Rally in US key indicators puzzling for investors

INVESTORS AND analysts have a crucial question to consider: how rapidly and vigorously will the rally in leading economic indicators translate into a recovery in industrial activity and consumer spending?

Consumer confidence data on both sides of the Atlantic has risen from lows but this improvement in sentiment provides little guarantee of a rebound in spending in the face of rising unemployment and continuing property market weakness.

US consumer confidence rose from 25.3 in February, a record low, to 39.2 in April, and a further improvement to 42 is expected in the Conference Board data for May, due out tomorrow.

US petrol prices have fallen compared with last year, providing a boost to consumer sentiment, but this week’s data releases will highlight continuing housing market weakness and a grim outlook for employment.

The Case-Schiller measure of US house prices in 20 metropolitan areas, due out tomorrow, is expected to show the year-on-year decline slowing slightly from -18.6 per cent in February to -18.3 per cent in March.

Home sales, due on Wednesday, are seen rising from 4.57 million in March to 4.65 million in April while new sales, due on Thursday, are expected to increase from 356,000 to 363,000.

US initial jobless claims, also due on Thursday, are forecast to fall to 625,000 from 631,000 in the previous week. Most analysts expect the US unemployment rate to hit 10 per cent by the end of this year and the Federal Reserve’s latest forecasts suggest it could still be as high as 8.5 per cent by the end of 2011.

Thursday is due to bring the figures for durable goods orders, with the core measure (non-defence capital goods, excluding aircraft) down 19.4 per cent in March compared with the same month last year. Continuing declines in durable goods orders point to further weakness in business investment spending.

Joseph LaVorgna, chief US economist at Deutsche Bank, warns that there is little need for businesses to make capital investments when spare capacity has risen so much.

Revisions to first-quarter US gross domestic product will be published on Friday with the headline growth measure likely to be revised from -6.1 per cent to -5.8 per cent.

The euro zone consumer confidence figure, which is due for publication on Thursday, is expected to rise from -31.3 in March to -29 in April. The underlying measures in the European Commission’s survey – expectations for significant purchases and property deals, concerns about unemployment and the outlook for household finances – all point to a muted recovery in consumer spending.

Germany’s Ifo business climate survey for May, due today, is forecast to increase from 83.7 to 84.8, fuelling hopes that the trough for economic activity has passed. – (Copyright The Financial Times Limited 2009)