U.S. Economic News Week Ending April 29, 2011

All of the major U.S. stock indices hit multi-year highs this week, with the Russell 2000 Index reaching an all-time high, as companies continued to report strong first-quarter profits. Nearly 80% of companies reporting thus far have posted improved sales and operating earnings over the year-earlier period. The strong corporate news helped overshadow weak U.S. economic reports, including a sharp slowdown in first-quarter economic growth, higher weekly initial jobless claims, and anemic new-home sales.

The U.S. dollar fell against major currencies, with its weakness reinforced by the U.S. Federal Reserve Board’s announcement that it would maintain low interest rates for the foreseeable future. The prices of gold and silver soared to new records, boosted by the weak dollar, investor nervousness, and the precious metals’ reputation as an inflation hedge.
Global economic news

U.S. Fed to phase out quantitative easing
The Fed announced it would phase out its $600 billion bond-buying program in June. In its first-ever news conference this week, the central bank said it would maintain ultra-low interest rates for the time being.

U.S. gross domestic product up 1.8%
U.S. economic growth slowed sharply in the first quarter, to a 1.8% annualized rate, from 3.1% in the last quarter of 2010, the U.S. Department of Commerce reported. Higher prices, especially for gasoline and food, squeezed consumer budgets, winter storms took their toll on economic activity, and a rise in imports reduced the country’s output as well. In addition, the federal government reduced its spending by 7.9%, the sharpest drop in a decade.

U.S. Fed’s inflation gauge rises 3.8%
The price index for personal consumption expenditures, the Fed’s key inflation gauge, jumped an annualized 3.8% in the first quarter of 2011. Excluding food and energy items, the price index rose 1.5% during the quarter. The Fed expects the overall inflation measure to climb between 2.1% and 2.8% this year.

U.S. consumer sentiment climbs
U.S. consumers were more confident in April than in March, as indicated by a rise in the Thomson Reuters/University of Michigan final index of consumer sentiment to 69.8 from 67.5 in March, which was the index’s lowest level since November 2009. It appears that the improving job market is helping Americans tolerate higher fuel costs.

U.S. jobless claims spike
Initial jobless claims increased unexpectedly by 25,000, to a seasonally adjusted 429,000 in the week ended April 23, the U.S. Department of Labor reported. The four-week average rose by 9,250 to 408,500, marking the first time since mid-February that the average sat above 400,000.

New home sales lag in the United States
Sales of new homes increased by 11.1% in March from February. However, sales were down 21.9% from a year earlier. The median price for a new home sold in March was $213,800, up 2.9% from a month earlier but 4.9% lower than in March 2010. Meanwhile, the Standard & Poor's/Case-Shiller index of property values in 20 cities fell 3.3% from February 2010 to February 2011, underscoring the continued housing market weakness.

Durable goods orders up
New orders for durable goods increased 2.5% in March, the Commerce Department reported. The strength of this report stood in sharp contrast to some other economic reports, and it supports the view that any economic slowdown related to commodity price increases or poor weather could be temporary and brief. The durable goods report pointed to strong growth in a variety of areas, including metals, machinery, computers, software, and automobiles.

Japanese industrial output plummets after earthquake
The impact of the March 11 earthquake and tsunami was very clear in the country’s report on industrial production in March. According to the Ministry of Economy, Trade, and Industry, output at factories and mines dropped by 15.3% in March from February, the largest monthly decrease since the government began collecting this comparative data in February 1953. In its semiannual report, the Bank of Japan curbed its forecast for growth in real gross domestic product to 0.6% for this year, down from 1.6% in a January forecast. It predicts a strong rebound in 2012, however, to 2.9% growth.

Eurozone inflation up a notch in April
European inflation reached its fastest pace in more than two years, rising at a 2.8% annualized pace, up from 2.7% in March, according to an initial estimate released by the European Union’s statistics office. An index of executive and consumer sentiment fell to 106.2 from 107.3 in March, indicating a potential gradual slide in business and consumer confidence. Separately, the Markit Eurozone Retail Purchasing Managers Index eased to 52.2 in April from 53.5 in March but remained above its long-term average.
Global corporate news

Oil giants pump up profits
Very strong first-quarter results indicate the oil industry is poised to enjoy substantial profits in 2011. Exxon Mobil reported a 69% jump in first-quarter earnings, Royal Dutch Shell posted a 60% rise in profits, ConocoPhillips’ first-quarter earnings rose 44%, and Chevron's first-quarter earnings grew 36%. All four benefited from higher oil prices. Exxon and Conoco attributed some of the robust results to strong refining margins. Shell mentioned growth in upstream production and ongoing cost-cutting. Exxon also enjoyed a rise in production volumes, while Conoco achieved its results despite a sharp drop in production. Chevron posted stronger refining margins.

French oil company Total reported a 35% rise in adjusted net profit on higher crude oil and natural gas prices. The firm’s unadjusted net profit was 51% higher than a year earlier.

Automakers post varied results
Global automakers were all over the map in their first-quarter earnings. Ford Motor reported a $2.6 billion quarterly profit, its largest first-quarter profit since 1998. However, Honda Motor said its quarterly earnings fell 38% as it struggled to find enough auto parts to bring factory production above 50% capacity. Honda warned that earnings would remain weak for the next two quarters. Meanwhile, Ford said it idled a manufacturing plant in Taiwan and a South African assembly plant as precautionary moves to help conserve parts.

Volkswagen reported a vastly improved net profit on booming emerging market demand. Mitsubishi Motors posted a 42% decrease in its fiscal fourth-quarter earnings because of the yen’s strength and lower domestic production. Daimler’s profit nearly doubled in the first quarter and its revenue rose by 17%, driven by accelerated demand for luxury cars.

Deutsche Bank rebounds
Deutsche Bank had its best first quarter since 2007. The large German bank’s net profit rose 7%, benefiting from its recent acquisition of retail bank Postbank, which helps to diversify Deutsche Bank’s mix of banking businesses.

Microsoft profits up, but Windows sales down
Despite sharply rising quarterly profits on robust sales of Office and Xbox, Microsoft reported a decline in the sales of its Windows operating system as demand for traditional personal computers weakened because of competition from tablet devices.

Caterpillar soars on emerging market sales
Caterpillar, the world’s largest construction equipment maker, surpassed first-quarter earnings estimates on surging sales in developing countries. Net income was more than five times higher than a year earlier, while sales climbed 57%.

Merck tops estimates on cost-cutting, higher sales
Merck, the second-largest U.S. pharmaceutical firm, posted a higher-than-estimated first-quarter profit, benefiting from cost reductions and rising sales of its Januvia diabetes pill, which more than offset revenue losses to generic competition.