A Mixed Week Ends Well
There was a flurry of economic news this week, most of which was encouraging. The economy is in decent shape. Not great, just decent.
We began, on Monday, with a strong showing from durable goods, which grew 4.6% in December. The problem with this is that the growth was skewed by aircraft orders which are notoriously volatile. Even without them, however, orders were – you guessed it decent. The other Monday report was also a bit misleading. Pending homes sales dropped 4.3% in December, but the problem appears to be a lack of inventory of houses for sale in key areas rather than a lack of demand. This weakness may continue until the spring when home owners usually start the selling process. This would ease the inventory blockage and allow demand to be met more closely.
Then Tuesday produced evidence to support that interpretation of the pending homes sales decline: the Case-Shiller index of home prices showed a solid year on year price gain of 5.5%. Nineteen of the twenty cities comprising the index showed a year on year gain, with only New York City showing a decline. So the real estate market continued its recovery throughout the year and enters 2013 in much better health. We ought to remember, though, that even after 2012’s recovery home prices are still about 30% below the absurdity of their bubble peaks and practically every index of activity in housing is well below those peak levels as well.
Tuesday also brought us a shocking consumer sentiment number. The Conference Board measure of sentiment dropped to 58.6 in January, its lowest level since November 2011. Not only was the decline sharp – the index had been 66.7 in December – but it was more than expected and through the market into some confusion. The thinking had been that the horror show in Washington had eroded consumer confidence a tad, but no one expected anything to this degree. It turns out that the decline was less to do with legislative lunacy and the ongoing farce that is our political system, but was driven largely by a reaction to the sudden loss of wages due to the hike in payroll taxes. Not only does that hike scrunch worker pay packets, but it reminds people that their wages haven’t been growing much anyway. Score another negative for the forces of austerity.
Next: Wednesday brought us the bad news that the economy actually shrank 0.1% in the fourth quarter. This turns out to be an illusion when we adjust for two major quirks. First, inventories dropped sharply. Second, there was a huge spike down in defense spending. Remove these two oddities and the economy was chugging along at its recent 2.0% pace. there is no reason to believe that either inventories or military spending will repeat that fourth quarter gyration. So we can safely ignore them when we try to project the trajectory of growth this year. That dull, but decent, 2.0% rate seems a safe bet.
On Thursday there were one or two more strange numbers to think about. Personal incomes rose in December at the fastest rate for eight years. Was this the end of wage stagnation? Unfortunately not. The 2.6% jump came almost entirely because of a 34.3% increase in divided income. A very large number of businesses shifted their dividend payout from early 2013 to late 2012 in order to avoid potential tax increases. So what appears top be a great number turns out to be a total dud. The increase will simply be offset by a decline in 2013 as things settle back to normal. And that flood of cash it unlikely to turn up as spending. Typically people who receive much of their income as dividends are more wealthy and tend to spend a smaller percentage of their overall income.
Thursday’s weekly new claims for unemployment assistance data was also a jolt. Claims shot up 38,000 in a single week. Under normal circumstances this kind of change would make us all worry about the labor market, but this week’s figures elicited a big yawn. The reason being that it seems to be simply an unwinding of a major seasonal shift. The prior few weeks had been unusually strong, so much so that no one really believed the figures, and so this week’s weakness has been interpreted as a return to normal.
That this is the case is supported by today’s employment data. The economy added 157,000 new jobs in January which belies any thoughts of weakness. The number of new jobs was less than many had predicted based upon the very healthy 192,000 new private sector jobs reported by ADP earlier in the week. One of the key differences between the government report and the ADP date is that the government includes public sector jobs as well. Since government at all levels has been shedding jobs steadily the relatively good data for the private sector is being masked by the layoffs by government. Don’t forget that the majority of government jobs fall into three categories: teachers, police, and fire personnel. So the attrition of government jobs means we have of those people. Indeed most of the loss is in teaching – the country is employing about 300,000 fewer teachers than before the onset of crisis.
The good news on the jobs front was that there were some major revisions to the data for the end of 2012 with the result that the economy added an average of close to 180,000 jobs a month last year. This is the best sustained rate of job creation we have seen for a decade, and speaks well to the underlying strength of the economy. It still isn’t good enough, though, to prevent the unemployment rate from ticking up slightly to 7.9%. The reason being that we are seeing a greater influx of workers into the workforce. With opportunities more abundant some of the discouraged workers who dropped out completely during the bad years are now starting to look for work again and this has the perverse effect of making the data look worse.
Lastly, also today, we had the monthly glimpse into manufacturing provided by the Institute for Supply Management’s index and we had a different look at consumer sentiment.
The ISM index rose to 53.1% from 50.2%, which was a slightly stronger improvement than expected. Any reading over the magic 50.0% mark means that the manufacturing sector is expanding rather than contracting so this months number is encouraging. It also reverses the slight reversal that had set in during late summer and early fall. At the same time it is a not a very strong statement about the economy. Clearly thing could be a lot better.
Then there was the University of Michigan’s monthly look at consumer confidence which showed an increase from 72.9 in December to 73.8 in January. Yes, I know. This contrasts rather starkly with the other index – from the Conference Board – I mentioned earlier. One fell, the other rose. The common features are these: the ending of the payroll tax ‘holiday’ hit consumers hard; neither index is very strong by historic standards; and both were depressed by what people see as dampened current conditions. Those aspects of sentiment dealing with the future were more buoyant. Whether consumers are right about the future we will have to wait and see.
Right now we have navigated a very full week of information only to end up pretty much where we started. The economy is decent,not great. It could be a whole lot better, but won’t be until we get policies aimed at getting demand moving. Since the entire focus is on austerity, which is a policy disaster, we cannot expect an improvement.
Nothing this week changes my mind: look for growth to hover between 1.5% and 2.0% this year. Better than nothing. Not good at all.
