Tuesday, March 19, 2013

Is the Economy Stronger Than We Think?

A quick introductory note from Bonddad:  for both NDD and myself,  we wanted to welcome all the readers who have come here from a link on Professor Krugman's NY Times blog and Professor Mark Thoma's blog.  We are flattered and honored to be noted by both of these economic commentators.

At the beginning of this year, I wrote several posts wherein I concluded that the underlying nature of the US economy had not meaningfully changed: we were still in a post financial crisis recovery which by definition is very weak.  Here was my general conclusion:

To sum up the national and international position, I just don't see strong enough overall growth in any economy to warrant a strong long position right now.  The best reading of the data is that we'll see a stronger second half, with the US housing market providing sufficient domestic stimulus combined with a more settled fiscal situation.  This would also allow the EU to continue strengthening or bottoming. The stronger second half argument leads could lead into the fact that the market is a leading indicator of anticipated future activity -- a fair point as far as it goes, but I just don't see the overall underlying strength to support the rally long term.

At the beginning of February, I wrote two columns wherein I focused on the positive and negative economic numbers, with the positive numbers coming from new home sales, auto sales and manufacturing and the negative coming from the fiscal situation in Washington.  I drew no formal conclusion from these two competing sets of data, but my feelings were that the negative Washington situation would trump the positive developments and lead us to more of the same: sub-par growth in the 0%-2% range.   

However, recent economic numbers have led to to question that conclusion.  Consider these recent economic developments:

Housing continues to rebound:

Sales of new single-family houses in January 2013 were at a seasonally adjusted annual rate of 437,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.  This is 15.6 percent (±18.9%)* above the revised December rate of 378,000 and is 28.9 percent (±21.7%) above the January 2012 estimate of 339,000.

However, read this from Calculated Risk
But also read this from CR

Employment continues to grow:

The latest employment numbers were unabashedly strong: non-farm payrolls increased 236,000, unemployment dropped .2%, wages ticked up  four cents (a big increase on a month scale) and hours worked increased .1.  Gains were seen across all major groups, including construction.  While this is only one month of data, the underlying components of this report were very good.

Initial Jobless Claims are In Good Shape:

Initial jobless claims fell 10,000 in the March 9 week to 332,000. The week's total was the second lowest of the recovery. There were no special factors skewing the report. The four-week average is now at its lowest level of the recovery, down 2,750 from the prior week to a 346,750 level that is a bit below the 350,000 trend of the month-ago comparison in what is an early positive indication for the March employment report. Continuing claims are also moving lower, down 89,000 in data for the March 2 week to 3.024 million which is another recovery low as is the 4-week average at 3.098 million. 

Retail Sales Increased 1.1%.

As both NDD and I noted, the latest retail sales numbers were very strong: 

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for February, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $421.4 billion, an increase of 1.1 percent (±0.5%) from the previous month and 4.6 percent (±0.7%) above February 2012. Total sales for the December 2012 through February 2013 period were up 4.5 percent (±0.5%) from the same period a year ago. The December 2012 to January 2013 percent change was revised from +0.1 percent (±0.5%)* to +0.2 percent (±0.3%)*.

These are, simply put, great numbers even when adjusted for inflation.

Industrial Production

The latest IP report was also very strong.

Industrial production increased 0.7 percent in February after having been unchanged in January. Manufacturing output rose 0.8 percent in February, and the index revised up for the previous two months. In February, the output of utilities advanced 1.6 percent, as temperatures for the month were near their seasonal norms after two months of unseasonably warm weather. The production at mines declined 0.3 percent, its third consecutive monthly decrease. At 99.5 percent of its 2007 average, total industrial production in February was 2.5 percent above its level of a year earlier. The capacity utilization rate for total industry increased to 79.6 percent, a rate that is 0.6 percentage point below its long-run (1972--2012) average.

While the mining component has been decreasing for the last three months, the manufacturing number more than makes up for the decline.

Both the ISM Manufacturing and Non-Manufacturing Numbers Have Been Strong:

The latest Manufacturing ISM Report:

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 54.2 percent, an increase of 1.1 percentage points from January's reading of 53.1 percent, indicating expansion in manufacturing for the third consecutive month. This month's reading reflects the highest PMI™ since June 2011, when the index registered 55.8 percent. The New Orders Index registered 57.8 percent, an increase of 4.5 percent over January's reading of 53.3 percent, indicating growth in new orders for the second consecutive month. As was the case in January, all five of the PMI™'s component indexes — new orders, production, employment, supplier deliveries and inventories — registered in positive territory in February. In addition, the Backlog of Orders, Exports and Imports Indexes all grew in February relative to January."

The Latest Service Number:

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI™ registered 56 percent in February, 0.8 percentage point higher than the 55.2 percent registered in January. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. This month's reading also reflects the highest NMI™ since February 2012, when the index registered 56.1 percent. The Non-Manufacturing Business Activity Index registered 56.9 percent, which is 0.5 percentage point higher than the 56.4 percent reported in January, reflecting growth for the 43rd consecutive month. The New Orders Index increased by 3.8 percentage points to 58.2 percent, and the Employment Index decreased 0.3 percentage point to 57.2 percent, indicating growth in employment for the seventh consecutive month. The Prices Index increased 3.7 percentage points to 61.7 percent, indicating prices increased at a faster rate in February when compared to January. According to the NMI™, 13 non-manufacturing industries reported growth in February. The majority of respondents' comments reflect a growing optimism about the trend of the economy and overall business conditions."

Both of these numbers indicate the underlying business community is doing well.

The underlying numbers have one drawback: they are only one month of data for all.  However, we don't see many chinks in the underlying numbers; readings are solid all the way around, leading to the conclusion that the underlying economy may be better off then previously thought.

From NDD:

Bonddad asked me to comment on his thesis in this post, and with all the Europanic excitement yesterday, I neglected to get around to it.

The data in the last few months has turned stronger again.  But I think extra caution is warranted.  We've seen this movie before -- economic strength in the winter crumbling into a complete stall in the summer -- in each of the last several years.  Not only is Bonddad's column something we could have written a winter or two ago, almost certainly we did.

It has been suggested by some commentators that the huge downdraft in autumn and winter 2008 has created a new seasonal distortion in the averaging of the numbers.  That may or may not be true, but I also think it has a lot to do with seasonal increases and decreases in gasoline prices -- moving from about $3/gallon in December to about $4/gallon before Memorial Day -- and then back down again.  Oil prices are acting like a governor or a choke collar on the economy, and that may explain why we get an acceleration in good economic numbers around this time of year.

I'll explore that later this week.