Economic Flux

By: Chad Hudson & Ryan Bend | Thu, Sep 9, 2004
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Last week was capped off by the August employment report that revealed 144,000 jobs were added. While slightly lower than the 150,000 jobs economists predicted, it was the strongest report since May and reversed a four month trend of weaker employment gains. Additionally, the number of jobs created in June and July were revised upward by a total of 59,000. The unemployment rate dropped to 5.4%, the lowest since October 2001, and down 90 basis points since June last year.

Showing a bit of contrast to the employment report, Challenger Gray & Christmas reported that companies announced 74,150 layoffs in August. This was 6.5% higher than in July, but less than last year. Looking at the short-term trend, August had the higher number of layoffs in the past six months. But looking at the total number of layoffs announced year-to-date, it is 23.5% lower than during the same period last year. The placement started collecting hiring announcement recently and said that hiring announcements increased to 132,105 in August from 26,800 in July. Most of the gain came from retailers.

On Wednesday, the Federal Reserve released the latest Beige Book. Interestingly, it mentioned a dynamic which we have discussed on several occasions. The manufacturing sector has been expanding, while consumer spending has softened. But, even as we have pointed out, much of the apparent weakness is due to comparing results to a period when consumers were rapidly accelerating their spending. The Beige Book noted that, "Despite the recent slowing in retail sales, several Reserve Banks noted that sales were still up on a year-over-year basis." Similarly, "demand for consumer loans softened somewhat, but several districts noted increased commercial lending." Residential construction "remained at high levels but slowed a bit in some regions."

Homebuilder Hovnanian Enterprises, continued to prosper during its third quarter. It announced that for the quarter ending July 31, earnings jumped 25% driven by a similar increase in revenue. Net new orders increased by 19% from last year, with the dollar value increasing 34% during the quarter that ended July 31, 2004. The company added that August orders have remained strong with the dollar value up 57% from a year ago. The strong orders during the quarter pushed backlog to $2.7 billion, 68% higher than last year. Based on the strength the company experienced and continues to see, the company increased guidance for the full year. The company first issued guidance for 2004 last year when it expected to earn $4.13 per share. Now the company expects EPS of $5.30 this year, which is $0.30 higher than guidance given at the end of the second quarter. This will be 34% higher than full year 2003 earnings. Similar to the data from the Mortgage Bankers Association, Hovnanian has seen a shift to adjustable rate mortgages from its buyers. During the quarter 42% of its originations were for ARMs compared to only 19% last year. The company also noted that the majority of ARM customers are choosing three and five-year ARMs. During the conference call, the company openly complained that investors are not rewarding the company for the rate of growth the company has strung together over the past several years. The company noted that its PE ratio is about only half the market multiple while it has grown earning by a compound 64% over the past five years.

More anecdotal evidence that the economy is expanding comes from Parker Hannifin and Yellow Roadway. Parker Hannifin, the world's largest motion control products manufacturer, said that orders jumped 17% in August versus a year ago. The nation's largest trucking company, raised earnings guidance for the third quarter. CEO, William Zollars, was quoted in a Bloomberg article saying, "This is probably the best pricing environment we have seen in the last 10 years. Capacity is getting tighter as we move into the peak shipping season, allowing us to raise prices."

Wal-Mart announced that same store sales were on plan. This comes after the leading retailer announced weak August same store sales. The leading retailer also mentioned that sales of paper goods were strong party due to inflation. Geographically, strength was seen in the Southeastern and Western markets. Additionally, average ticket size drove the comparable store sales.

News on the high end apparel and accessory front came on Tuesday from Neiman Marcus and Coach. Neiman Marcus, the operator of Neiman Marcus and Bergdorf Goodman stores, reported fourth quarter results and Coach offered an update on its first quarter business progress. These announcements offered further proof to a thesis that we have commented on before, that the higher income consumer continues to spend, while the average consumer continues to struggle.

In the past twelve months, Coach shares have appreciated 54% as women have rushed to purchase more expensive handbags and accessories. On Tuesday, the company said that first quarter results are tracking ahead of plan and ahead of analyst estimates.

CEO Lew Frankfurt offered some more detail on the first quarter, adding that

"We have seen robust sales continue throughout the summer and into the start of the fall season across all business units in the US and in Japan as well. Consumers have enthusiastically embraced our transitional and fall offerings, including the updated Soho and Hamptons leather collection, the new sophisticated Vintage Signature lifestyle collection, and the Chelsea handbag group. Looking out further, based on the vitality of the Coach brand, the uniqueness of our business model, and the growing US premium accessories category, our prospects for long term future organic growth have never been stronger."

The Neiman Marcus earnings release and conference call had positive tones as well. For the fourth quarter, Neiman recorded earnings of 42 cents a share, well better than First Call consensus of 36 cents. For the fiscal year 2004, Neiman Marcus reported same store sales growth of 14% and operating margins of 9.7%, the highest margin in the history of the firm. Sales per square foot increased to a record $530 and the company maximized full priced selling throughout the year. Strength was seen specifically in designer handbags, women's shoes, and fine apparel. For the fall, the high-end retailer is seeing demand in "multiple handbags", designer jewelry, evening and formal wear, and fur.

We continue to see the economy in a state of flux. The manufacturing sector has finally gotten itself out of the cellar and is exhibiting the strongest expansion in recent memory. This is happening right when consumer spending is starting to moderate. If consumers are truly starting to live within their means, it's likely that the expansion in the manufacturing sector will not continue. On Wednesday, Ford announced it will layoff 800 workers at one of its plants due to reductions in production levels. Is this a precursor to the rest of the manufacturing sector if consumer demand continues to soften?


Chad Hudson

Author: Chad Hudson

Chad Hudson
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Ryan Bend

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Ryan Bend

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