I apologise in advance if this week's column seems like a lot of excuses and whining, but some of the data problems that I've worried about for months have come home to roost. As expected, last week's set of US economic data was seriously messed up with weather, seasonal adjustments, and data that just didn't seem to match up with what our analysts were hearing from their companies.
There are times in an economic cycle when it's just better to listen to the government's numbers, as companies seem too shell-shocked to see improvement under their own noses (as was the case last spring). Then there are times when it is better to listen to companies and analysts because the changes in government data become smaller later in a recovery, and the noise levels (weather, for example) become larger than the changes in the raw data. Now is one of those times.
There was positive news out of our transportation experts and retail team even as the economic news was generally mixed. That is why I am sticking with my moderately bullish forecast of 4% GDP growth for the US economy in 2010. On the positive side, the GDP figure for the fourth quarter was raised to 5.9% from the first guess of 5.7%, surprising many analysts. Apparently we aren't going to have the "now you see it now you don't" GDP growth shown in the third quarter (the growth rate moved from the 3.5% initial report to just 2.2% in its second revision).
Housing sales looked dismal, but I'll explain that data more fully later. Home prices, on the other hand, were better than expected and showed a clear pattern of stabilising at the end of 2009. Initial unemployment claims, normally a reliable indicator, also looked worse than expected, at least partially because of weather.
Consumer confidence data stunned the market
The market moving news of the week was a poor consumer confidence reading from the Conference Board. The reading plunged to 46.0 from 56.5 in just one month's time, which doesn't make a lot of sense to me. The confidence number usually correlates well with employment data, housing prices, or even recent stock market performance. None of these precursors showed all that much short-term deterioration.
Back in the real world of consumer spending, weekly chain store data continued to show improvement even in the face of some extreme weather. Later in the week, Consumer Sentiment numbers from the University of Michigan reported a more benign decline to 73.6 from 74.4 for February.
But why does the market suddenly care so much about confidence numbers? My thesis for a long, long time has been that it is the confidence and spending habits of the 90% of the people who have jobs that will propel the economy forward. Even a small change in spending will be much more influential than a few ticks of change in the unemployment rate. That is especially true as consumer consumption makes up about 70% of the economy. Without more consumption, there would be no need for additional production, additional employment, or the need for additional machinery and factories. So my beef is not with the market's newfound emphasis on the consumer but with the metrics the market is using. Watching real consumer incomes, balance sheets, and retail spending reports makes a lot more sense than anecdotal surveys, in my opinion.
Retailers getting better slowly
Speaking of company comments, both Lowe's and Home Depot reported better-than-expected results for the most recent quarter and were cautiously optimistic about the future. Lowe's chairman, Robert Niblock, is quoted as saying, "the worst of the economic cycle is likely behind us." It now appears that same-store sales will increase in the spring quarter after 14 consecutive quarters of decline (Ouch!). Improvement in 13 of 24 regions for the just-ended quarter, as well as more quoting activity on big ticket items such as kitchen cabinets and appliances, is behind some of the company's optimism. Luxury goods retailer Nordstrom also reported better top-line growth as a better stock market has encouraged sales of more luxury goods.
Transportation data looking up at last
Truck data, a laggard in this recovery, showed vigorous improvement last month. Our trucking analyst, Anthony Dayrit, reported that monthly shipping volumes increased a sharp 3.1% in January according to the American Trucking Association. This marks the fourth monthly improvement in this index, which continues to bode well for goods-producing industries.
Also on the transportation front, senior analyst Keith Schoonmaker noted that freight forwarder Expeditors had seen a 36% increase in its very economically sensitive air freight business on a year-over-year basis. The company has a lot of other businesses, but I was still impressed with the dramatic improvement in this metric.
Home sales disappoint, but there is a reason
Homes sales data for January continued to show weakness because of lingering effects of the changes in the first-time homebuyers credit, normal seasonality, and in some cases lack of supply (see the Wall Street Journal article from Feb. 23, Vegas Bargains Dry Up).
January existing home sales were off 7.6%, following a 16.2% decline in December. However, compared to last January, sales were up 11.5% and were still higher than at any time during the first half of 2009 when there was no national stimulus programme in effect. Remember, the potential threat of an expiring credit boosted existing home sales 25%-30% above an already improving trend line in November. That number was clearly not sustainable at 6.4 million units at an annual seasonally adjusted rate. Something in the 5.3 million-5.5 million range looks like a normal sustainable baseline rate without credits. This month was another month of payback time, with sales of just 5.05 million units coming in below that trend line. Weather was a factor as both new and existing homes sales got socked hard in the weather-stricken Northeast region and were less bad in other sections of the country. Obviously, this statistic will get another major shot in the arm in April when the next round of stimulus is scheduled to expire. Then the hangover begins again this summer.
On a more positive note, inventories declined to 3.2 million units, down from 4.6 million units at its high in 2007 but still elevated from the long-term trend line of 2.5 million units of inventory. Given that a lot of that inventory is in bad condition or poorly located (recent comments from Lennar, a major homebuilder, back up my assessment), large inventories may not be putting as much pressure on prices as some believe. The latest pricing data from both Case-Shiller and the Federal Housing Finance Agency continue to show stabilising prices even in the face of slowing transaction volumes. Results were better than our homebuilding team and I expected, and we are glad to be wrong.
Initial unemployment claims: Is it the economy or is it the storm?
A combination of weather and holidays combined with low staffing levels at some unemployment centres has wreaked havoc with initial unemployment claims data all year. This week the number jumped to 496,000 new claims on a one-week basis and 473,750 on the more dependable four-week moving average basis.
The recent volatility in this series will force me to look at a broader range of employment statistics in the weeks ahead. For example, the employment sections of the regional purchasing managers' reports have been decent bellwethers, and those still look very positive. That said, it is clear that layoffs improved dramatically in the second half of 2009, but really haven't gotten any better in 2010. What is interesting this recovery is that we see firms like Sun, Caterpillar, and Cisco announcing new jobs, while other high-profile names like Wal-Mart and Verizon continue to make significant cuts.
Manufacturing data, jobs report in the spotlight this week
This week opens with ISM's survey of purchasing managers, which has proven to be a good indicator of manufacturing and even the broader economy. Last month the indicator came in at 58.4, and I expect a relatively flat to higher number in February versus the consensus of a down reading.
So far the early regional reports have looked quite positive, including data from Chicago, New York, and Pennsylvania. The Chicago index was at its best level since 2005; the new orders component grew but at a slower rate than the previous month. Company comments have also been positive. However, issues with Toyota and to a lesser degree, the weather, could put a damper on the reported number. These numbers have been on such a run lately, a bit of a pause should not come as a total surprise.
Personal income and consumption data for January will also be available Monday. These stats have improved over the last several months, and I continue to expect improvement in January. Consumption growth and income growth of 0.2% and 0.3%, respectively, seem to be real possibilities given some annual raises and cost-of-living adjustments. Better retail sales data would also seem to point to decent consumption statistics, although really strong December auto sales will make the January number look less robust.
The monthly employment report is due on Friday, and these numbers will be particularly difficult to interpret because of the weather factor. Bad weather in the Mid-Atlantic states was at its peak during the week the surveys were taken (the week containing the 12th). Consensus is for job losses of 30,000 or so compared with 20,000 jobs lost a month ago. A considerably worse number could be a possibility if the weather factor turns out to be real. If weather had an impact, it would probably be evidenced by huge losses in the construction industry. Temporary help might be particularly hard hit by bad weather, too.
