Mark Luschini is chief investment strategist at Philadelphia-based regional brokerage Janney Montgomery Scott and managing director and senior vice president of Parker/Hunter Asset Management, which manages around $950 million in assets.
September’s unemployment rate rose to 9.8 percent with 263,000 job losses and initial job claims jumping to 551,000. What does this data say about the hoped-for V-shaped recovery?
M.L.: It suggests that the recovery, which is well-entrenched at this point, will be uneven.
While there are those who have largely been in the camp of a V-shaped recovery, we have not. We expected to see a sharp rise in economic activity in the third quarter of this year, possibly in the fourth quarter as well, but a good percentage of that activity is a byproduct of the stimulus efforts. Even then, we expect to continue to see job losses, which will ultimately bring the unemployment rate north of 10 percent.
We also believe that the recovery after a couple of quarters of above average economic activity will likely taper off and be more tepid across 2010. Therefore, the unemployment rate, which may push higher from here, will likely stay elevated well through next year.
We’ve lost 7.2 million jobs since the downturn started in December 2007, and we needed 3 million new jobs, more than 125,000 per month, to match population growth, and to close the 10 million gap by September 2011, we probably need 550,000 new jobs a month. If that’s not possible, how will it affect the economy?
M.L.: The short answer is that it’s not plausible at this juncture. What’s required to absorb not only the 125,000 or so coming into the workforce for the first time and also draw down the unemployed to the level at the start of the recession would require a much faster growth rate that what we expect.
Typically, a 3 percent growth rate in the economy is required to absorb just those coming into the workforce for the first time, so you can imagine the growth rate to also draw down the unemployed must be well in excess of 3 percent, which we don’t foresee.
And consumer spending, which must ultimately pick up to replace the fiscal stimulus phase, will not be strong enough to sustain that economic growth speed.
That doesn’t mean the economy will relapse into recession. It means we’re likely to be in this “new normal” period, where the economic growth rate is below the 3 percent level. We don’t foresee a relapse to the inactivity levels in the fourth quarter of 2008 and the first quarter of 2009, where the world economy virtually went into cardiac arrest.
Car makers posted tepid numbers last week. But the September ISM Manufacturers report showed another month of some growth, with 13 industries reporting growth, up from 11 in August. How important is this data to figuring out the health of the U.S. economy?
M.L.: I was not surprised to see car sales slump, largely because we felt the “Cash for Clunkers” program was going to borrow from future demand.
The manufacturing reports are important, even though manufacturing is less important to the economy than over the last several decades. It’s still indicative of not just domestic but global order. And in seeing the reading still north of the magical 50 — the line of demarcation between expanding and contracting activity, it’s encouraging.
The growth in manufacturing activity is partially driven by the inventory restocking by businesses that basically allowed their inventory crop to be drawn down severely through the first half of this year due to concern over final demand. Now that there has been a whiff of resumption of spending by both consumers and businesses, it’s a natural response for companies to rebuild inventories in anticipation of future sales.
Pending home sales and construction activity have been rising, but we still have foreclosures and the imminent end of the $8,000 tax credit for new-home buyers. Analyze the housing situation for us.
M.L.: The housing situation is providing glimmers of hope, and housing is critical to stabilizing not only the balance sheets of consumers but that of banks as well. To see increases in not only the sales of new and existing homes but also the lift in pending sales activity is encouraging. Obviously much of that has been driven by historically low mortgage rates, which are being helped by the Federal Reserve’s efforts to buy mortgage debt directly in the market, helping to keep mortgage rates low and as well the home purchase credit.
In addition, housing prices in the aggregate have fallen to the point that housing affordability is exceedingly reasonable. It’s the cocktail of low interest rates and incentives as well as affordability which is encouraging buyers into the marketplace, and that’s good news for the housing market, albeit the question remains what happens if this home purchase credit terminates and if interest rates would begin to creep higher.
Don’t you expect interest rates to rise, after recent comments from the Fed?
M.L.: We think the likelihood of seeing higher rates is still a ways off. We believe the Fed is likely going to remain dovish long enough to insure that the recovery is sustainable.
What will the stock market do during the rest of October?
M.L.: The stock market is a long way from the lows of early March. At this point, investors are looking beyond news that is just “less bad” to actual tangible good news. Immediately facing investors are the upcoming earnings reports. The market will be looking not only at improving earnings growth but also at the source of those earnings. Last quarter, share prices moved higher on better-than-expected earnings, even while those earnings came largely through cost-cutting. The market would prefer to see earnings this quarter coming through sequential revenue growth. Beyond the earnings, we think the market has support in the U.S. economy and on a global basis.
