Monday, June 4, 2012

Actually, the Economy Isn't As Bad As The Employment Report Indicates

The above graphic -- which I posted on Friday -- is very concerning as it shows two negative developments.  First, we're repeating the exact same pattern this year as last year -- Europe sneezes and we catch a cold.  Second, we now have four months of declining jobs data, which includes downward revisions to the previous months.  This is the exact pattern you'd expect before a recession.  So, let's look at the underlying data to see if that is confirmed, starting with the leading indicators:
The Conference Board Leading Economic Index® (LEI) for the U.S. declined 0.1 percent in April to 95.5 (2004 = 100), following a 0.3 percent increase in March, and a 0.7 percent increase in February.

Says Ataman Ozyildirim, economist at The Conference Board: “The LEI declined slightly in April. Falling housing permits, rising initial claims for unemployment insurance and subdued consumer expectations offset small gains in the remaining components. The LEI’s six-month growth rate fell slightly, but remains in expansionary territory and well above its growth at the end of 2011. The CEI, a measure of current economic conditions, has also increased for five consecutive months.”

Says Ken Goldstein, economist at The Conference Board: “The indicators reflect an economy that’s still struggling to gain momentum. Growth is slow, but choppy, and consumers, executives and investors are looking for more progress.”
That is a pretty apt description of the economy -- one that is trying to "gain momentum."  Here's a graph of the latest data:

As reported in the release:
Five of the ten indicators that make up The Conference Board LEI for the U.S. increased in April. The positive contributors – beginning with the largest positive contributor – were interest rate spread, average weekly manufacturing hours, ISM® new orders index, Leading Credit Index™ (inverted), and manufacturers’ new orders for consumer goods and materials*. The negative contributors – beginning with the largest negative contributor – were building permits, average weekly initial claims for unemployment insurance (inverted), average consumer expectations for business conditions, and stock prices. The manufacturers’ new orders for nondefense capital goods excl. aircraft* held steady in April.
While it's not a great looking picture, it's not one that points to a serious contraction, either.

The overall direction of the LEIs is still positive.

The ISM manufacturing index is still positive.  The anecdotal evidence from the latest report -- which was released last Friday -- is actually very positive:
  • "Business has been trending moderately higher since the beginning of the year. [We] anticipate 5 percent to 7 percent growth for the year." (Chemical Products)
  • "Sales were stronger than expected; customers are waiting until the last minute to place orders." (Machinery)
  • "We are having the best year in sales volume and profit since mid-2008." (Fabricated Metal Products)
  • "Business seems to be holding steady." (Miscellaneous Manufacturing)
  • "We had modest growth across most of our businesses, with stable raw materials [prices] and improved schedules and efficiency in our operations." (Textile Mills)
  • "Business is lower than forecast for Q2 2012." (Computer & Electronic Products)
  • "We are seeing overall steady improvements, month over month and year over year." (Apparel, Leather & Allied Products)
  • "Business is steady." (Food, Beverage & Tobacco Products)
  • "While not quite as busy as last month, production is steady and year over year still much better." (Transportation Equipment)
  • "Business continues to be up in general." (Furniture & Related Products)
In addition, in the latest report new orders increased to a high reading.  While production decreased, it is still positive.  And, employment was still positive (which was born out in the latest employment report which showed an increase in manufacturing employment).

Regional reports are mostly just barely positive.  New York is positive,  Philly's was slightly negative, Richmond was slightly positive, Dallas is slightly positive,   Kansas was slightly positive, and the Chicago Fed's index rose in the latest report.

New orders for durable goods are a problem spot, they've essentially leveled off over the last 7 months.  This would explain the above referenced manufacturing readings just above 0, showing some growth, but not "barn burning" growth.

Let's turn to services:

The latest ISM services index (a new one will be released on Tuesday) is still positive.  The latest report had the following anecdotal information:
  • "Sales have improved slightly, yet still lag behind pre-recession highs. The hiring freeze has been lifted, but open positions are still being vetted for need, timing of the fill, and so forth." (Public Administration)
  • "Business conditions have improved in March and April 2012. We have received more job inquiries and job awards in this period. The increase is about 15 percent." (Professional, Scientific & Technical Services)
  • "Current conditions compared to prior year are good. Fuel and food continue to be a challenge." (Arts, Entertainment & Recreation)
  • "Business is slowing — and projections for the rest of the year are being lowered." (Professional, Scientific & Technical Services)
  • "Business is still ahead of last year, but has leveled off a little." (Wholesale Trade)
  • "High price of petroleum/oil driving up costs for all market areas." (Transportation & Warehousing)
The above are less positive than the manufacturing comments, but still good.  They show a sector that is growing, albeit slowly.

Let's turn out attention to the consumer:

Real retail sales are also still in an uptrend and increasing.  In fact, they are now at levels seen of the height of the last expansion.  In addition, real PCEs are also rising -- and are still in an uptrend.  I have noted previously that this is primarily due to durable purchases, but that is also a good sign.  People don't buy durables unless they have at least some confidence that the economy will grow or that their fortunes will at least stay the same.  The last chart of auto sales shows that this area of the economy is actually doing pretty well, too.

And then, there is this:

Oil is now 83/bbl.  While this latest move represents traders placing very negative bets on the economic outlook, it also frees up money for other purchases.  As NDD would say, the oil choke collar is loosening.

The underlying picture of the economy is one that is muddling through.  With the exception of the employment sector, all indicators are positive, but just barely so.  With employment, there are two issues.  The first is the EU situation: why hire a bunch of people when one of the largest economic blocks might start to break apart causing a banking and currency panic?  The second is lack of demand.  While the US consumer is still spending, he's doing so at a restrained pace.