Thu, 31 Oct 2013
Recent slow manufacturing and retail data is no reason to panic just yet, but one housing report is a bigger concern, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
There's been a decided soft tone to a lot of the economic data we've seen recently. But as is usually the case, there's more to the story. Here to give his take on the data is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here today.
Stipp: We have seen some near-term data that does look a little soft, but you have more than one way of looking at that data. I want to take it datapoint by datapoint, and get your take on recent data and also your longer-term perspective.
One report that we got this week was retail sales and auto sales, and it looked soft in this last month.
Johnson: Yes, absolutely. The retail sales number overall, and this is the official government report, is a little dated. This is September data, and it's about two weeks delayed from when we'd usually see it [because of the government shutdown]. Just a little bit of a caveat there. It was before the furlough, so this shouldn't have been impacted by people not having their government checks. Nevertheless, we were done 0.1% month-to-month, that is comparing September to August.
The year-over-year data that I like to look at, averaged over three months and excluding the volatile gasoline sector as well as the autos, was right in the range where it has been for some time--about 4% [growth]. In fact, maybe just a shade under: Maybe the average is 4.2% on the year-over-year basis, and we're at about 4% right now. So really no reason to panic yet, but again, the trends are a little bit soft there, and we've been warning about that for some time.
The retail sales report was also interesting, in that it explains some of the shopping center data that had been so weak and continues to be weak. In that [report,] the non-store retailers are among the best performers, and those aren't counted in the shopping center data, which is a little bit of the reason why that data has been soft.
Stipp: When it came to autos, there is a near-term issue with how Labor Day got counted.
Johnson: The actual Labor Day, even though it was Sept. 1, got counted in the August data by industry agreement. So that made [August] look unusually strong, 16 million autos sold, and then things kind of fell off a cliff down to 15.3 million in September. Now if you average those two together, you're much closer to the right number, which is probably about 15.7 million. I'll be very much looking forward to the auto data on Friday to see on which side of that 15.7 million we land for October.
Stipp: Obviously, the consumer drives the economy, so it's interesting to get that take on where we are with retail sales. But let's talk about another piece of the economy, durable goods orders, which we got last week, and those looked soft.
Johnson: In fact, we've been down two of the last three months. I think the other month was pretty close to flat in durable goods, ex-aircraft, ex-defense. I have to put all those caveats on there, because that's the best way to look at it.
And that's a great indicator of a few things: … It's a means of measuring business confidence. I don't believe in any of those big confidence surveys on the consumer or on the business side. I tend to like to look at real, hard data, and in this case, these durable goods orders are things that last a long time. These are factory-type equipment; you don't invest unless you've got confidence for the future. Unfortunately, the month-to-month data has been [declining] for three months in a row, which has me a little bit concerned. Obviously, business confidence isn't good in general. That's also bad for hiring. So that's why I'm doubly concerned.
The good news is that the year-over-year trend [in durable goods orders] is starting to look up a little bit, and we're improving there. So as bad as the month-to-month data is, the year-over-year data seems to say, hold on, don't panic just yet.
Stipp: Durable goods orders can be a leading indicator for industrial production, so what does the industrial production data look like recently?
Johnson: That's been a little soft, too. The headline number this month was pretty good at about 0.4% [growth], but the issue was that it included utilities. We had warmer weather, and so we had to use more air-conditioning, so that artificially inflated the number. If you take out utilities and mining, we were only up 0.1% month-to-month on industrial production.
We have mentioned how people are very excited about the manufacturing economy because of all the purchasing managers' surveys, but the [corroborating] data just isn't there. The durable goods orders and the industrial production numbers have both been soft.
On industrial production, going to the year-over-year data, we've had a huge collapse over three or four years from almost double digits down to the low-2% range in year-over-year growth in industrial production. We are off the bottom a little bit; we're maybe 2.3%-2.4% for annual growth, which is better than the 2.1%-2.2% we hit at the low earlier this summer. But still, nothing to write home about.
Stipp: One piece of data that looks soft in the near term and also looked soft year-over-year was pending homes sales. This one is bit more of a concern.
Johnson: This one is a big concern, because housing has been a good driver of the economy. Existing home sales don't get directly into GDP, but they help for furniture sales, paint sales, moving companies--all those type of things--with a lag. The very first part of that is actually signing a contract, and that's what [pending home sales] measures, and then you actually have the closing of the contract, which usually happens about two months later when the inspections are done and you've got your mortgage. Then buying the stuff to fill the house tends to happen in another two or three months after that.
Unfortunately, pending home sales have been down two or three months in a row, month-to-month. And the thing that got scary about this one is that it's also down year-over-year. This is a previously robust and pretty important sector of the economy, and now we're down year-over-year. So that's the most worrisome one of the dataset this week, and I am troubled by that.
Stipp: One report that has a good and a bad side, potentially, is the wholesaler producer price index, which showed that wholesale inflation was nonexistent, essentially.
Johnson: Right. We were down 0.1% month-to-month, so a very low number. I think we're still up a little on the year-over-year basis.
The food prices were down in that index, so that's going to turn up in the Consumer Price Index, which is actually pretty good news for the consumer. It's not such great news for farm income and so forth, and spending on farm equipment will probably be a little soft as a result. But the biggest takeaway from that was that food prices seem under good control, and it's a good predictor, or at least it's a component, of CPI growth over time, and it pointed to pretty controlled conditions. Low inflation is great news for the consumer.
If there is anything that restarts a slow or slumping consumer, nothing does it faster than bringing down prices, and that certainly seems to be what the Producer Price Index was indicating this week.
Now, the bad news side of that is, obviously, we don't want to get into a Japan situation, where everybody is anticipating that prices will keep coming down, and therefore don't buy anything.
Stipp: The Fed is keeping a close eye on inflation, and they're also worried about deflation, too. Given all sorts of data points that we've seen suggest a little softness--and low prices certainly suggest softness--the market has liked that data, because it thinks the Fed has a lot more room to stimulate the economy.
Johnson: That's been the thing, and I wrote about it in my column last week: Bad news is good news yet again. The softness that we're seeing in the [near-term] data--because a lot of people don't go through the trouble of looking at the year-over-year data--[suggests to them that] this is really bad. Who knows when the Fed is going to quit? Maybe they're going to try to figure out another stimulus program rather than cut back what they're doing. Some of the data is probably soft enough that, if you were looking at it carelessly, you might think that.
Certainly just the fact that interest rates aren't going to be soaring, or maybe there's going to be a more gentle process on the way back up, has encouraged people. So the market is up, in my opinion, because people think this big rise in rates and the Fed immediately tapering, … [isn't] going to happen. I think that's gotten people excited. Here and there we've seen earnings that are a little bit better than expected, but in general it's still a pretty soft earnings season. We're talking 3%-4% earnings per share growth year-over-year--nothing to write home about. …It's probably [how] they think the Fed might react to the soft data that's driving the market higher.
Stipp: Bob, always great perspective on the recent data and also great long-term perspective as well on the economy. Thanks for joining me.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.