DKW; April 20, 2009
Just when we thought we were seeing some glimmers of hope on the possibility of perhaps defining maybe the beginning of the end of the rapid rate of the economic downturn, we get hammered by the latest economic data. With pressure mounting to find good news in the economic situation, spying the "green shoots" of recovery in Fed parlance, we were grasping at things such as the "rate of the downturn has lessened". In other words, we were looking at the second and even third derivatives of the data trends, and comparing them with recessions passed to see if we could raise consumers' confidence a bit and send them back on a spending spree supported by the pending flow of stimulus money.
I even printed out a packet of graphs for internal discussion complete with little orange circles showing where the indicator was not, indeed, as bad as the previous recent data points. By not as bad, I mean not necessarily good. For example, industrial production was only declining by two percent instead of four percent last month and the ISM manufacturing index had climbed from 35 to 36 (below 50 means contraction). Or, housing starts had popped up to a 580,000 annual run rate (we figure the equilibrium annual run rate is something like 1.6 million units). Even news of April 15, from The Associated Press, "Housing index posts biggest jump in 5 years. Economist: 'We are at or near the bottom of the current housing depression'." (My emphasis added.) The article goes on to say, the builders' confidence index "posted its biggest one-month jump in five years"; all the way to 14. Later the article mentions that "readings lower than 50 indicate negative sentiment".
Well, it was working. The stock market launched a rally March 9th. Then some big banks issued positive earnings reports. Well Fargo was first out of the shoot, even reporting early, with first quarter profits. Imagine, banks actually making money. Halleluiah, the market is risen. Let's get back in. The market recovered twenty percent off the lows. The Dow Jones 30 Industrials has been meandering around the 8,000 level for a couple weeks now, up from the 6,500 level in early March.
Beginning the week of April 13, a spate of significant economic data releases came out: Tuesday, retail sales, business inventories, and producer price index; Wednesday, consumer price index, industrial production, and housing market index; Thursday, housing starts and jobs numbers; and Friday, consumer sentiment.
- March retail sales were down 1.1 percent - down across the board by product class and store chain with the exception of Walmart, which was up, but less than expected - a factor given was that the late Easter pushed sales into April.
- Business inventories continue to decline 1.3 percent - good for the long-term, not so good for GDP or short-term hiring. Core producer price index was essentially unchanged - utilization capacity low.
- Consumer price index essentially unchanged - lower gasoline prices took it negative. Industrial production was down more than expected as was capacity utilization, the 69.3 percent utilization figure is lowest on record - no demand for goods.
- Housing market index up five points to 14 - see above. Housing starts fell 10.8 percent in March - the 510,000 annualized pace was down 48.4 percent over the year. Housing permits were also down 9.0 percent - so much for housing rally.
- March Wisconsin jobs numbers continued to decline with year-over-year comparison showing 112,400 fewer jobs - unadjusted unemployment rate increased to 9.4 percent, now above national rate. So, is it any wonder consumer spirits remain near historic lows, although they are beginning to move in the right direction.
- The Reuters/University of Michigan's consumer sentiment figure increased to 61.9 from 57.3 two weeks ago. The index was near 90 for most of 2007. Sub-measures in the report show a rise in the expectations component, indicating consumers may believe the worst has passed. If gasoline goes to $3 or $4 a gallon this summer, consumer confidence will wither and additional cash will be run out the tailpipe. (Every dollar change in the retail price of gasoline amounts to about a $100 billion shift in spending flows.)
But before we lose all hope, these data points do show a change in the economic trends. The fact that the data are volatile instead of just monotonically decreasing is usually the first sign that the economy has seen the worst. Right now, it appears that it will be sometime yet before we build a critical mass of optimism, confidence, consumer spending, and business investment to truly turn the economy around. Jobs recovery is a lagging activity and it may well be another year before job gains begin in earnest.
As an old baseball voice was heard to say when the chips were down, "Huh, we gotta do sumptin' ", (unattributable).
Much is resting on the success of stimulus package, thawing the credit crisis (which is actually making progress in several quarters), and re-instilling confidence in the consumer and business sectors, not only in the U.S. but in Europe and Asia as well. China's stimulus package amounts to what would be about $2.5 trillion for the U.S. in equivalent GDP terms (non-purchasing power parity). I think that the U.S. and China working together could, and probably will, bring about the global economic turnaround, maybe even by the end of this year.
Written by Dennis Winters, Chief Economist and OEA Administrator. April, 2009.