A closer look at the jobs report: showrooming, weather, and a worrying deviation from trend

- by New Deal democrat

I've had a chance to dig deeper into Friday's punk jobs report, spurred on by Dean Baker (who says it was mainly due to the weather) and Scott Grannis (who says it isn't nearly as poor as it looks), in contrast to my initial impression that "showrooming" (i.e., using local retails stores as the showroom for online purchases) might be the primary culprit.

My conclusion: while I hope Scott Grannis is right, there has been a worrying deviation from trend. Some of that deviation is from a leading component of the trend. The remainder seems about equally split between the effects of our non-winter winter, and an increase in showrooming probably partly in response to high gasoline prices.

First, let's note Scott Grannis's point. The household report continues to suggest a much stronger private sector than the establishment report. The establishment report shows a gain of 1.450 million jobs in the private sector in the last 8 months, or about 180,000 a month. By contrast, the household report shows a gain of 3 million jobs during that period, for an average gain of 375,000 a month. Here's the graph of private job growth in the household survey (blue, left scale) vs. the establishment survey (red, right scale) for the last 5 years:



There is evidence that the household survey leads the establishment survey at turning points. On the other hand, the household survey is noisier. Time will tell.

Now let's turn to the establishment report. Dean Baker chides observers for failing to take into account the weather:

In the winter months we usually get some serious snowstorms in the Northeast and Midwest. This means construction sights get shutdown and project starts are delayed. People will be less likely to go out to restaurants when the streets are covered with snow or its below zero. The same applies to shopping at the mall or buying a new car. If the weather is really bad factories will shut down because they can't get necessary supplies.

None of this happened this winter which meant that job growth was better in the winter months than would ordinarily be the case. But if we didn't get the winter weakness that we expect, then we won't see the same spring bounce that we usually get.

People were hired in January or February who would not ordinarily be hired until March or April. Similarly, people who bought their car in the winter months will not be buying another one in the spring.

The data adds credence to Dean's point, but only in part. Here's a graph of the industry groups he refers to -- construction (orange), restaurants (purple), retail (red), auto dealers (orange), and transportation (blue):



Construction lost 7000 jobs in March vs. gaining 18,000 in January, manufacturing gained 37,000 in March vs. 52,000 in January, and auto dealers gained 700 in March vs. 5,700 in January. On the other hand, Food and Service actually gained more jobs in March (+37,000) than in January (+26,000). In other words, while the retailers in the strip mall may have taken a hit, the restaurant next door didn't. That can't be explained by the weather.

Losses in retail jobs, while large in the aggregate (-33,800):



don't entirely support Dean Baker's analysis, however.

Losses were concentrated in department stores (pink), with smaller losses at electronic stores (green), grocery stores (purple), and online retailers (beige). There was reduced growth in auto dealers (blue) and home furnishings (red). In contrast, there was increased growth at lawn and garden centers (orange), and clothing stores (gray). If the weather were the decisive factor, we would have seen similar declines in building supply, clothing, and garden center stores, as well as restaurants (see first graph above, purple). We didn't:



That the declines in retailing were concentrated in department and electronics stores suggests that consumers have increased their practice of showrooming. A local store may be visited, but the purchase is made online for a lower price. It is very likely this is one strategy adopted by especially younger consumers to minimize gasoline usage. For example, it has been reported that 52% of holiday shoppers engaged in showrooming. Items as mundane as cosmetics are now being repeat-purchased online. In other words, those retail businesses most vulnerable to showrooming took by far the biggest hit.

Next, let's turn to transportation (blue) and utilities (purple) employment. Despite the fact that railroads (red) are hauling much less coal than usual, due to a weather-related drop in demand from utilities, neither of those industries took an employment hit:



Weather probably did play a role here, as an unusual number of truckers (green) were hired in February, after which there was an actual decline in March. Finally, remember the hubbub about the surge in employment of couriers (orange) from the December report? It's been completely revised away..

Finally, let's look at professional and business services. These only added +31,000 jobs in March, well below February's +79,000 and similar advances in December and January. While legal (blue), accounting (red), architectural and engineering (green), programming (orange), and technical consulting (purple) services all hired less, the biggest factor by far was in employment services(blue-gray) (half of which are temporary services), which fell -14,200 in March after a 67,000 gain in February :



In fact, I've had to divide the change in employment services by two just to show the other changes in services. Employment service losses account for virtually all of the decline in growth, and half of that is in the leading sector of temporary jobs.

To summarize, while weather played a big role in the March miss compared with January and February, it may not be the BLS's seasonal adjustment at fault so much as miscalculations by the businesses themselves. When the increased business failed to pick up further, they stopped hiring temporarily (hence the employment services decline), and laid off some employees depending on how big a miss -- where the biggest miss was due to showrooming. If so, the weather related effects should only persist through April, while showrooming is probably here to stay for the duration of high gas prices.

That leads me to the final point. March's employment report is a break in trend in the relationship between job losses and job hires. Here is an update of my scatterplot graph showing the relationship between initial jobless claims and private sector job changes.



Going into the last recession, as is typical, hiring stops before significant layoffs begin. In the recovery, hiring in recovering sectors start before overall layoffs end. March's report moves us in the direction of the pre-recessionary pattern. That the two leading indicators in the jobs report -- manufacturing hours and temporary jobs -- both declined, adds further weight to the concern. Thus March's jobs report must be regarded as a yellow caution flag concerning the sustainability of the recovery.

Morning Markets

To reiterate my view on the markets

My primary concern for the US markets has been the international markets.  Simply put, with other markets and economies slowing down, I've wondered how the US can continue rallying (see here, here, here and here).  Last week's action in the US markets indicates the US is coming under more pressure both from international markets and internal weakness.

Both the QQQs and SPYs are either right at critical support (the QQQs) or just beyond it (the SPYs).  Put another way, both markets are one bad trading day away from moving through very important trend lines.  Also note the declining momentum for both charts; the QQQs have given a sell signal and the SPYs have been showing declining momentum for the last few months.  However, note the rising A/D  for both, indicating more money is coming into the market.

As I've noted before, the IWMs are the problem child of the market; while the QQQs and SPYs were rallying, the IWMs were stuck in a rut, unable to advance.

The Treasury ETFs all share the same characteristics.  After selling off in reaction to the Fed minutes release, they have all since rallied back to key levels.  Prior to the sell-off, one of my concerns (and  others) was that the treasury market was taking money away from the equity market.  The sell-off gave us hope that that situation was reversing.  However, the rally over the last few weeks indicates the safety play may be returning to the market.  This will take money away from the equity markets, preventing their rally.

Weekly Indicators: April fool's got delayed 5 days edition

- by New Deal democrat

This past week's monthly data releases were dominated by yesterday's nonfarm payrolls report, which read like a bad April fool's joke delayed by 5 days. The commentary a month ago was how there were no weak spots in the report and the economy was hitting on all cylinders. Four weeks later and it reads like the engine has seized. Auto sales were great, but slightly below February. Factory orders, ISM manufacturing, and ISM services all improved. Residential construction spending held up, but nonresidential spending declined.

The high frequency weekly indicators do not give any hint of oncoming weakness. Let's start with the employment related data, to compare with the monthly report:

The Department of Labor reported Initial jobless claims of 357,000 last week, a new post-recession low in the revised series. The four week average declined by 3250 to 361,750, also the lowest revised number in 4 years. There will be one more week where the new seasonal revisions will increase the number compared with the former adjustments before turning lower.

The American Staffing Association Index held steady at 89. It is well above last year's level and almost equal to its 2007 level.

The Daily Treasury Statement shows that for the 20 day period ending 5 days into April, $151.8 B has been collected in withholding taxes vs. $144.2 B a year ago, for an increase of $7.6 B or +5.3% YoY.

In summary, none of the weekly employment indicators show any sign of weakness, and to the contrary, show more strength.

Sales also remained positive.

The ICSC reported that same store sales for the week ending March 31 rose +3.8% for the week and also rose +4.2% YoY. Johnson Redbook reported a 4.6% YoY gain. The 14 day average of Gallup daily consumer spending at $76 remains near the highest spring reading since the recession, and is also up about 20% YoY.

The energy choke collar remains engaged:

Gasoline prices are about 7% higher than one year ago while usage continues to be much lower: Oil was steady at $103.31. Gas at the pump rose another $.02 to $3.94. Gasoline in particular is significantly above the point where it can be expected to exert a constricting influence on the economy. Gasoline usage, at 8572 M gallons vs. 8906 M a year ago, was off -3.8% YoY. The 4 week moving average was down only -0.8% YoY. The decline in gas usage began one year ago, so the YoY comparisons are getting easier. Still, these usage numbers do not show any increase in stress.

Turning to housing, the Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index increased +7.2% from the prior week, and was more than 2% higher YoY. The Refinance Index decreased another -1.4% from the previous week, reflecting higher rates and a pause before the new government refinancing assistance program starts.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were up +4.1% from a year ago. Asking prices in this index have now been up YoY for 4 straight months. This week another asking price index, Trulia, premiered, adjusting prices for the mix of properties on the market. This index is seasonally adjusted, and it also bottomed in December and has risen even since. As to sale prices, CoreLogic reported that YoY declines in non-foreclosures had slowed to -0.8%. Foreclosures were significantly worse. This raises the interesting possibility of a bifurcated market in house prices depending on foreclosure status.

Real estate loans from the FRB's H8 report, turned outright positive YoY for the first time since the recession in the week of March 31. On a monthly basis, they were flat YoY. These were identified by Prof. Geoffrey Moore, the founder of ECRI, as a leading indicator for this market.

Rail traffic remained negative but with the same explanation.

The American Association of Railroads reported mixed weekly rail traffic for the week ending March 31, 2012, with U.S. railroads originating 286,962 carloads, down 6.2 percent compared with the same week last year. Intermodal volume for the week totaled 242,772 trailers and containers, up 3.6 percent compared with the same week last year. The entire decline in carloads is still due to coal shipments which were off -18.2%. Railfax's graph of YoY traffic by types remains in a positive trend on a YoY basis.

Bond prices and credit spreads both rose :

Weekly BAA commercial bond rates fell +.09% t0 5.25%. Yields on 10 year treasury bonds fell .10% to 2.22%. The credit spread between the two, which had a 52 week maximum difference of 3.34% in October, rose by .01% to 3.03%.

Money supply, however, was flat to negative on a weekly and monthly basis:

M1 rose +0.7% last week, but was lower by -0.2% month over month. On a YoY basis it rose +16.8%, so Real M1 is up 14.1%. YoY. M2 rose +0.4% for the week, and also +0.2% month over month. Its YoY advance fell to +9.4%, so Real M2 was up 6.1%. The YoY comparisons are becoming tighter (although still historically high), and have generally stalled on a weekly and monthly basis for the last couple of months, which is becoming noteworthy.

Turning now to high frequency indicators for the global economy:

The TED spread fell back .01 to 0.40. This index remians slightly below its 2010 peak, generally steady for the last two months, and has declined from its 3 year peak of 3 months ago. The one month LIBOR remained at 0.241. It is well below its 12 month peak set 3 months ago, remains below its 2010 peak, and has returned to its typical background reading of the last 3 years.

The Baltic Dry Index fell 2 to 928. It has risen 278 from its 52 week low, but is still well off its October 52 week high of 2173. The Harpex Shipping Index also fell 1 to 395 in the last week, up 20 from its 52 week low.

Finally, the JoC ECRI industrial commodities index rose slightly for the week to 124.26. This indicator probably forecasts the global economy much better than it does the US economy.

With the sole exception of the decline in rail traffic, due to utilities needing less coal for energy generation in turn due to the unusual weather, none of the high frequency indicators are giving any warning of any imminent turn in the economy. The Oil choke collar remains engaged, but generally the data suggests smooth sailing ahead. More than anything else, the comparatively poor jobs report strongly indicates something is going on with retail stores. Is everybody becoming Amazon's showroom?

Have a nice weekend.

Weekend Weimar, Beagle and Pit Bull

It's that time of the week. As I mentioned yesterday, I'm cutting out early for the weekend (actually, I've already left).  Think about anything except the markets. I'll be back on Monday; NDD will do the weekly stats this weekend. Until then ....

March employment report: outlier or pre-recession?

- by New Deal democrat

Well, this was an unpleasant surprise. A few days ago I wrote that if the trend of initial jobless claims compared with payrolls from the last 3 years held, we should expect a report of about +250,000 jobs. That was considerably above the consensus. Instead, as you know by now, we only got +120,000.

In that same post I wrote:

[I]f we were on the cusp of entering an economic contraction, new jobs offered would decline before layoffs increased, meaning the new entries on the scatterplot would shift substantially to the left. Should March come in under 200,000 ..., and should February also be revised down under 200,000, that would be a bad omen.

Although February's report was actually revised up to +240,000, this month's report is what I would expect to see in the months leading up to a recession, per the scattershot graph comparing initial claims to payrolls (note this does not include this morning's data):



Today's report is well to the left of what the trend, just like the months as teh last recovery waned in 2007 (shown in yellow and also the first six of the series shown in red) before the onset of that recession.

The manufacturing workweek, an element of the Index of Leading Economic Indicators, declined 0.3 hours to 40.7. That is a large decline and is consistent with manufacturing rolling over from weakness. Another leading part of the report, temporary jobs, also declined by 7,500 (completely contrary to the ASA survey's strong increase).

The punk report was based on weakness throughout the service economy, but especially two areas. Comparing January with March, retail jobs went from +24,900 to -33,800. Professional and business services went from +79,000 to +31,000. Those two areas alone are responsible for 106,000 in the shortfall in job creation.

The index of Aggregate hours worked in the economy, [which were revised higher for February, fell 0.2 from 96.0 to 95.8 -- NDD note. This original line is in error.] did increase 0.1%, in line with actual payrolls. This is a notable coincident indicator consulted by the NBER.

The general workweek declined by 0.1 hour to 34.5. Overtime was unchanged. Hourly earnings rose $0.05 to $23.39, a 0.2% increase.

The only relatively bright spot was the unemployment rate, which did fall from 8.3% to 8.2%, as predicted from the initial jobless claims data, since that leads the unemployment rate (note the graph below does not include this morning's data):



The broad U6 unemployment rate fell from 14.9% to 14.5%. Some of this was due to the -0.1% decline in the employment to population ratio. Since the unemployment rate is a lagging indicator, this isn't terribly heartening.

It may be that some job growth was pulled forward due to the non-winter winter, but between the declining leading indicators in the report, and the break in trend with initial claims, this report has to be regarded as a serious piece of evidence that high gas prices, wages that have not kept up with inflation, and weaker manufacturing growth are finally extracting a toll.

Hey Doomers! Check out Gallup's employment report!!!

- by New Deal democrat

Remember the big hubbub last month about how Gallup's unemployment survey showed a big month over month increase, so the February employment report was going to be awful?

Well, check out what Gallup's employment report said today:

U.S. unemployment, as measured by Gallup without seasonal adjustment, declined to 8.4% in March from 9.1% in February, while Gallup's seasonally adjusted rate fell to 8.1% from 8.6% in February.
....
Gallup trends show the U.S. unemployment rate declining dramatically over the past year.
....
Gallup's seasonally adjusted unemployment rate was essentially unchanged at 8.5% in mid-March from 8.6% in February, but then fell to 8.1% for all of March

Contrast that with the much smaller decline in March of last year:

Unemployment, as measured by Gallup without seasonal adjustment, was 10.0% in March -- down from 10.2% in mid-March and 10.3% at the end of February.

That's a 0.7% unadjusted month over month decline this year vs. a 0.3% month over month decline last year. And a full 1.9% lower year over year.

Given how important the Gallup report was for the Doomers last month, I'm sure they'll be all over highlighting it again this month.

Right?

How helping the middle class helps the economy

- by New Deal democrat

Henry Ford famously said that he wanted to pay his workers enough so that they could afford his cars. The wisdom of that statement, I submit, is borne out by the graph of the real personal savings rate I posted this morning. Here it is again:



The point is that the real personal savings rate leads GDP by 1 to 2 years, and has consistently since World War 2. Although not shown above, consumer savings skyrocketed after the nadir of the Depression in 1933, and continued through World War 2. When the GI's came home, there was an enormous pool of savings set to power the post-War boom. Notice, however, that the real personal savings rate has generally declined since the 1960s. After briefly recovering in the early 1980s, the almost inexorable trend since has been downward -- and the trend of declining peaks in GDP has followed.

With the "Great Recession" the savings rate again briefly surged. GDP rose, but not nearly so much, as households focused on refinancing debt at lower interest rates, paying it down, paying it off, or simply defaulting. The result has been that households in the aggregate are in their best shape in 30 years to begin both saving and spending more, as shown in this graph of household debt levels I have been updating every quarter for several years. It is only current through December 2011. The next update, covering the first quarter already ended, will come in June:

Lakshman Achuthan of ECRI has said for several years that we are in a pattern of more frequent and deeper recessions, as GDP growth trends downward over the decades. I do not believe that is inevitable. In fact I contend it is the natural result of policies that have redistributed wealth upward from the middle class.

Study after study has shown that the share of income going to labor vs. owners and financiers has declined relentlessly for over a generation. As less income has accrued to the middle and working classes, they have had less and less savings to fall back on. What the graph of the leading relationship of the real personal savings rate to GDP above shows is that a result of this policy-driven transfer of wealth, the overall growth rate of the economy has suffered for nearly 3 decades.

And the closer we come to the point where transfering wealth upward from the middle class becomes akin to squeezing blood out of a stone, the less ability there is even for corporations to generate greater profits. This is the graph of corporate profits after tax since the recession bottom:



Corporate profits at their post-recession peak have been 10% higher than their prior peak, but the increase shows signs of being short-lived.

The alternative to the type of economy predicted by Laksham Achuthan, in which the majority of consumers have reduced savings to spend, corporate profits stall, and growth is lackluster for a long time, is to implement policies that favor a greater share of income winding up in the savings of the middle class. Henry Ford would know that in the long-term, this even favors the well-being of the 1%.

The case for economic contraction

- by New Deal democrat

For the last couple of weeks, I've been revisiting my forecast from the beginning of the year, which was for weakness in the first half followed by stronger growth in the second. So far I have been piling up the evidence that the expansion will continue.

It's not as if there aren't some significant problems, though.

First of all, I've already touched on consumer spending in the face of increasingly high gasolilne prices, and the fact that wages haven't kept pace with inflation for over a year. As a result, people are digging into their savings, and at a more precipitous rate since the beginning of the year:



In the past, I've noted that the real personal savings rate, i.e., the savings rate minus inflation (blue in the graph below), is an excellent long leading indicator, by about 12-24 months, of GDP (red), albeit with a fair amount of noise:



Here's a close-up of the past 11 years:



The 2010 increase in real savings started to feed through into GDP towards the end of 2011. Once that is done, the real personal savings rate predicts serious trouble ahead.

Real income has stalled again, and is down slightly since December 2011. This is one of the four data series typically used by the NBER to date recessions. While not a good sign, note that the graph shows this has been a problem off and on ever since the recovery started:



Secondly, not only are consumer incomes and savings a problem, but corporate earnings (a long leading indicator) also look like they are peaking or have already peaked:



Probably not coincidentally, durable goods (a short leading indicator) look like they have rolled over:



The slowing growth of manufacturing is also shown by the ISM new orders index (blue) and vendor deliveries index (red):



Both of these are also short leading indicators. New orders in particular haven't rolled over as of this point, but could do so quickly based on past experience.

Finally, the pattern of commodity prices (green), producer prices (red), and consumer prices (blue) YoY change mirrors that we saw in both the 2001 and 2008 recessions:



At approximately the midpoint of each of those recessions, prices fell, with commodity prices - the most volatile - falling more than producer prices, which in turn fell more than consumer prices. Note, however, a couple of occasions (2004, 2006) where commodity and producer prices fell, but not faster than consumer prices. In those cases, the economy was not so weak that it went into actual contraction. The pattern of these prices - i.e., if the YoY change in commodity prices is significantly less thant the YoY change in consumer prices - will tell us in the next few months if we escape without a recession or not.

The economy does show definite signs of weakness. What remains is to add up the ledger of the positive and the negative trends I've discussed over these last couple of weeks..

Through the Eyes of The US and Australian Central Banks

I'm taking a long weekend this weekend.  So, today I wanted to leave you with some meaty reading to keep you occupied until Monday.  Consider the following statements from the Australian and US central banks regarding the overall economic situation.  All of these were released this week.

From Australia:

At its meeting today, the Board decided to leave the cash rate unchanged at 4.25 per cent.

Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring. Several countries in Europe will record very weak outcomes, but the US economy is continuing a moderate expansion. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions around other parts of Asia softened in 2011, partly due to natural disasters, but are not showing signs of further deterioration. Some moderation in inflation has allowed policymakers in the region to ease monetary policies somewhat. Commodity prices declined for a few months last year and are noticeably off their peaks, but have been relatively stable for a while now, at quite high levels. Australia’s terms of trade have peaked, though they remain high. 

Financial market sentiment has generally continued to improve in recent weeks and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs are tending to decline, though they remain higher, relative to benchmark rates, than in mid 2011. But the task of putting European banks and sovereigns onto a sound footing for the longer term remains large and Europe will remain a potential source of adverse shocks for some time yet.

In Australia, growth in domestic demand ran at its fastest for four years in 2011, driven by private spending. Nonetheless the balance of recent information suggests that output growth was somewhat below trend over the year. There are differences in performance between sectors, and considerable structural change is occurring. Labour market conditions softened during 2011, though the rate of unemployment has been little changed for some time.

Interest rates for borrowers remain close to their medium-term average. Credit growth remains modest. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains soft. The exchange rate has remained high over recent months, even though the terms of trade have declined somewhat.

In underlying terms, inflation was around 2½ per cent in 2011. CPI inflation was higher than that but will fall over the next quarter or two. It is currently expected that inflation will be in the 2–3 per cent range over the coming one to two years. This forecast abstracts from the effects of the carbon price and also embodies an assumption that productivity growth in the economy increases somewhat as a result of the structural change now occurring. At its next meeting, the Board will have the opportunity to reassess the outlook for inflation, taking into account not only data on demand and output but also forthcoming information on prices.

The Board eased monetary policy late in 2011. Since then, its judgement has been that, with growth expected to be close to trend, inflation close to target and lending rates close to average, the setting of monetary policy was appropriate. The Board's view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy. At today's meeting, the Board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy

From the US:

The information reviewed at the March 13 meeting suggested that economic activity was expanding moderately. Labor market conditions continued to improve and the unemployment rate declined further, although it remained elevated. Overall consumer price inflation was relatively subdued in recent months. More recently, prices of crude oil and gasoline increased substantially. Measures of long-run inflation expectations remained stable.

Private nonfarm employment rose at an appreciably faster average pace in January and February than in the fourth quarter of last year, and declines in total government employment slowed in recent months. The unemployment rate decreased to 8.3 percent in January and stayed at that level in February. Both the rate of long-duration unemployment and the share of workers employed part time for economic reasons continued to be high. Initial claims for unemployment insurance trended lower over the intermeeting period and were at a level consistent with further moderate job gains.

Manufacturing production increased considerably in January, and the rate of manufacturing capacity utilization stepped up. Factory output was boosted by a sizable expansion in the production of motor vehicles, but there also were solid and widespread gains in other industries. In February, motor vehicle assemblies remained near the strong pace recorded in January; they were scheduled to edge up, on net, through the second quarter. Broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels suggesting moderate increases in factory production in the coming months.

Households' real disposable income increased, on balance, in December and January as labor earnings rose solidly. Moreover, households' net worth grew in the fourth quarter of last year and likely was boosted further by gains in equity values thus far this year. Nevertheless, real personal consumption expenditures (PCE) were reported to have been flat in December and January. Although households' purchases of motor vehicles rose briskly, spending for other consumer goods and services was weak. In February, nominal retail sales excluding purchases at motor vehicle and parts outlets increased moderately, while motor vehicle sales continued to climb. Consumer sentiment was little changed in February, and households remained downbeat about both the economic outlook and their own income and finances.

Housing market activity improved somewhat in recent months but continued to be restrained by the substantial inventory of foreclosed and distressed properties, tight credit conditions for mortgage loans, and uncertainty about the economic outlook and future home prices. After increasing in December, starts of new single-family homes remained at that higher level in January, likely boosted in part by unseasonably warm weather; in both months, starts ran above permit issuance. Sales of new and existing homes stepped up further in recent months, though they still remained at quite low levels. Home prices were flat, on balance, in December and January.

Real business expenditures on equipment and software rose at a notably slower pace in the fourth quarter of last year than earlier in the year. Moreover, nominal orders and shipments of nondefense capital goods declined in January. However, a number of forward-looking indicators of firms' equipment spending improved, including some survey measures of business conditions and capital spending plans. Nominal business spending for nonresidential construction firmed, on net, in December and January, but the level of spending was still subdued, in part reflecting high vacancy rates and tight credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales in recent months, although stocks of motor vehicles continued to be lean.

Data for federal government spending in January and February indicated that real defense expenditures continued to step down after decreasing significantly in the fourth quarter. Real state and local government purchases looked to be declining at a slower pace than last year, as those governments' payrolls edged up in January and February and their nominal construction spending rose a little in January.

The U.S. international trade deficit widened in December and January, as imports increased more than exports. The expansion of imports was spread across most categories, with petroleum products and automotive products posting strong gains in January. The rise in exports was supported by shipments of capital goods and automotive products, while exports of consumer goods and industrial supplies declined on average. Data through December indicated that net exports made a moderate negative contribution to the rate of growth in real gross domestic product (GDP) in the fourth quarter of last year.

Overall U.S. consumer prices, as measured by the PCE price index, increased at a modest rate in December and January. Consumer energy prices rose in January after decreasing markedly in December, and survey data indicated that gasoline prices moved up considerably in February and early March. Meanwhile, increases in consumer food prices slowed in recent months. Consumer prices excluding food and energy also rose modestly in December and January. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers were unchanged in February, and longer-term inflation expectations in the survey remained in their recent range.

Measures of labor compensation generally indicated that nominal wage gains continued to be subdued. Increases in compensation per hour in the nonfarm business sector picked up somewhat over the four quarters of 2011. However, the employment cost index increased at a more modest pace than the compensation per hour measure over the past year, and the 12-month change in average hourly earnings for all employees remained muted in January and February.

Recent indicators suggested some improvement in foreign economic activity early this year after a significant slowing in the fourth quarter of last year. Aggregate output in the euro area contracted in the fourth quarter, but manufacturing purchasing managers indexes (PMIs) improved in January and February relative to their low fourth-quarter readings, and consumer and business confidence edged up. Floods caused steep production declines in the fourth quarter in Thailand and also had negative effects on output in other countries linked through Thai supply chains. However, economic activity in Thailand recovered sharply around year-end, and manufacturing PMIs moved up across Asia through February. Higher prices for energy and food put upward pressure on headline inflation in foreign economies, but measures of core inflation remained subdued.

Welcome to Reuter's/Felix Salmon Readers

Wow!  I am very pleased to see that we have been favorably mentioned by Felix Salmon on the Reuter's Blog.  Felix is a great blogger who we have cited before.  We are extremely flattered to be mentioned by Felix and hope to continue writing quality material that holds to his high standards.

As for new readers, welcome.  Please look around and bask in our wonkishness.

Bonddad and NDD

1955: Interest Rates, Inflation and Fed Policy

 

Remember that during 1955,  the economy was growing at very strong rates.  As the economy expanded, businesses increased their borrowings.  In addition, as the economy expanded, the Fed became more and more concerned with inflation.  This is the reason for the increase in the discount rate during the year.  Consider the following excerpts from various rate decisions by the Fed:

From April 13: 

August 3:

November 17:

However, prices were in fact pretty contained:

The bottom whole sale price chart shows that crude goods were decreasing in price.  The real price pressure was coming at the intermediate price level, but producers were able to absorb that cost, as evidenced by the slow rise of finished goods prices.  The top chart shows that food prices were dropping sharply, while other prices were moving higher.

Consumer prices were also pretty contained.  The primary area where we see an increase are in services, which is to be expected; this year -- and this decade -- saw a tremendous increase in service usage on the part of consumers.  As the US started to form households, they purchased more and more goods such as dry cleaners, yard services etc....

Can The US Lead the World In Growth, Pt. 2 PCEs

Yesterday, I looked at investment as a contribution to GDP and argued that business and equipment investment should be able to contribute to growth, but that CRE and residential investment were probably out.  I should also add that with the rest of the world slowing down, exports can't really contribute to growth for obvious reasons. And with the new found love of austerity, it's doubtful we'll see any major public initiatives in the future. As such, that leaves US consumers as the last salvation.

So, let's start with where the consumer is now, by looking at real PCEs.

Overall, real PCEs have been rising since mid-2009.  Aside from a leveling off in growth in early/mid 2011, we see that total PCEs have continued to increase.

Real durable goods purchases -- which only account for about 12% of all PCEs, have risen strongly, especially in the last six months.  

Real non-durable goods purchases, however, haven't risen at all.  These account for about 20% of PCEs.  

Services are at strong levels -- higher than the previous expansion - and they rose strongly last month.  However, for the five months prior to that, we see a leveling off in growth.  This occurred when there was concern in the US about an overall slowing in the economy as a whole.

Real retail sales are also increasing.  However, like the service component of PCEs, we see a leveling off over the the summer/end of 2011 as there was a concern about an overall slowdown in the economy.

The above information reveals some very interesting information.

1.) The stalling in non-durable goods tells me that consumers are doing two things: first, they're making do with less.  Whereas they previously were more inclined to purchase an additional piece of clothing when it was on sale regardless of need, they are now making very tough choices and refusing these purchases.

2.) Consumers are doing more things for themselves.  I think the stalling in service expenditures last year is a sign that consumers are doing their service work themselves -- they're fixing their home themselves or doing their own yard work etc... 

3.) The rise in durable goods purchases tells me that consumers are only purchasing those goods that they absolutely need -- like autos and appliances.  These purchases are receiving the bulk of consumers discretionary purchase attention.

Now- -- can we continue to see an increase in PCEs to such a degree that the US consumer continues to drive growth?  In order for that to happen, we need to see the following happen.

1.) A continual improvement in the employment picture. First, we need to see initial unemployment claims remain at least at current levels:

The 4-week EMA of initial unemployment claims has been below 400,000 since the beginning of the year.   At minimum, we need to see these levels continue on going forward.  In addition,

The public needs to see continued improvement in the unemployment rate.

In addition, we need to see real wage gains.  Unfortunately, because of high unemployment, we're not seeing this number advance.  Consider the following measures:

Average hourly earnings of production workers -- while seeing an increase -- is still seen a weak and declining YOY percentage change.

Real compensation per hour has also stalled for the last three years.

Real disposable personal income has declined for the last two months; overall, the figure for the last five months has been in a very narrow range.  And before that, we also don't see much growth. 

The YOY percentage change in real DPI has been incredibly weak.

During the recession, we saw a big increase in savings.  For the duration of the recovery, that number has been fluctuating between 4 and 6 percent and is currently declining.  This is the source of some of the consumer spending.  In addition,

Consumer credit outstanding is on the rise, providing liquidity for consumers.

It's possible we could see the following: consumers continue to tap their savings and consumer credit to increase purchases.  But central to this is the need to continue to see improvement in the job market.  If the unemployment rate continues to drop, we will see a boost to consumer confidence, which will in turn lead to increased purchases.  However, a slowdown in the employment figure would be fatal, lowering confidence and limiting consumer purchases.