The restructuring of the auto sector risks delaying the economic recovery. The fact that GM will shut down plants this summer and faces streamlining is no surprise to the trade. A potential bankruptcy is on the horizon and may add risk more production cut backs, but the situation is well known. Likewise, Chrysler’s retrenchment and bankruptcy has been discussed. However, it should be noted that AKS (AK Steel) lowered its profit forecast. It made the following statements:
· It said that Q2 shipments of steel would be closer to 725,000 tons than the original 800,000 ton estimate.
· Average price per tone would decrease 3% to 4% sequentially in Q2.
· It would post an operating loss of $75 to $80 mln compared to a prior forecast of $50 mln.
· AKS is not only impacted directly by GM and Chrysler, but also suppliers who will see lower output levels.
The news is a reminder that the auto sector will remain a drag on the economy through the summer, and an economic recovery will be slow to develop until structural issues are corrected. The auto industry’s move toward health is complicated by government and union intervention. If AKS is impact, other suppliers and related businesses will also be affected.
Looking to housing, DHI (DR Horton) said that the industry faces many challenges which are cooling the enthusiasm toward the recovery in the housing market. DHI indicated:
· DHI continues to reduce inventory on both a dollar and volume basis.
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· Said that speculative homes are being built, but at lower costs. DHI is focusing more at supplying smaller homes which are attractive to first time buyers. It is also pricing to compete with foreclosures.
DHI indicates that foreclosures present ample housing supply and are holding back the housing market from a full recovery. The excesses need to be clear to put the housing sector on firmer footing. A removal of foreclosures will also raise home prices and improve consumer wealth.
Thinking about Labor
The market is going to focus closely on employment data over the next few days. ISM data points to falling labor demand and a contraction in payrolls, but the drop should moderate from recent months. The market will take a look at ADP data today for clarification. The market is looking for the ADP report to show a 645,000 drop in private sector payrolls. The ADP - BLS payroll relationship can be loose, and the ISM employment numbers are pointing to a contraction in total payrolls of about 465,000. Besides the ADP report, the market may take a look at Challenger numbers. Layoffs have surged in recent months, but are showing signs of peaking. Hiring intentions are depressed, and have not changed materially in recent months. There should be a continuation of the recent trend within the April data. Hiring will remain downbeat, but layoff intentions will continue to fall. The auto industry is the main risk to the outlook for labor market stability as GM and Chrysler are restructuring and closing plants.
The table below displays the trend in Challenger layoff and hiring intentions for the month of April. The change in payrolls and the unemployment rate are included. There is limited relationship between the Challenger data and the BLS numbers on a month to month basis, but the table provides a reference point for today’s data.
The ISM employment indices suggest the worst for the labor market is behind. However, demand remains historically depressed. The ISM numbers tend to lead shifts in the unemployment rate. Notice that the ISM indices worked higher in the 2001 to 2003 period prior to a peak in the unemployment rate. This is a sign the employment report is a lagging indicator of labor market conditions. It looks like the unemployment rate falls when the employment indices rise above 50 and rises when the employment indices fall below 50 – roughly speaking.
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