As the first of the third quarter financial reports were released last week, analysts were making predictions pointing to an optimistic quarter — particularly in the finance and retail sectors –and an increasingly positive view of an apparent economic recovery for fourth quarter and 2004.
Last week alone, consumer confidence picked up and new claims for unemployment insurance moved lower, while housing construction surged and industrial production increased. These important indicators were coupled with stock prices that hovered near 16-month highs — the Dow Industrial Average keeps inching toward the benchmark 10,000 level again — and supported further by a strong September at retail.
The one remaining issue is the apparent jobless recovery, with companies becoming far more efficient and profitable with far fewer workers. Defying traditional patterns, this recovery has yet to generate sustained improvement in employment, after 2.5 years of steady losses that equated to 2.8 million lost jobs.
There are positive signs. The economy added 57,000 jobs in September, the first gain after nine months of losses. The unemployment rate has slowly declined from a peak of 6.4% in June to the current level of 6.1%.
The improving employment picture appears to be influencing another key indicator as the University of Michigan's preliminary consumer sentiment index for October rose to 89.4 from 87.7 in September. The closely watched measure of consumer confidence in the U.S. beat economists estimates of 88.2 for the month.
As September's job gains made headlines, consumers pushed the survey's preliminary current conditions index up to 102.2 from 98.4 in September. The expectations index, which tracks perceptions about the future of the economy, rose slightly to 81.2 from 80.8 in September.
“This confirms that consumers are starting to feel an improvement,” said Kurt Karl, head of economic research at Swiss Re, in a Reuters report. “This is not a hard number of actual hires but it shows that consumers are sensing some good news on the job front and the income front.”
One other positive indicator that analysts are citing is the ratio of positive to negative pre-announcements, which has been the strongest its been in several years.
Already, The Sportsman Guide and The Sports Authority have both raised estimates for their third quarter results. So far, no companies on the vendor side have issued improved guidance. The revised guidance from TSA, reported here on Monday last week, pushed other retail stocks higher for the week. Galyans benefited the most, with GLYN shares climbing 11.3% for the week to close at $12.19 on Friday.
Dicks SG increased 8.4% for the week, while Big 5 rose 8.2% for the week. TSA shares were up 3.1% for the week to close at $36.08 on Friday. Sport Supply Group rose 6.2% for the week.
Yet some of the recent sales and profit gains by companies in our industry may be harder to maintain as the dollar strengthens and inventories get too tight to respond to the consumer enthusiasm.
And others economists and analysts worry that the good results evident in corporate earnings and retail sales were achieved largely with the government tax breaks and lower interest rates.
“The worry is the extraordinary support the U.S. economy has received from tax cuts, mortgage refinancing and record-setting home sales has not succeeded in promoting upturns in employment and capital spending,” said John Lonski, managing director and chief economist at Moody's Investor Service in a Chicago Tribune article. “That is necessary for a self-sustaining economic recovery.”
Real consumer spending has increased at an annualized rate of six percent or more in only three quarters in the past decade — and none of them were back-to-back quarters. Some feel it's tough to make a case that the consumer will repeat or surpass the Q3 retail improvement in the fourth quarter.
That doesn't mean the expansion is short-lived. Some of what consumers bought in the third quarter came out of already slim inventories. With business stockpiles at an all-time low relative to sales, suppliers will have to step up production so they don't lose sales. In economic terms, this is a pure Reaganomics trickle-down theory at work. The government gives tax relief, consumers buy goods, inventories get lean, companies make more goods and hire more people, people with jobs buy even more goods, fueling the cycle.
“A key cyclical dynamic is the boost to growth that comes from the inventory cycle,” says John Ryding, the chief market economist at Bear Stearns. The holding profits on inventory have been rising sharply due to the 1.0% Fed funds rate, which should result in a boost to inventory investment over the next two quarters”, he adds
Henry Willmore, the chief U.S. economist at Barclays Capital agreed, saying inventories could easily make a positive contribution to GDP growth in the current quarter and in the first half of 2004. And he said that consumer spending should get a boost from “a significant tax refund because of over-withholding”.
According to the median forecast of 60 economists surveyed by a USA TODAY report, the U.S. economy may have grown at a 5.4% annual rate in Q3 – the fastest pace since the fall of 1999. Based on the survey that was conducted in early October, the economy is expected to grow 4.0% in Q4 and 3.8% in full-year 2004.
The hope is the stimulus gives rise to new hiring, as companies attempt to replenish depleted inventories, said one analyst, but also warning that we have no indication of that yet.
