of a QE-induced recession.

Construction Spending

Construction spending bounced in March after three months of particularly deep decline, down 17% at an annual rate December – February. 

The increase was driven by private-sector residential spending as the segment jumped 2.6%, although it followed a 6.8% slide in February.  Private-sector nonresidential spending rose 0.9% after slipping 0.2% in February. 

Public sector spending, which has kept total construction spending from falling even further (see chart below), rose just 0.1% in March as outlays on residential projects fell 3.0%, which follows a 7.3% slump in February.  Public-sector nonresidential spending dipped 0.2% after a 1.2% decline in the previous month.  The problem with this whole game of the government buoying activity  is that it has a blow back effect as Washington’s spending binge is on even more borrowed money than is usual – pretty much a problem for the economy as a whole, which is why this expansion is such a weak one. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900