Popular Economics Weekly

Retail sales soared last month and inflation was nowhere to be found, indicating that we should have at least a 3.5 percent GDP growth rate for the first quarter January to March, which follows the 5.6 percent rate in Q4 2009. Consumers are spending again, in spite of flagging confidence, proving that one can shop and feel depressed about it at the same time. But cheer up, consumers, since retail is 50 percent of all consumer consumption, spending your hard-earned savings should mean more investment, and jobs.

Overall retail sales in March jumped 1.6 percent after gaining 0.5 percent in February, and are up a huge 7 percent, year over year. The March boost topped market projections for a 1.2 percent spike. Motor vehicles provided a huge contribution, spiking 6.7 percent after dipping 1.9 percent in February. But even excluding autos, sales in March posted another healthy gain, rising 0.6 percent which came after a 1.0 percent surge in February.

Fed inflation hawks got no help in March as consumer price inflation was essentially nonexistent. Overall CPI inflation for March nudged up to 0.1 percent from no change the prior month. The rise matched the consensus forecast for a 0.1 percent increase. Core CPI inflation, however, showed no change from up 0.1 percent in March and coming in just under expectations for a 0.1 percent gain. At the headline level, food prices rose moderately while energy costs were flat. The core was held down in part by declines in apparel and recreation and flat housing costs.

Another boost to consumer confidence may come from March industrial production, which rose to 4.0 percent from 2.2 percent in February. Within manufacturing, durables output jumped a sharp 1.4 percent with all major categories advancing, most over 1 percent. Nondurables production increased 0.5 percent in March, led by a 3.0 percent jump in petroleum & coal products and by a 1.7 percent gain in rubber products. Other increases were more moderate but still widespread.

And the recovery finally is starting to take traction beyond just manufacturing. The ISM’s non-manufacturing index for March improved to 55.4—a 2.4 point jump from the prior month. The index has been in positive territory for three months in a row.

Forward momentum looks good as the new orders index spiked 7.3 points to a really hot 62.3 reading. This is the highest level for this index since a reading of 63.0 in February 2005, according to Econoday. Export orders were strong, jumping more than 10 points to 57.5.  Adding to the argument that forward momentum is strengthening, backlog orders also rose, gaining over 9 points for the month to 55.5.

The huge output increase in both the manufacturing and non-manufacturing (service) sectors has to boost employment in coming months, as we said. Even builder optimism rose, as new-home traffic has increased, according to the National Association of Home Builders, indicating that housing is not slipping back into recession although this sector is still getting support from homebuyer tax credits that are about to expire..

Housing starts in March strengthened from snow bound February-with permits pointing toward even better improvement than starts. March construction rebounded 1.6 percent after a snow storm damped 1.1 percent rise in February. The February number was revised up from an original estimate of a 5.9 percent drop. The March annualized pace of 0.626 million units rose 20.2 percent on a year-ago basis.

This is in spite of flagging consumer sentiments. Consumer sentiment has fallen deeply the last two weeks in a surprise that indirectly points to trouble in the labor market, according to the University of Michigan survey. The mid-month consumer sentiment index fell to 69.5 vs. 73.6 in March. Deterioration is deepest in the leading component, expectations, which fell 5.6 points to 62.3 and a level last seen mid-year last year when payrolls were still declining severely.

We hope consumers aren’t dispirited because they are again spending what they don’t have. The evidence doesn’t show such. It may just be all the bad news still out there. The actual recession probably ended last July or August. But even the National Bureau of Economic Research that calls recessions refused to announce that fact, saying, “Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months.”

With even the experts uncertain about economic growth, it is no wonder consumers are still pessimistic about their future.

Harlan Green © 2010

Popular Economics Weekly

The Federal Reserve decided to raise their nominal discount rate by 0.25 percent—the rate they charge banks to borrow Fed money—to 0.75 percent last week. The reason is to get banks off the Fed’s dole. Banks had been borrowing from the Fed, because the money was so cheap. The Fed is now saying it is time for banks to look for funds in the private sector.

But it also signaled that this wasn’t the beginning of a sustained tightening. “"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy."

This is a sign the Fed sees business activity increasing. We have already talked about the surge in manufacturing in what is looking like a ‘V’ shaped recovery.

Industrial production posted another strong gain for January-but this time the strength was real and not weather related. Industrial production in January advanced 0.9 percent, following a 0.7 percent jump in December. The January was marginally better than the market projection for a 0.8 percent gain.

The service sector is also on a sustained recovery. The headline composite rose 1.4 points to 50.1, a level indicating very little month-to-month change in overall activity for the bulk of the economy. New orders, the life blood of business, did show a month-to-month increase at 52.1, the slowest increase over the last four months. In a reflection of the prior gains in orders, the business activity component, which can roughly be described as a production reading, rose more than 4 points to 53.7.

Lastly, consumer spending has been expanding since April 2009. This was remarked upon by the Federal Reserve in its latest Beige Book report. “Ten Districts reported some increased activity or improvement in conditions, while the remaining two–Philadelphia and Richmond–reported mixed conditions. This was an improvement from the last Beige Book that reported eight Districts with increased activity or improving conditions and four Districts showing little change and/or mixed conditions.

And is why retail sales have been increasing since last fall.

The bottom line is that the Fed has decided to no longer subsidize the so-called ‘carry trade’, whereby banks were able to borrow monies at next to zero interest and lend or invest it at prevailing market returns. This is why profits of the largest banks have been surging. The release of minutes from the January FOMC hints at why the Fed has begun to tighten.

“Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls.”

It remains to be seen how the markets will react to the first interest rate rise in more than 2 years.

Harlan Green © 2010

Popular Economics Weekly

What will economic growth be in 2010? Will it be enough to bring down the unemployment rate, for instance, or bring back the housing market? Does that mean we are really out of the Great Recession? Much of it may depend on how we feel about what has happened.

There is talk of a ‘new normal’ growth rate that will be slower than in recent years. Bill Gross, managing Director of giant bond fund PIMCO, says that a combination of deleveraging debt, re-regulation, and slower foreign growth means slower economic growth for all.

The largest drag will be the need to pay down both public and private debt to more historical levels. That means halving annual government budget deficits from 6 to 3 percent of GDP. That is projected to take 5-10 years—sooner if Congress will reinstate the Pay-as-you-Go rules mandating no additional government spending without the revenues to pay for it. This prevailed during the Clinton Administration that created a budget surplus by 2000.

Household debt is more difficult to determine; but it is rapidly declining, with overall balances back down to 2006 levels and household mortgage and credit card payments as a percentage of disposable household income the lowest since 2001.

The effects of re-regulation are something harder to measure. But if forceful, much confidence will be restored in the financial markets that have caused so much loss. Consumer confidence has stalled since the fall of 2008 when Lehman Brothers and Bear Stearns failed. Housing will also benefit if clearer rules for mortgage lenders are formulated that restores trust in banks. Former Fed Chairman Paul Volcker is leading the charge to take commercial banks out of high-risk investments, for instance.

Behavioral economist Robert Shiller has highlighted the importance of the loss of “hearts and minds” of workers that resulted from the horrendous financial losses incurred by the successive speculative booms. Shiller says “Solutions for the economy must address, not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors—problems that may otherwise persist for many years.”

He is implying that restoring confidence in our financial system is only part of the problem. There is a system-wide malaise from a sense of injustice—that our modern economic system is not egalitarian, particularly today when Wall Street is being rescued by the victims of their greed—U.S. taxpayers.

Major indicators are giving the green light to better growth this year. Firstly, fourth quarter GDP growth surged 5.7 percent after 2.2 percent in Q3. But much of the growth was from replenishing depleted inventories, which is normal during a recovery. Businesses usually over react to downturns by cutting back on shelf-stocking, so have to play catch up when demand picks up.

Two other growth indicators put out by the Institute of Supply Management (ISM) show improving growth as well. The so-called non-manufacturing, service sector has been growing for the past 6 months, after shrinking for 10 months. Its new orders component shot up 2.7 points in January.

The pace of month-to-month growth in the manufacturing sector also rose sharply in January, driven by a red-hot pace of new orders that points to exceptional overall growth through the rest of the first quarter. The ISM’s manufacturing index jumped more than 3 points to 58.4 for its sixth straight indication of month-to-month growth over 50 percent.

Today’s report is very strong and points to a V-recovery for the manufacturing sector, a sector all through the second half of last year that was at the center of economic recovery. It has been rising since December 2008.

In fact, much of the current malaise is due to the high degree of uncertainty about what the future will bring. Start with housing—both the backlog of toxic mortgages weighing down banks, and home foreclosures waiting in the wings. Then we have the uncertainty of jobs growth, which depends in part on less than confident consumers. This uncertainty can only be allayed by a restoration of trust—in both our public and private institutions.

Harlan Green © 2010