Tuesday, November 17, 2009

Industrial Expansion, Services Stagnation (and Weekly Indicators)

- by New Deal democrat

The release of October retail sales yesterday and industrial production this morning make for interesting bookends to the economic situation.

This morning Industrial Production for October was reported up a mere 0.1%. Capacity utilization was reported up 0.2%. I tend to ignore the latter number, since it generally tracks the former, and capacity utilization has been in decline literally for decades, reflecting America’s relative industrial decline. Industrial production, however, is an excellent coincident indicator for industrial growth or weakness. Whether October's meager increase means a slowing down of the trend of expansion, or is just one month's noise, is impossible to tell. In any event, this means that since its bottom at the end of the second quarter, industrial production has grown 2.9% in four months (or about 12% a year), which is the best rebound from a recession trough since 1982. In other words, so far manufacturing is having a V-shaped recovery.

On the other hand, while yesterday’s retail sales figures appeared great at first blush, up +1.4% from September and topping estimates substantially, the downside was the very nasty revisions to August and September. August was revised down from +2.7 to +2.2. September was revised down from -1.5 to -2.3. In other words, those two months together went from +1.2 to -0.1. The efficacy of “cash-for-clunkers” as anything other than a momentary blip appears to have been entirely revised away. Ouch! Thus September may have actually made a new low in real retail sales for the recession. Over the longer term, since April, real retail will be about +0.8 instead of +2.0 as it may have otherwise appeared. The services economy isn’t having a V-shaped recovery; in fact it is barely having a recovery at all.

The above contrast fits perfectly with the ISM manufacturing and non-manufacturing data. Manufacturing moved into expansion first, and is already expanding faster than it has coming out either post-1982 recession. Non-manufacturing, however, is barely expanding at all. Employment in manufacturing has already started to increase, according to the ISM manufacturing report, but employment in services is continuing to fall, and actually fell off at a worse rate last month. This analysis also seems to dovetail well with Invictus’ take on the divergence between large vs. small employers. I’ll have more to say about this divergence in an extended post in a couple of days.

So we have two bookends for the economy: industrial expansion, services stagnation. The recovery from the recession is all about selling goods to foreign consumers, chiefly Asians, whose standard of living is improving. On the other hand, the American consumer is no longer the engine of global growth, but the caboose. His/her standard of living is in decline, and will only turn around when the structural forces which led to that decline have been abated.

One final note: the October growth in retail sales was not surprising, if you’ve been following my “Weekly Indicators” each Friday. I have been tracking these items precisely because they give high volume real-time information. So when automakers reported sales up 10% from September to October, and when the ICSC reported ever-improving week over week sales followed by good monthly same store sales for October, it appeared likely that the retail sales number would oblige, and it did.

From Bonddad:

From the NY Federal Reserve:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in November, but at a somewhat slower pace than in October. The general business conditions index fell 11 points, to 23.5. The indexes for new orders and shipments posted similar declines. Pricing pressures eased, with the prices paid index positive but lower than last month and the prices received index rising to a level just below zero. Employment indexes fell from October’s elevated levels, remaining slightly positive. Future indexes conveyed an expectation that activity and employment would improve in the months ahead and that both input and selling prices would increase significantly.

Here is the relevant chart:

Notice the index is currently at levels associated with expansion. Also note the index has rebounded from the extremely low levels we saw earlier this year. SilverOz has noted that part of most statistical rebounds we are seeing is due to the extreme readings we saw earlier this year; that is, part of what we are seeing is a standard rebound. I think that's accurate. The economy literally hit the brakes at the end of last year/beginning of this year. However, I think there are continuing signs the economy is recovering. Here are additional charts from the report:

Notice the overall trend for both overall business and new orders is positive.

Also note the employment component of the report is also getting better.

Retail Sales Increase:

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $347.5 billion, an increase of 1.4 percent (±0.5%) from the previous month, but 1.7 percent (±0.5%) below October 2008. Total sales for the August through October 2009 period were up 1.5 percent (±0.3%) from the same period a year ago. The August to September 2009 percent change was revised from -1.5 percent (±0.5%) to -2.3 percent (±0.3%).

Here are some very important observations:

Excluding the 7.4% increase in auto sales, retail sales rose 0.2% in October, the data showed. Sales excluding autos have risen for three months in a row and in five of the past six months.

Simply put, sales are moving in the right direction. Also note the alot of the increase was car sales - in a post cash for clunkers world. That tells us there is still demand for autos out there without government stimulus.

Here is the relevant chart:

A while ago I noted that we can look at the recent data in the following way:

A.) The complete contraction in any spending and

B.) The recovery where the pace of month over month percentage changes returned to more normal levels. That appears to be where we are now.

Short version, both of these pieces of data are positive.