As the markets have rallied over the last couple of months one of the primary “hopes” by mainstream analysts, economists, and even the Fed, has been the hope that the economy will begin to show real signs of life. While the continued injections of monetary liquidity have inflated asset prices to previous peaks; unfortunately the same cannot be said for the underlying economy. After four years, and trillions of dollars of financial support, the economy is still mired at sub-par growth rates, unemployment remains a structural disaster and confidence remains depressed.
The recent economic data from durable goods, consumer confidence, retail sales and manufacturing all point to an economy that is still exceedingly weak. I will review each in a bit more detail.
The most recent release of durable goods orders showed a sharp jump of 5.7% at the headline. Unfortunately, this was primarily aircraft orders. The reason I say unfortunately is that, unless you were out buying a Lear Jet or a Gulf Stream last month, once you exclude the transportation component we find a -0.5% decrease in the core new orders for durable goods. This measure tells us much more about what is happening with average consumer.
More importantly, as I have stated many times previously, the month to month data points tell us very little about the real strength, or lack thereof, in the data. Therefore, if we look at the annual rates of change in the data, or some other measure to smooth otherwise very volatile data, we can get a much clearer picture. The chart below shows the annual percentage change in new orders for durable goods compared to the annual change in new orders for non-defense capital goods.
What becomes much more apparent is that the bounce in orders from December through February were likely mostly related to Hurricane Sandy. This was expected, however, that boost is now likely fading.
From a “technical” perspective the downtrend of the data is very clear. The recent bounce in the data was well contained within the context of that downtrend. It is very likely that the data will continue to trend lower until the data turns substantially more positive on a sustained basis for several months. Currently, with the bulk of the OECD countries in, or near, recession, there is little to offset the current spate of weakness.
The release of the consumer confidence data was the most stunning of all of the reports. I say this because the Fed’s stated purpose of liquidity programs is to “inflate asset prices in order to boost consumer confidence.” The latest report clearly shows that higher asset prices are NOT inflating confidence. In the month of March confidence fell sharply from the downwardly revised February read of 68 to 59.7. More importantly, future expectations also declined sharply which does not bode well for consumer spending which is critical for continued economic growth.
The assessment of future job conditions fell with more seeing fewer jobs opening up six months from now and fewer seeing more jobs. More importantly, those find “jobs plentiful” fell from just 10.1 to a paltry 9.4. For some perspective the “jobs plentiful” index peaked in the mid-50’s.
Of course, with employment remaining a big concern – income expectations also remain low. The only positive note was that plans to buy houses was up but plans to buy automobiles and appliances were down.
There are two important points to remember about consumer confidence. The first is, that despite the Fed’s liquidity programs, the majority of American households feel relatively little impact from inflated asset prices as they don’t actively participate in the financial markets. Secondly, consumer confidence remains mired at levels normally associated with previous recessions which doesn’t provide the necessary impetus for dramatically stronger economic growth in the future. Particularly as it relates to future consumption.
As stated above – the importance of consumer confidence is ultimately consumption. The economy is currently more than 70% driven by personal consumption expenditures and the impact of rising costs of gasoline and food, higher taxes and healthcare costs, stagnant wages and a still very tough employment environment keeps consumers on the defensive.
The chart below shows the relationship between consumer expectations and personal consumption expenditures (PCE). Consumer expectations tends to lead PCE by a couple of months and the recent decline expectations doesn’t bode well for strong PCE in the months ahead.
The negative trend in PCE does not support claims of stronger economic growth this year. However, if we look solely at retail sales, as with the chart below, we find confirmation of weakness.
The recent month-over-month slowdown in the ICSC-Goldman Sachs retail sales continues to show a lack of traction. This corresponds with the collapse in the 3-month average of the annual rate of change in the retail sales data. It is clear that retail sales, along with the economy, peaked in 2011 and early 2012. Importantly, the current drop is threatening to fall below the 3% rate of growth. While the history of the retail sales data is somewhat limited; historically a breach of that level has been indicative of a recessionary economy in the past.
Richmond Fed Manufacturing Survey
The recent Fed manufacturing surveys have come in mixed as of late. Most of the more positive data can be attributed primarily to a bounce post several months of declines. However, the trends of the data in these surveys continue to remain mired within negative trends currently.
The most recent release of the Richmond Fed Manufacturing survey fell from last month’s read of 6 to just 3 in March. The chart below shows the changes in the data from a year ago.
The build in inventories, while supportive of economic growth in the short term, is likely unwanted as excess inventory sits idle. While employment improved over the last year, which coincides with the meager growth in the employment data, the remaining data all showed considerable weakness. Most notably was the sharp drop in order backlogs which is not supportive, when combined with excess inventory, of continued strength in future employment.
While there have certainly been positive data points over the last few months the problem remains, for anyone actually willing to look at the data, is that the trends remain very weak. The current inflation of asset prices is beginning to push the boundaries of excess. Therefore, either the economic data will need to turn sharply higher in the months ahead or there will be a recoupling of asset prices with the economic underpinnings. Those reversions tend to be far greater than “expected” and the end result is a devastated investor that once again “panic sells” at the bottom.
This piece is cross-posted from Street Talk Live with permission.