Monday, January 24, 2011

Expect More Economic Growth

Last week, we saw a string of solid economic reports come out that indicate more economic growth ahead. Perhaps most importantly was the index of leading economic indicators, that increased 1%. From the press release:

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 1.0 percent in December to 112.4 (2004 = 100), following a 1.1 percent increase in November, and a 0.4 percent increase in October.


Says Ataman Ozyildirim, economist at The Conference Board: “While the LEI points to an economic expansion that is gaining further traction, its components still suggest the expansion path may be uneven. December’s gain was led by housing permits, the interest rate spread, initial claims for unemployment insurance and consumer expectations. The large increases in December and November show that, after a brief pause in the second quarter of 2010, the LEI is resuming the upward trend that began in March 2009.”

Says Ken Goldstein, economist at The Conference Board: “The four-month rise suggests the economy now has some wind in its sails; however, it still faces some strong headwinds in the medium-term. Overall economic activity is likely to continue to gain momentum in 2011.”

What's particularly impressive about this increase is there are two numbers responsible for 50% of the LEI: average hours of manufacturing (which account for 27% of the number) and M2 (which accounts for 32% of the number). However, neither of these numbers contributed to the increase in the LEIs. Instead, the increase was the result of building permits and the interest rate spread.

The Empire State Manufacturing Survey also printed some good numbers;

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in January. The general business conditions index rose 2 points to 11.9. The new orders index moved up 10 points to 12.4, and the shipments index surged 18 points to 25.4. After a sharp decline last month, the inventories index rose above zero. Employment indexes also climbed into positive territory. Both the prices paid and prices received indexes rose, pointing to an acceleration in both input prices and selling prices. Future indexes conveyed a high level of optimism, with the future general business conditions index advancing to a level not seen since early 2010, while future price indexes climbed to multiyear highs.

This number dropped in the summer law year, probably in relation to the EU situation. However, it has bounced back for the last few months, indicating the problems from the EU situation are probably subsiding.

The Philly Fed also showed improvement:

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, edged down slightly from a revised reading of 20.8 in December to 19.3 in January.* The index has been positive for four consecutive months, following a two-month dip into negative territory (see Chart). The demand for manufactured goods is showing continued improvement this month: The new orders index increased 13 points this month, the fourth consecutive monthly increase. The shipments index also improved, increasing 8 points.

Firms' responses continue to suggest that labor market conditions are improving.The current employment index increased 13 points, and for the fifth consecutive month, the percentage of firms reporting an increase in employment (25 percent) is higher than the percentage reporting a decline (7 percent). Twice as many firms reported a longer workweek (22 percent) than reported a shorter one (11 percent).


Price increases for inputs as well as firms' own manufactured goods are more widespread this month. Fifty-four percent of the firms reported higher prices for inputs, compared with 52 percent in the previous month. The prices paid index, which increased 6 points in January, has increased 42 points over the past four months. On balance, firms also reported a rise in prices for their own manufactured goods: More firms reported increases in prices (26 percent) than reported decreases (9 percent), and the prices received index increased 8 points, its second consecutive positive reading.

Let's take a look at the chart of both data points:

The chart above shows the dip both indexes experienced in the summer and early fall of last year and the subsequent rebound.

Going forward there are two issues for the manufacturing area: price increases as we see commodity prices continue to move higher and a possible slowdown, this time caused by China as their central bank tries to slow down their economy. I should add that a Chinese slowdown -- if bona fide -- should exert downward pressure on commodity prices.

Finally, we saw continued improvement in the labor picture:

First-time applications for jobless benefits fell by 37,000 last week to 404,000, mostly reversing a sharp spike earlier this month, according to Labor Department data.

Yet the latest drop doesn’t reflect a sudden improvement in hiring trends: Labor officials attributed the prior spike in claims to a backlog that built up over the holidays. State unemployment offices were open fewer hours and poor winter weather deterred some people from filing applications right away. As the backlog was processed claims were expected to recede/

The previous week saw a large spike in claims, which were supposedly caused by an administrative backlog. Now we know that story was pretty much true, as the backlog appears to be clearing out.

The bottom line is last week's data was solid and points to continued expansion.