With the release of real retail sales Monday and industrial production yesterday, we now know the numbers for 3 of the 4 big coincident indicators for the economy. Payrolls were reported two weeks ago and personal income hasn't been reported yet. With housing permits being reported yesterday, we also know what the most important long leading indicators are forecasting through early next year.
Let's start with the long leading indicators. These include real M2 (green) and corporate bond interest rates (inverted)(red) as well as housing permits (blue) :
Long leading indictors forecast the economy 12+ months later. Many people also include the yield curve in this group. The problem with the yield curve is that it does not function well in times where deflation is a real possibility (it never inverted between 1930 and 1950, for example). In any event, 12+ months ago was just as these indicators were approaching a nadir. Hence my belief that the weakness shown in several series in the last few weeks is real.
But note that beginning in spring 2011 all three turned up. This tells me the weakness will be short lived and we should expect relatively strong growth as we go into the second half of this year.
Next let's look at shorter leading indicators, which forecast the economy 6 to 8 months later. The raw ECRI WLI is a good index of these. In the graph below it is shown in orange (h/t Kirk Lindstrom):
The big downdraft in the WLI occurred last September, 7 months ago. This confirms the forecast for weakness in the next few months.
Finally, here are the 4 big coincident indicators -- real retail sales (blue), payrolls (red), industrial production (green), and real personal income ex transfer payments (orange):
Through March, two are rising and one is flat. We don't know about real personal income yet, although it has declined slightly in the last couple of months. Two of the three that we do know are weaker than they were a few months ago, but notice that the trends were much worse last spring.
Digging a little deeper, let's look at one of my favorite comparisons, real retails sales vs. payrolls:
As this graph plainly shows, consumption leads jobs. With real retail sales strongly positive through March, it is likely that payrolls will continue positive through the second quarter.
Next, here's the same relationship on a YoY% basis (with retail sales divided by 2):
Real retail sales do a decent job of forecasting amplitude as well as direction, although obviously not perfect. With real retail sales continuing to run at about 5% YoY, it is likely that payrolls will not deviate much from their current 1.5% YoY rate.
The bottom line is that, barring extreme revisions, the first quarter of 2012 showed continued growth, and it is likely that jobs growth persists in second quarter as well.
Per my recent commentary, I do think there will be a slowdown in that growth for the next several months, but I do not see anything strong enough to take us into actual contraction at this time. To the contrary, the upturn of the long leading indicators last spring and the short leading indicators since the beginning of this year buttress the argument that we should see relatively better growth in the second half of this year.
3 comments:
About the forecasts:
If the ECB doesn't step and buy Spanish and Italian bonds and the Chinese central bank doesn't cut rates within the next month or so, then there very likely will be a collapse in durable goods orders in the US (already has been meaningful drops) and a significant drop in industrial production. Domestic auto production won't be enough to keep the numbers up either, as there is already an all time record in domestic auto inventories. The auto makers will probably be shutting down longer than usual anyway this summer, possibly by several weeks, and this will show up in the initial unemployment claims data.
If the US wasn't so interconnected with the rest of the world - like in the 90s and early last decade - then this wouldn't be nearly the big concern that it is. However, manufacturing activity has become heavily reliant on foreign economic growth, not just in exports but also in the commodity areas (oil and coal production and equipment related to such). I wouldn't be surprised to see steel companies in the same situation they were in in the 2002-early 2003 period...
Arrggg... Hopefully there will be some catalyst to tank the economy in the second half and prevent an Obama 2nd term. I'll happily suffer short-term economic pain to prevent longer-term problems from more Obama.
I'm becoming concerned that high gas prices is beginning to take its toll on the economy. If gas prices don't come down soon, then the current soft patch in the economy could turn permanent and a new recession could begin next year.
One possibility is that the current economic soft patch is due to seasonal adjustment problems. In that case, we should see a pick up in job growth in May. However, if we do not see a pickup of job growth in May, that would be a troubling sign, and Mitt Romney will probably be president in 2012.
If Mitt Romney is elected president. Expect deep budget cuts early next year to push the economy into recession. We could see an economy a lot like the early 80s where the next recession could be a real whopper. On the other hand, whichever political party wins the next election will have certain long term trends going their way. One will be the retirement of babyboomers, which will lower unemployment rates in the next 15 years.
However, there is no question that Ronald Reagan still dominates politics today. In the long run, I see continuing deregulation and greater income disparity. This could keep us vulnerable to financial collapses we saw in 2008 and 1929. I see the economy in a period much like the last quarter of the 19th Century.
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