The Month in Brief.

Optimism was evident in America … but not in its financial markets. Wall Street had a tough month, and investors hoped it was not an omen for the year. In Washington D.C., more bold solutions were proposed for lingering economic problems. In the retail, service and manufacturing sector, layoffs occurred again and again. Oil prices sank, and gold prices rose. Mortgage rates stayed comfortably around 5%. Investors hoped that hope would translate to action and confidence in the very near future – with the health of banks the biggest concern.

Domestic Economic Health.

The economy was shedding hundreds of thousands of jobs, and it was definitely weighing on consumers. In early January, we learned that December’s unemployment rate was 7.2%, up from 6.8%. In late January, the number of continuing unemployment claims surpassed highs set back in 1982. As January ebbed into February, we learned that America’s 4Q 2008 GDP was -3.8% (at least that was the preliminary reading). During that quarter, durable goods purchases fell 22%; the personal savings rate went up by 2.9%. Consumer spending fell for the sixth straight month in December – a 1% drop. Last month, we learned that retail sales slipped 2.7% in December; consumer prices fell 0.7% and producer prices fell 1.9%.

Interestingly, two key gauges found the service sectors and retail sectors faring better than economists had anticipated. The Institute for Supply Manufacturing’s January manufacturing index just came in at 35.6, above the 32.5 analysts had forecast. In mid-January, we learned that the ISM’s service-sector index registered a 40.6% for December, up from 37.3 for November.

House Democrats crafted a stimulus plan totaling about $825 billion, and President Obama said it was “on track” to become law by mid-February. But what would solve the banking problem? Banks still lacked the confidence and/or capital to lend freely. TARP and TALF money could be used to thaw parts of the credit freeze or at least capitalize banks, but maybe a “bad bank” would have to be created. At the end of the month, discussion surfaced of an “aggregator bank” that would do roughly what then-Treasury Secretary Henry Paulson wanted to do in 2008 – buy up bad assets from thrifts. The FDIC would likely run it; FDIC-guaranteed bonds could help to finance it. The downside is that the government might pay too much for the assets; the upside is that the purchases would boost consumer confidence about banks, leading to more capital and freer lending. At the start of February, it is simply a plan.

Global Economic Health.

Could rate cuts be coming in Europe? Manufacturing data for January is interesting. A broad manufacturing survey revealed that economic contraction worsened in only one of the Eurozone’s top four economies last month – that of Germany. The manufacturing sectors of Spain, Italy and France contracted at a slower pace than in December. The Eurozone manufacturing purchasing managers’ index rose to 34.4 from 33.9 in December; the index also showed manufacturing costs falling at the fastest pace since the survey began in the late 1990s. The European Central Bank is widely expected to cut interest rates in March.

In Japan, Sony, Toyota and Hitachi were posting losses. South Korea ’s exports were down 32.8% in January from levels of a year before, and Indonesia’s December exports declined approximately 20% from a year earlier. Australia’s manufacturing sector shrank for the eighth straight month in January. On the other hand, a purchasing managers index in China rose a full percentage point for January, indicating slowing contraction; Premier Wen Jiabao noted decreasing inventories in ports and rising industrial prices.

World Financial Markets.

In America, stocks had a lousy month. How about the overseas indices? They hurt also. There were exceptions: the Shanghai Composite Index soared 9.3% in January, Brazil’s Bovespa gained 4.7%, and Russia’s RTSI climbed 2.5%. In India, the Sensex 30 dipped 2.4% for the month but gained 8.6% in January’s fourth week. Other indices had rougher Januarys, including Germany’s DAX index (-9.8%), the FTSE 100 (-6.4%), the CAC 40 in Paris (-7.6%), the Nikkei 225 (-9.8%), and the Hang Seng (-7.7%).

Housing & Interest Rates.

Good news and (of course) bad news here. The good news: mortgage rates were amazingly low. In Freddie Mac’s January 29 survey, 30-year FRMs were averaging 5.10%; 5/1-year ARMs were averaging 5.27%, and 1-year ARMs 4.90%. The refinancer’s choice, the 15-year FRM, averaged 4.80% (actually up from 4.62% in the first survey of the year).

There wasn’t much to get excited about otherwise in the housing sector. The bright spot? December existing home sales. They rose 6.5%, with low, low prices helping the gain. New home sales in December? Pretty poor. The Commerce Department measured a 15.0% drop from November, and a 44.8% drop from 12 months before. December housing starts, unsurprisingly, were also way down – down by 16.0% from November.

Major Indexes.

The markets did not exactly share the optimism of the populace – far from it. In fact, January 2009 marked the poorest January in the S&P 500’s history. The same held true for the Dow. 18 We can only hope the markets heat up along with the weather in the next two or three months.

% Change
1 Month
2008
DJIA
-8.84
-33.84
NASDAQ
-6.38
-40.54
S&P 500
-8.57
-38.49
Source: CNBC.com, 1/30/09

February Outlook.

Pessimists have looked at the January numbers and presumed a negative year for stocks, with some assessments gloomier than others. But it is early in the year, and across 2009, we have TALF, TARP, a likely stimulus package, and possibly a bank to buy up bad assets in the wings. If we stabilize banks and restore confidence in that sector, it may prove a huge step toward recovery. There are other problems to address, however. Consumer spending declined by 3.5% last quarter and 3.8% in the third quarter; inventories also rose last quarter, which would seem to promote lower retail prices but certainly not manufacturing growth. Government figures had capital spending down 19.1% in 4Q 2008 as well. Barack Obama, Tim Geithner, Sheila Bair and House Democrats have a huge task ahead: restoring investor and consumer confidence in the face of mighty pressures against economic growth. But the federal government is trying to heal the economy as never before – and looking past the mood and indicators of this moment, its efforts might end up succeeding in momentous ways.

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