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 Member FINRA/SIPCpage 1 of 3
Last week, global financial markets braced for the bankruptcy of GM, cheeredfor a quick end to Chrysler’s bankruptcy, all while trying to gauge the impactof the automakers’ meltdown on the U.S. economy. The news on housing lastweek suggested that the bottoming process in that sector continued, whilethe release of the regional manufacturing surveys offered hope that the painof the auto bankruptcies may be contained.This week, markets will digest the details of the GM bankruptcy, whichwill allow market participants to begin to more accurately assess what theimpact to the economy will be. As the week progresses, attention will turnto the employment picture in May, with the release of the ADP employmentreport on Wednesday, the jobless claims data for the week ending May 30 onThursday, and the May nonfarm payroll jobs report on Friday.Also of great interest to the market, will be the release of the weekly chainstore sales data for the week ending May 30 on Wednesday, the chainstore sales data for the month of May, due on Thursday, along with the Aprilpersonal spending report, which was released as this publication was beingwritten. This data will provide a sense of the pace of consumer spending(two-thirds of gross domestic product) in the early-to-mid part of Q2 2009.Spending rose at a 1.5% annualized clip in Q1 2009 versus Q4 2008, but weexpect spending to fall in Q2 versus Q1, but only by about 1.0%.The news on the housing market last week continued to suggest that thelong-suffering housing sector may be in the bottoming process. Why?Existing house sales have been moving sideways since last Fall, rising to
a better than expected 2.9% in April versus MarchNew house sales have been moving sideways since early 2009, rising
0.3% in April versus MarchThe inventory of existing and new homes for sale has dropped
dramatically, with existing home sales inventory down 18% from theirJuly 2008 peak, and new home inventories down 48% since peaking inJuly of 2006[Chart 1]Soaring affordability (falling prices, historically low mortgage rates, relativelystable incomes), along with the government’s foreclosure mitigation programhave all helped. We still have a long way to go before housing can be a plusfor GDP growth, but at least it has stopped getting worse.GM and Chrysler passed each other in bankruptcy court, with Chrysler likelyto emerge this week from a month long stay in receivership after filing on
Will the Auto Sector Turmoil Detour theEconomy’s Road to Recovery?
June 1, 2009
John Canally, CFA
EconomistLPL Financial
LPL FINANCIAL RESEARCH
Weekly Economic Commentary
ECONOMIC CALENDAR
Monday, June 1
Personal Spending
April 
Personal Income
April 
ISM Mfg
May 
Construction Spending
April 
Tuesday, June 2
Domestic Car/LightVehicle Sales
May 
Pending Home Sales
April 
Wednesday, June 3
ADP Employment
May 
Challenger Job CutAnnouncements
May 
ISM Non ManufacturingIndex
May 
Factory Orders
April 
Thursday, June 4
Productivity
Q1
Initial Claims
wk 05/30 
ICSC- Chain Store Sales(YoY)
May 
Friday, June 5
Unemployment Rate
May 
Nonfarm Payrolls
May 
Consumer Credit
April 
 
LPL Financial Member FINRA/SIPC Page 2 of 3
WEEKLY ECONOMIC COMMENTARY
May 4, and GM filing on June 1. The question for the market is, what impactthe bankruptcies will have on the broad economy over the next few months.First some background. U.S. auto and light truck output is now just 1.5%of GDP, after accounting for roughly 3.5% of GDP on average since 1970,and accounting for as much as 4.5% of GDP for much of the early 1970s.Thus, the bulk of the auto sector’s pain has probably already been felt in theeconomy over the past several years.[Chart 2]In terms of jobs, auto relatedemployment accounts for roughly 2% of all employment. Thus far, the impactof the Chrysler bankruptcy has been negligible on a national scale. First,jobless claims stood at 605,000 the week Chrysler filed for bankruptcy onMay 4, and in the latest week (May 23) claims stood at 623,000, an increaseof 18,000. While, unwelcome, a rise of that magnitude suggests that thelabor market outside of autos is not experiencing any further deteriorating dueto the Chrysler bankruptcy.In addition, the Institute for Supply Management’s Survey of ManufacturingIndex rose to 42.8 in May from 40.1 in April, beating expectations of a42.3 reading; a reading below 50 signals contraction, while an index above50 signifies growth in manufacturing. A reading on the ISM in excess of41.2, over a period of time, generally indicates an expansion of the overalleconomy.
Therefore, the May ISM indicates growth in the overalleconomy in May following seven months of decline, but continuingcontraction in the manufacturing sector.
Note that the impact of the GMbankruptcy (and related plant shutdowns) will also impact the June ISM data,as will the lingering effects of the Chrysler plant shutdowns.Regionally however, the impact has been quite large, judging from the bigdrop in the Chicago Area Purchasing Managers Index in May versus April.Much of the nation’s auto production occurs in the Midwest. Notably, it wasthe only regional manufacturing survey to deteriorate between April andMay, thus we can conclude that in May, the impact of the auto sector turmoilhasn’t spread to other sectors of the economy.[Chart 3]Overall it’s unfortunate that auto bankruptcies will muddle the economicpicture, just as the markets are trying to assess when the recession will endand how robust the recovery might be. Our view is that the bankruptciesat GM and Chrysler will cloud the economic picture over the summer, butwon’t do enough damage by themselves to run the economy off the roadto recovery. The question is can markets look past the auto impact to theunderlying health of the economy?As the week progresses, markets will begin to focus on the labor marketreports for May, which include:The ADP and Challenger layoff data for May on Wednesday, which often
provide an “early look” into the government’s jobs reportThe jobless claims data for the week ending May 30 on Thursday. As
noted above, the impact of the Chrysler bankruptcy on the claims datahas been muted, with the impact from the GM shutdowns loomingThe nonfarm payroll jobs report on Friday, which provides the most
comprehensive look at the nation’s labor market in May
 
1
Housing Market Bottoming Process Continues
 
2
Auto Sector Share of GDP has Already DeclinedMarkedly
3
ISM Suggests the Economy is Emerging fromRecession; Little Impact from ChryslerBankruptcy
Source: Realtor/Census Bureau/Haver 06/01/09Source: Haver 06/01/09Source: Institute for Supply Management/Haver 06/01/09
640060005600520048004400400014001200100080060040020099000102030405060708Existing 1-Family Home Sales: United States
(left scale)SAAR, Thous
New 1-Family House Sold: United States
(right scale)SAAR, THous
5.254.503.753.002.251.500.757075808590950005Motor Vehicle Output as a Percent of GDP
 
Above 41.2% Economy ExpandingBelow 41.2% Economy Contracting8070605040302075808590950005ISM Manufacturing: PMI Composite Index
SA, 50+ = Increasing
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