Wednesday, July 22, 2009
leading and lag industries in this earning seasons Q2 2009
Associate director of economic analysis Bob Johnson on the current economic signals and which sectors may perk up first. Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. With earning season starting to pick up, I'm here to discuss the potential impact that macroeconomic factors will have on these earnings with our associate director of economic analysis, Bob Johnson. Thanks for joining me today, Bob. Bob Johnson: Good to be here. Glaser: So, first things first. Let's talk a little bit about the employment situation. We learned this [Thursday morning] that over half a million people applied for unemployment claims for the first time last week. That still seems like a staggering number of people to be losing their jobs. Johnson: It is a big number and it's unfortunate for those folks. But, the neat thing about that number is that it has been trending down now since March. What I called in many of my pieces a glacial slowdown in that number--it peaked at something like 674,000--and maybe we'd go 620,000 or 615,000 or 610,000. And today we busted under 600,000 jobs lost in a big way. The loss came in at 565,000. So, better than it's been. It finally broke under that key, psychologically important 600,000 level. Some will claim there's different things with the auto industry and so forth that may distort the number. Maybe the Fourth of July. But clearly that was built into some people's expectations when they were thinking about what the number would be. And I think the number was better than what most people were thinking. I view the number as a positive. It could easily tip back up next week when it's reported. But we'll take it any way we can get it right now. Glaser: But even if it was a little bit better than it was before, it's still a tremendous number of people who are still losing their jobs. Still, the unemployment rate is continuing to rise. When you think of consumer spending as being a key driver of the economy, how is that ever going to pick up? How are people going to have the confidence to go out and buy when they see so many of their friends and family losing their jobs? Johnson: I think a lot of the job losses are concentrated in certain geographic areas, and in certain industries more than others. I think some of the broad-based layoffs that we saw at the beginning of the year are now more strongly focused in construction, and a couple of the manufacturing sectors. Therefore I think we'll have the opportunity where people are not thinking that everybody that's right next to them is losing their job. One is improved consumer confidence. And the people that have their jobs spend more money. They're a little bit more confident. They've saved up a little bit of money. They didn't buy that house or that car. So now they've got the money to spend somewhere else. So that's another thing that can help. Glaser: Speaking of consumer spending, June same-store sale numbers also came out this morning. Anything interesting there? Johnson: Clearly, some of the apparel things are being badly impacted by some absolutely atrocious weather conditions in the upper Midwest and in the Northeast. We've gotten to the point now where, two sunny days in Boston since May. We've just had our coldest day in 124 years in Chicago yesterday for the month of July. Those are all pretty stunning things that have a real effect on things like swimsuits, and towels, and people driving to the beach. One positive trend in the retail sales number was some of the department stores--they've been doing pretty badly. Again, still didn't do wonderfully, but did better than expectation. So people are maybe starting to build up a little bit from shopping entirely at Wal-Mart and Family Dollar an moving up the chain just a little bit. So that was good to see in the month as well. Glaser: So taking a step back, when we see second quarter earnings start to roll out, what industry should we be looking at as leading industries that we'd want to see improving before the rest of the economy does, and which are going to be lagging? Johnson: Almost always, consumer discretionary are the items that improve first. I think we've seen that already in some stock performance. And hopefully we'll see some of that follow through with improved earnings this quarter. Again, people don't anticipate in advance, but we expect that to get better first. Technology is another area that typically gets a little bit better first. We've talked to our semiconductor analyst on that. We're not claiming a major victory, but it's a little bit of a restocking. People that had drained their pipelines think nobody will ever buy anything again. Now they're saying, "I've got to have a little bit in stock. Just a little." So, in the semiconductor industry in particular, we've seen a lot of inventory rebuilding this quarter. So that sector I think will actually be, on a relative basis, one of the better looking ones this quarter. Glaser: What do you think could potentially look pretty bad? Johnson: Again, some of the manufacturing and materials. Materials in particular and some of the commodities. If you think about it, last year was when all of the commodities were going crazy, they peaked in the July, August, September time frame. And so you've got those type of things in the high numbers last year, and now very low this year. So, the year-over-year comparison will look horrible.