Though the data show an undeniable slowing, the real driver of the economy--the consumer--is still holding up, says Morningstar's director of economic research.
Jason Stipp: I'm Jason Stipp for Morningstar. After a year-plus long hiatus, the words "double dip" are back into the headlines and back into people's conversations.
But how much of a risk is another major slowdown?
Here with me to offer some insights is Morningstar's Bob Johnson, director of economic analysis.
Bob, thanks for joining me.
Bob Johnson: Great to be here.
Stipp: Undoubtedly, we have seen some data that hasn't looked great. Why do you think "double dip" is once again part of the vocabulary? What things are causing people to feel this way? Can we tick them off?
Johnson: Sure. Industrial production was down two months ago, and it was flat again this month, so industrial production and manufacturing look a little weak. The employment data last month, instead of growing the number like 200,000 to 250,000 jobs per month, we only grew 88,000 jobs, so we had a slowing on the employment front.
Retail sales this week weren't as bad as people had feared they would be, but nevertheless retail sales were at a little bit slower rate than they had been--still satisfactory, in my view.
But those are probably the biggies that are out there.
Stipp: So, Bob, I want to get your take on some of those data points and put them into context in a moment.
But before we do that, I want to talk a little bit about the notion of a double dip and what that means.
So, back when we were told that recovery had actually started, we discussed how there's a perception gap. We were told that the recovery started at a certain time, but in a lot of people's minds, it didn't feel like a recovery had started yet. And now it seems like some of the data shows it's going down the drain and people think "double dip." But what is the actual economic definition of a double dip? How do you know if it's come?
Johnson: I think a double-dip is after you've had a few months or a few quarters of economic growth, but you don't get all the way back to your old peak and then you fall again.
They're very careful about how they set the end a recession, and the start of a recovery. And I think that they've been very careful about that. The data would seem to indicate that the previous recession was over. We've gone to a new high in GDP. This would be the start of a new recession, if we had one.
Stipp: So, I want to talk to you a little bit about some of the data that we've been seeing and what you're looking at, and how much of a risk you actually think another slowdown would be. It seems to me that you felt like we had more room to run in the recovery…
Johnson: ... and I still do ...
Stipp: Okay. So, let's talk a little bit about some of the data that we've been seeing. So, I think some of the data that came out this week, the Empire Manufacturing Index showed some contraction. We didn't see the growth that we saw there. How are you thinking about manufacturing right now in a broader context?
Johnson: In a broader context, I say it again and again, but the consumer is 70% of the economy. They are what drives the economy. You watch the consumer; you figure what's going to happen to the rest of the economy.
Manufacturers don't manufacture things for their own health. They manufacture things because the consumer is buying them. So you watch the consumer data and that's what's really the lead.
Manufacturing can have their ups and downs with inventories, their cycles. It's hard to get everything just right. So they are going to have up periods, and they are going to have down periods, even as the economy is improving.
For the gap between 1990 and 2000 during that recovery, there were three major downturns in the purchasing managers' survey. It wasn't until we got to the fourth time that the economy actually fell apart, which was in 2000, which was related to actually some of the Nasdaq activity.
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Stipp: So, certainly you have to keep your eye on the consumer. So what is the data been telling you week-to-week about the strength of the consumer and have you seen some weakness start to creep in there?
Johnson: Well, I'll tell you what, the numbers for the last five or six months, despite all the talk about the gasoline prices and consumer confidence and so forth, the consumer is continuing to spend. For probably five months in row, we've been going at something that's pretty close to a 3% year-over-year growth rate in consumer spending. But it varies from week-to-week; in the latest week's data we were about 2.5%. But over the last six months, it has been in a range between 2.5% and 3.5%. So clearly there's not been a dramatic weakening on the consumer side of the house. In fact, I think he may be a little better off with some of the good inflation news recently.
Stipp: So I wanted to talk a little about inflation because you had mentioned earlier that we were seeing some slowdowns in some areas, and we were also seeing some inflation at the same time. I know that you said inflation is a recovery killer. Where are we right now with inflation? Do you think it's going to abate enough so that the consumer will continue to spend or will be able to spend?
Johnson: So far we've slowed a little bit in the economy, but we have not slowed dramatically. The inflation has had, unfortunately, somewhat of a negative effect on the economy as it always does and as we might have expected. The good news, and the reason I really haven't panicked yet in terms of the economy just yet, is because there are some early signs that inflation is beginning to come in.
In terms of oil prices, we've seen a pretty decent flow down from $115 to $98 in terms of the price of a barrel of oil. The thing that we see every day at the pump, we've gone from a national average of around $4 to something that looks more like $3.70. So those numbers are starting to filter into the consumers' pocketbooks.
And then food has been the other really major problem in terms of inflation, and we've seen some of the fresh food and vegetable category come down. We had tomato and other things coming from Florida this winter were just horrible for a couple of months. Sky-high prices--those have started to come in.
Now, I think, in July, when Russia begins to lift their export ban and the U.S. crops start to come in again, that the rest of the food complex may come back in a little bit. So I am optimistic that the two biggest causes of inflation over the last year are coming in and that we actually may see ... relatively flat [inflation] numbers and that the consumer is going to be in a little bit better shape again.
Stipp: So I know that recently you did lower your expectations for GDP growth. I want to ask you, when you look at where we are now versus where we were six months ago, do you think that there is a higher risk that we could see, whether you call it a double dip, whether you call it another recession, that we're at a higher risk now than maybe we thought we might have been six months ago?
Johnson: I really don't think so. I suppose we've got a little bit less employment and maybe people can get scared and talk ourselves into a problem a little bit.
But I think a lot of the weakening data is related to the manufacturing situation and due to the Japanese supply chain operation, which has dramatically lowered auto sales, and auto sales drive an awful lot of the numbers. I think as we back off of those problems, as Toyota ramps up again in June a little bit, more even in July, that those numbers reverse will themselves, and we'll see very strong growth in the second half of the year.
Weather is another thing--if there was anything that could go wrong, it did. And I don't think that's going to be sustainable in the second half. So I think things will be a little bit better in the second half despite the weakness that we've seen so far.
Frankly, when the bad weather and the production things occur, I got to put them in my numbers. And so while my number is down in the first half, I still think we're going to have a very strong second half, and I think my estimate of 2.5% to 3% growth for the full year is still very doable.
Stipp: So in your mind, rough patch, not double dip?
Johnson: Not double dip, absolutely not.
Stipp: All right, Bob thanks so much for joining me and for your insights.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
