Are We There Yet?

07.30.2009 // Posted by: Michael Schwert // Posted in: Articles, Switches & Relays

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Are We There Yet?

It’s summer vacation or “staycation” season for many families and this means car trips of short and long duration and the gleeful anticipation of children asking; are we there yet?

This summer, after a dark economic winter and colder than normal spring, there are signs the economy could be improving and prompting the parents of those children to ask; are we there yet? In other words, are we at or near the end of the recession that began in December of 2007? Let’s look at some of the positive events in real estate, manufacturing, and automotive markets, as well as, corporate profitability and unemployment to see how it could be affecting consumers and the relay and switch market.

Home Sales Improving

The housing market continues to show signs of improvement fueled by affordable prices, low mortgage rates, and an $8,000 tax incentive for first time buyers. Existing-home sales rose for the third consecutive month with inventory easing and home prices declining less sharply in June, according to the National Association of Realtors. Existing home sales increased 3.6 percent to a seasonally adjusted annual rate of 4.89 million units in June from a downwardly revised pace of 4.72 million in May, but are 0.2 percent lower than the 4.90 million-unit level in June 2008. Pending home sales rose for the fourth month with growth of 0.1% in May after increases of 6.7% in April, 3.2 % in March and 2.1% increase in February.

The U.S. Census Bureau reports new home sales rose 11% in June over May to an annual rate of 384, 000 units. The largest month-over-month increase in new home sales in over eight years.

PMI on the Rise

The Institute of Supply Management’s PMI for June is 44.8 up from the 42.8 in May, a sixth move higher (a definite trend) from Decembers low of 32.9. The PMI has been below 50 for the past 11 months. The new order rate in June was 49.2 down from last months 51.1 and just under the 50.0 that indicates growth.

The U.S. Census Bureau reported May new orders for durable goods rose 1.8% after a 1.4% increase in April. Shipments of durable goods decreased 2.1% now the tenth consecutive monthly loss.

Cash for Clunkers

The government’s cash for clunkers, actual called the Car Allowance Rebate System (CARS), provides up to $4,500 for a new car buyer that trades up in fuel economy. This program follows the bigger cash for clunkers program that allowed General Motors and Chrysler to reorganize in bankruptcy court shedding massive amounts of debt and unproductive operations. Meanwhile Ford turned a profit in the second quarter of this year without government assistance. Hopefully the government incentives and retooled domestic manufacturers can profitably attract new buyers.

Q2 Corporate Profitability

So far over 70% of the S&P 500 companies that have reported second quarter earnings have exceeded analyst expectations. This is primarily due to cost reductions realized with layoffs. So despite revenues being down twenty to thirty percent earnings were reduced at a lower rate and bettered expectations. This increase in productivity should allow companies to enjoy significant earnings increases once revenues return to growth. This may be the reason behind the recent rally in the stock market as investors try to position themselves for future gains. Another good sign, when coming out of recession stock markets generally improve six months before the economy does and the market turned up in March.

Unemployment and Consumers

The rate of U.S. job losses bounced back up to 467,000 in June after slowing to 345,000 in May but not reaching the 504,000 lost in April. The average monthly loss for the second quarter was 438,700 that is far better than the 700,000 average rate in the first three months of this year. With the large percentage of S&P 500 companies showing better than expected profits in the second quarter future job losses should continue to slow.

Consumer spending accounts for two thirds of economic activity in U.S and so far this year consumers are saving eight percent of their income, up from a negative rate a few years ago, and spending less. This surely is due to decreases in the value of real estate and retirement accounts as well as the fear of losing a job. If existing and new home sales continue to grow real estate prices will first stabilize and then begin to improve. Since the lows of early March the S&P 500 index has improved about 45%. Those that kept their retirement funds invested should see a significant improvement when they receive second quarter statements. Both real estate stabilization and retirement account growth will help consumers feel better about spending, particular the 90% of the population that is employed.

The Feelings in the Relay and Switch Market

The latest Cumulus Market Notes survey of sales and marketing people of manufacturers and distributors of switches shows a positive trend in existing and expected business conditions. The graph below shows the appraisal of current business conditions for each month back to June of 2007. A positive reading indicates improvement and a negative one shows a declining market. The survey shows feelings about the switch market bottomed from September of last year through January of this year. The last reading for June jumped above zero for only the third time in two years.

The next graph shows expectations of business conditions six months from now. Similar to current conditions, expectations for the future bottomed in a period from September to December of last year. Broke above zero in February of this year and the June reading is the best since April of 2006.

Second quarter sales data for the relay and switch markets shows consistent but mixed results when compared to Q1. For the relay market about 90% of manufacturers have reported and of those 79% show sales down in Q2 compared Q1. For the switch market about half of the manufacturers have reported and of those 83% indicate a better second quarter than first.

Are We There Yet?

The signs say we are almost there but far enough away that a detour could delay our arrival.

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