Friday, May 29, 2009

Improved liquidity and the ability to raise equity in capital markets have stabilized the economy, producing “green shoots.”

TO BE NOTED: From Bloomberg:

"U.S. Economy: Consumer Sentiment Rose to 8-Month High (Update1)

By Shobhana Chandra and Courtney Schlisserman

May 29 (Bloomberg) -- Confidence among U.S. consumers rose this month to the highest level since September, while business activity shrank at a faster pace than forecast as the auto slump rippled through the economy.

The Reuters/University of Michigan final index of consumer sentiment increased to 68.7, higher than anticipated, from 65.1 in April. The Institute for Supply Management-Chicago Inc. said its business barometer decreased to 34.9 from 40.1 in April; readings below 50 signal a contraction. A separate report showed the economy shrank less than previously estimated last quarter.

“The worst of the recession has passed, but it will take some time before we will see anything close to normal conditions,” said David Resler, chief economist at Nomura Securities International Inc. in New York.

The Chicago report ran counter to other regional figures this month that indicated manufacturing was starting to improve, signaling that the auto slump in neighboring Detroit may be affecting the entire Midwest. Rising confidence limits the risk that consumer spending, the biggest part of the economy, will peter out after increasing in the first quarter.

Stocks gained for a second day. The Standard & Poor’s 500 index rose 1.4 percent to close at 919.14 in New York. Treasury securities climbed, pushing the yield on the benchmark 10-year note down to 3.47 percent at 4:21 p.m. from 3.61 percent late yesterday.

The confidence index was forecast to rise to 68, according to the median of 53 economists surveyed by Bloomberg News. Estimates ranged from 67 to 71. The measure averaged 63.8 in 2008.

Finances Grim

A gauge of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items such as cars, slipped to 67.7 from 68.3.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, rose to 69.4 in May from 63.1 the prior month.

“Consumers see some light at the end of the tunnel,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. “This bodes well for the outlook for spending and for the turn in the economy.”

The Commerce Department also reported today that the economy shrank at a 5.7 percent pace in the first quarter, less than the government estimated last month. Following the 6.3 percent pace of decline in the last three months of 2008, the drop capped the worst six-month performance in five decades.

Lower Than Forecast

Economists forecast the Chicago gauge would rise to 42, according to the median of 55 projections in a Bloomberg News survey. Estimates ranged from 34.2 to 45.

Other regional figures earlier this month were more upbeat. The Federal Reserve Bank of New York factory index rose to minus 4.6, the highest level since August, and the Philadelphia Fed gauge climbed to an eight-month high. The Richmond Fed’s measure showed the first expansion in more than a year.

The Chicago figures are “undoubtedly affected significantly by shutdowns in the ailing automotive industry,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., said in a note to clients. “The rate of decline in manufacturing output will moderate in coming months.”

Consumers’ spirits are being buoyed by the improvement in stock markets and also because gasoline costs are down nearly 50 percent from July highs and mortgage rates are near historic lows, trimming borrowing costs for homeowners.

Recovery Ahead

“Consumers are looking at things like the rise in stocks, they are listening to reports talking about ‘green shoots’ and they believe it,” Chris Low, chief economist at FTN Financial in New York, said in an interview with Bloomberg Television. “They believe that a recovery is coming but they don’t see it in their current job prospects.”

Household wealth is being eroded by lower property values, and the economy has lost 5.7 million jobs since the recession began in December 2007. Economists predict the unemployment rate, at a 25-year high of 8.9 percent in April, may average 9.6 percent next year.

Automakers’ woes may cause more plant closures, production cuts and job losses. General Motors Corp., the world’s largest automaker until its 77-year reign ended in 2008, may file for bankruptcy protection on June 1, people familiar with the matter said yesterday. Chrysler LLC filed for bankruptcy on April 30.

Some executives have expressed optimism. Global capital markets have improved “dramatically,” General Electric Co. Chief Executive Officer Jeffrey Immelt said this week.

“The worst is over” for the economic downturn, Immelt said in a speech in Tokyo. Improved liquidity and the ability to raise equity in capital markets have stabilized the economy, producing “green shoots.” As a result, he’s more confident now than any time in the last nine months, he said.

To contact the reporters on this story: Shobhana Chandra in Washington at; Courtney Schlisserman in Washington at"

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