US Perspectives: Economy Ends 2010 on a High Note

Plenty of encouraging data flowed in for the last week of the year 2010.

Robert Johnson, CFA 04.01.2011
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I really expected this to be a quiet week; instead I got a flood of data, both good and bad. I caution that the data this time of year gets a little tricky to interpret because of huge seasonal adjustment factors that distort even small changes in the raw data. And bad weather right at the end of the month won't make an already difficult task any easier.


I have been hoping for better employment news to really help jump-start this recovery. Last week's dip in initial unemployment claims below the magical 400,000 level indicates a step in the right direction (though we could easily see an uptick after we clear out the holiday backlogs of claims). Despite some likely fluky items in the claims data, it's still encouraging to see weekly claims fall from 459,000 at the end of October to just 388,000 at the end of December, almost in a straight line.


Pending home sales, a great leading indicator of existing home sales, managed another small gain of just over 3%, continuing the gains of the last several months after a disastrous summer.


Holiday retail sales, as reported by both MasterCard and the International Council of Shopping Centers, showed consumers accelerated their purchases into the holiday season instead of falling back as many had feared.


And the manufacturing sector seemed to find its mojo again last week: The Chicago Purchasing Managers' survey showed truly amazing improvements across a broad range of categories.


But It's Not All Up, Up, and Away

However, things didn't come up all roses. The positive retail sales numbers on Monday got washed out by news from China that the government was going to raise interest rates in an attempt to curb inflation, which is running far ahead of what the government would like to see. Those higher interest rates could slow an economy that's been a major engine of growth during this recovery. Keep in mind that total exports are only 13% of GDP, while the U.S. consumer constitutes about 70% of GDP.


Though pending home sales showed that more homes were potentially sold, The Case-Shiller Index showed that prices are falling again--but not catastrophically so, in my opinion. The survey covered the three months ending in October, so it would seem that basically flat prices failed to depress consumers during the holidays, as retailers saw their best results since 2005 during the following two months.


However, those flat home prices may be behind the drop in the Conference Board's consumer confidence index, which registered an unexpected decline. Don't let it scare you. These types of indexes are not great leading indicators because they are both dated and subjective. I prefer to look at retail sales and auto sales to track consumer confidence, and those indicators continue to signal a go for the economy.


Will Consumers Have a Hangover Come January?

They key issue looking ahead is whether or not consumers will continue to spend once the holidays are over. I think great prices, favorable weather up until Christmas, and greater clarity on tax policy put consumers in a great buying mood in December. Though we haven't seen the income numbers that go with the spending numbers just yet, I am going to guess that at least some of that spending came out of savings. I think consumers underspent a little this summer and made up for it over the holidays. That probably means retail sales could settle back at least some in January. The lower payroll taxes could help out, but that effect is likely to aid just the back half of the month. Greater confidence in short-term tax policies helped consumers in December and is likely to help in early 2011 as well.


Consumer spending growth beyond January and February will have to come from growth in employment, hours worked, and hourly wages. I am very optimistic that those statistics will look better in December than November's disappointing results given better retailer results, which means more hiring (and the government's November retailing hiring numbers were also likely flawed), and a big push to get factory orders out at the end of the month as evidenced by the Chicago PMI report (provided weather doesn't throw a last minute monkey wrench). January and February should get a bit of an employment tailwind as new corporate budget cycles kick in.


A Thought to Scare You: March 2009 Monthly Same-Store Sales Report

I do offer two other words of caution: April 2009. After same-store sales, as measured by the International Council of Shopping Centers, soared by over 9% in March, sales went flat in April. The spike this time looks a bit smaller (4%), and the consecutive month of gains is more impressive this time around. Still it's a cautionary tale for those who might be tempted to get too aggressive. Maybe consumers are emerging from their rabbit holes when the coast looks clear and spending in big spurts, then dashing back into their holes before the hawk even appears on the horizon.


Consumers Turn Up the Afterburners in the Last Week Before Christmas

The retail data last week looked impressive indeed. MasterCard indicated that holiday sales were up an impressive 5.5% when measured from early November until Christmas day, led by jewelry and apparel. Measured the same way, sales were up 4.1% from an absolutely dismal 2008. Meanwhile,. the weekly data from the International Council of Shopping Centers showed year-over-year growth of 4.8% for the pre-Christmas week, and it is standing by its forecast of 3.5%-4.0% for all of December.


The table below shows that growth accelerated during the weeks leading into Christmas. That is unlike 2009, when sales started strong but petered out as we approached Dec. 25.



Sales Growth Accelerates Into Holiday Season

Week Ending

Year-Over-Year Growth Rate (%)

















Source: International Council of Shopping Centers



Snowstorm Could Detract from Growth

However, both the individual store reports due this Thursday and the full official government report due Jan. 14 will include the post-holiday period and are likely to be at least partially affected by the big Northeast snowstorm in late December. I personally don't think the weather effect will be that profound. I think conditions lifted soon enough in the week for shoppers to make their returns and gift card purchases. It also may have boosted online purchases at the expense of brick-and-mortar stores. Nevertheless, the general consensus seems to be that the storms would take about 0.5% off the December sales report, but some of that loss could show up in January.


Initial Unemployment Claims Shrink Again, Special Factors May Be the Cause

Several weeks ago I talked at length about the improvement in initial unemployment claims. Those gains were extended last week as claims dipped to 388,000 and 414,000 on a four-week moving average basis. The one-week figure is approaching 350,000, which I view as a relatively normal number of claims for the midcycle of the recovery. It beats the peak of 674,000 claims that we saw in early 2009.


However, we all need to acknowledge that seasonality factors and processing delays probably mean the figures will go up again in the new year. I also think the seasonality factors are still too heavily weighted to the manufacturing and auto sectors that typically have large layoffs this time of year. Those sectors are holding on to more jobs than is typical this time around. As we move into spring, those seasonal factors will drop drastically, potentially scaring investors. Despite that note of caution, I do think we have set a new baseline for initial claims in the low 400,000s versus the mid- to high 400,000s that were so prevalent for most of 2010.


Chicago Purchasing Managers' Report Surges to Its Best Level Since 1988

The Chicago Purchasing Managers' Survey, often the precursor to the national report due in a couple of days, surged from 62.5 to 68.6, its best level since 1988. This is the 15th consecutive month when the index has been in the expansion mode (readings greater than 50 indicate expansion). Better yet, all the individual categories looked great. Production, the all-important new orders category, and employment all surged to their best levels of the last four or five years. Order backlogs and lead times for capital goods spiked, which should bode well for the next several months of manufacturing data. Again, I should warn that while other regional reports were bullish, the Chicago data was such an outlier that it certainly does raise a few red flags. Data that seems too good to be true often is. Stay tuned for the national data this week.


The better manufacturing numbers shouldn't come as a total surprise. All of the goods flying out the door at retail outlets (as well as exports) in November and December had to come from somewhere. That's why I continue to watch the consumer so carefully. I also suspected that the ongoing trend to ship more things during the last month of the quarter may have depressed some monthly numbers this fall and inflated them a bit in December. Shipments to emerging markets seemed particularly skewed to the latter part of the quarter.


It did seem odd this fall that management teams remained almost universally bullish in the face of some mediocre macro data points on the economy. As I suspected, this time management was right.


Case-Shiller Data Throws Cold Water on a Good Week of Data--Don't Panic!

The Case Shiller Home Price Index fell 1.3% in the three-month period ending in October. The index fell 0.8% in September also, prompting fears of a double-dip in housing. Let me be quick to point out that the index is down only 0.8% on a year-over-year basis--hardly anything to lose sleep over. That's especially true compared to the almost 30% loss between the 2006 peak and 2009. The graph below is for the 10-city index, which shows a very similar pattern to the 20-city index.



5% Decline in Home Prices Possible but Certainly Not Ruinous

Our housing team believes prices could move down further based on a decline in median listing prices that has continued after October (though the median index is affected by how many big houses sell vs. how many small houses sell, the Case-Shiller Index adjusts for size). Normal winter softness, a restart to bank foreclosures, and thin transaction volumes won't help matters over the next several months, either. In the short term, there is at least some hope that declines won't accelerate from here. The Case-Shiller numbers are a three-month moving average, so it includes August through October. August was probably a rough month given the June expiration of the housing credit (credits tend to support prices). That month will drop out of the calculation shortly. Monthly data--not three-month moving average data--for October from the Federal Housing Finance Agency showed an increase of 0.7%. Something akin to that increase will have to wend its way through the Case Shiller index in the months ahead.


This Is Not 2007 All Over Again

With employment on the rise, affordability at record levels, and a more positive mood for consumers, I sincerely doubt that we will see another massive decline. Something on the order of 5% or less seems more likely. Given that the bank stress tests were run with housing price declines of 14%-20%, I don't think a 5% decline is going to ruin our banking system.


New Data Come Fast and Furious this Week, Capped by Employment Data Friday

I am on record as saying that November's official employment report was too pessimistic based on a reported decline in retail hiring that didn't seem to match reality. I'm not sure if the December report is likely to show a revision for November or an unusually high number for December. If November is not restated, I think the consensus for growth of 150,000 jobs in December may actually be light by 50,000-100,000. Combined, I believe November and December job growth should be 250,000-300,000 or a monthly average of 125,000-150,000 jobs. I suspect that the all-important hours worked indicator could rise more than the consensus estimate for a 0.2% given the manufacturing sector's December shipping surge.


Until Thursday's Chicago PMI data was released, economists had been anticipating a decline in the National PMI for December (due to be released Monday). However, December estimates were raised on Thursday to 57.4, compared with November's 56.6 actual reading. That revised PMI forecast for December seems just about right to me based on several strong regional reports (not just Chicago). Construction data will likely be down again for November, while auto sales should remain comfortably above the all-important 12 million shipping level for December (seasonally adjusted annual rate). Later in the week it will be interesting to see whether nondurable manufactured goods orders for November managed to show as much improvement as the durable goods orders did, excluding the volatile transportation sector.


This is an edited version. The article originated from Robert Johnson’s column at

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Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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