Economic indicators released Friday morning cited less rapid deterioration in the manufacturing sector, more optimistic consumer sentiment, and lower factory orders. The first released Reuter's/University of Michigan Sentiment report inspired U.S. equity futures higher before diving into the red after the manufacturing numbers and news from the government was released. The lack of confidence in equity markets during early trading responded to waning confidence, funneling down from scattered reports and rumors that the TARP bank stress test results would be delayed from Monday, May 4 until Thursday, May 7. The shaky sentiment of investors bled true during the past few trading sessions as the market found little applause from long investors above 875 on the S&P 500 index.
Oil found legs to extend its price valuations as spot prices for NYMEX crude touched $52/barrel several times throughout the morning. Hope for a manufacturing recovery and language from Chevron corp suggesting increased output offered a contrary outlook to the IEA's dire forecasts for yearly crude demand, yet prices at these levels are justified only given a true economic recovery.
Breaking down the ISM Manufacturing index, widely praised as a "green shoot" of news concerning the economy, one can find positive and negative economic indicators. While the actual index number jumped from 36.3 to 40.1 the firms didn't improve, but instead declined less, and thus gave hope to investors that the sector has begun to bottom. New orders declined less among those surveyed and remained the same for a greater percentage, causing that portion of the index to increase from 41.2 to 47.2. The report also suggests that lay-offs in the manufacturing sector are improving due to customers' inventory levels finding equilibrium with demand in the current environment. Exports are declining slower than imports, perhaps due to domestic price deflation, also helping the index.
The take away from the day and earnings season must be that the outlook from Q4 to Q1 by firms, consumers, and analysts was too dismal. The economy was believed to be spiraling out of control so inventories were slashed, employees were fired, and spending was cut off. Now that inventories have equalized the pressure will shift from the producers to the retailers, as the consumer decides the fate of the economy moving forward. Sharp increases in equity markets combined with government assistance have fueled consumers willingness to spend, but unemployment and credit availability are ultimately in control.
