Key US Data Releases and Events

The slowdown in corporate profits growth—revealed in the third report for fourth-quarter 2011 GDP—is a troubling omen for stock market returns for the remainder of the year. The Bureau of Economic Analysis reported that after-tax corporate profits growth was just 1.1% quarter-on-quarter in the fourth quarter, compared to 2.7% in the third quarter and 4.3% in the second quarter. Year-on-year growth was 8.5%, down sharply from the 20–30% growth rates seen in 2010. The profits slowdown should not be a surprise since it partly reflects a return to normal growth after two years of super-normal growth in 2009–10. But the slowdown also reflects slower productivity growth—firms are finding it harder to get more output from existing employees—as well as poor growth performances in the rest of the world, made worse by a stronger dollar. Indeed, while overall profits continued to grow in the fourth quarter, profits from the rest of the world fell. Expectations for corporate earnings are central to the outlook for stock market performance. The S&P 500 index is now at 1,403 and current expectations for S&P 500 earnings per share (EPS) are $104. This gives a price/earnings (PE) ratio of 13.4, meaning that investors are paying $13.4 per share for each dollar of expected earnings this year. Last year, investors were only willing to pay $11/share for a dollar of earnings (a PE ratio of 11). Indeed, most of the stock market gains this year have been due to improved valuations driven by reduced fears of a double-dip recession. PE ratios could rise a bit further this year, but most likely it will likely take better-than-expected corporate profits to drive stocks higher. Improved confidence will likely not be enough. The fact that corporate performance is being hampered by the above-mentioned factors could mean a bumpy road ahead for stocks.

In addition to the third pass at fourth-quarter GDP, this past week (March 26–30) brought data on home prices and durable goods, and more evidence on the impact of rising gasoline prices on consumers. Home prices fell again in January, and there are no indications that a pickup is imminent. Durable goods orders rose in February to make back some of January’s sharp decline, with motor vehicle orders a bright spot. Consumer sentiment readings were mixed, with the Conference Board index falling and the Reuters/University of Michigan index increasing. In both cases, measures of current conditions rose while expectations worsened, as inflation expectations one year ahead surged. Finally, consumer spending was stronger than expected in February, and far outpaced income growth; a drop in the saving rate made up the difference. Core consumer price inflation was subdued.

February’s payroll figures will be the highlight of the upcoming week (April 2–6), and another positive report is expected: 210,000 jobs added, with a nominal decrease in the unemployment rate (to 8.2%). This would be consistent with the data on initial unemployment insurance claims, which have declined steadily, and continued evidence of labor market optimism from consumer surveys. Despite higher gasoline prices, light-vehicle sales should remain robust in March, although February’s 15.0-million-unit sales pace (annual rate) is probably unsustainable in the short term. The ISM manufacturing index is expected to show strength in March, while the ISM non-manufacturing index should pull back slightly, but remain in expansion territory. Finally, particularly warm weather in February should give a boost to construction spending.

Monday, April 2 – ISM Manufacturing Index (Mar.)

• IHS Global Insight: 54.0
• Consensus: 53.1
• Last Actual: 52.4 (Feb.)

What to Look For

• An increase in manufacturing, centered on a rebound in supplier deliveries

Implications

The ISM index for manufacturing should firm to 54.0 in March, from 52.4 in February. The index will rise not because March was that great, but because February was not as bad as the headline figure suggested. Much of the February dip can be attributed to a 4.6-point drop in the supplier deliveries index, which should rebound in the March reading. Most of the remaining components should show improvement. An item to watch will be exports, which scored a robust February increase.

Monday, April 2 – Construction Spending (Feb.)

Construction Put in Place

• IHS Global Insight: 0.3%
• Consensus: 0.7%
• Last Actual: -0.1% (Jan.)

Construction Excl. Residential Improvements

• IHS Global Insight: 0.4%
• Last Actual: 0.3% (Jan.)

What to Look For

• A weather-aided increase in residential construction

Implications

Construction spending has benefited from mild weather recently. This past winter was the fourth warmest on record and the 20th driest since 1895. February was mild, and payback numbers are not expected. Instead, a modest 0.3% increase in total spending is projected, with residential spending accounting for all of the increase.

Tuesday, April 3 – Motor Vehicle Sales (Mar.)

• IHS Global Insight: 14.5 Mil.
• Consensus: 14.5 Mil.
• Last Actual: 15.0 Mil. (Feb.)

What to Look For

• Fewer light-vehicle sales in March, but still a robust number

Implications

Light-vehicle sales levels in March will sustain the positive first quarter results, although sales are expected to recede mildly from the February running rate.  As long as fuel prices remain an irritant to consumers, as opposed to a outright hindrance, momentum should be carried forward through the year.

Wednesday, April 4 – ISM Non-Manufacturing Index (Mar.)

• IHS Global Insight: 56.8
• Consensus: 56.6
• Last Actual: 57.3 (Feb.)

What to Look For

• A small deceleration in non-manufacturing activity

Implications

The ISM index for non-manufacturing is expected to slip a half point in March to 56.8 but remain well within expansion territory. It is too early to say that the pullback this month signals a soft patch in the US economy. At this point, it is more likely the result of month-to-month volatility.

Friday, April 6– Employment Report (Mar.)

Nonfarm Payrolls

• IHS Global Insight: 210,000
• Consensus: 210,000
• Last Actual: 227,000 (Feb.)

Unemployment Rate

• IHS Global Insight: 8.2%
• Consensus: 8.3%
• Last Actual: 8.3% (Feb.)

Average Hourly Earnings

• IHS Global Insight: 0.2%
• Consensus: 0.2%
• Last Actual: 0.1% (Feb.)

What to Look For

• Another strong month, with 210,000 jobs added
• A token decline in the unemployment rate, to 8.2%

Implications

March should produce another good employment report. While initial unemployment insurance claims may have flattened out recently, they are still signaling solid employment gains. We expect to see 210,000 payroll jobs added, and the unemployment rate edging lower, from 8.3% to 8.2%. This would be the fourth 200,000-plus month in a row.

by Nigel Gault and Paul Edelstein