Jason Stipp: I'm Jason Stipp for Morningstar. As Congress approached a deal to resolve the debt ceiling on Wednesday, there was instantaneous optimism in the market. But when the smoke clears after this issue is finally resolved, will we see a good or a troubled economy?
Here to offer his take on the fundamentals is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: We have a couple of issues to deal with, with Washington and the economy. First of all, there is possible damage that the wrangling may have done to the economy. But secondly, it's just the fundamental health of the economy absent what's going on in Washington.
So let's first talk about just the fundamentals that you do know about at this point--we haven't seen some data for a little while now. What do they tell you about the fundamental strength of the economy improving or not improving? There seem to be some pros and cons. When you look at what's not particularly hopeful in the data that you have seen, what are those things?
Johnson: The number one thing that I'd probably cite that's a little soft right now is my weekly shopping center data. That is one piece of data we did get this week, and that number fell to under 1% [growth]. Obviously, the government situation is having an effect on consumer spending. That's probably one of the very few times in this recovery we've had a single month's number under 1%.
Even the five-week moving average is below 2% now, which is a flash danger point to me, because without consumers shopping, they don't buy things, and they don't order things at stores, they don't manufacture things in plants, and the plants don't hire people, and you get that vicious downward spiral.
Some of the numbers on that look weak, and unfortunately, that whole index is hobbled just a little bit by the fact that it's retail stores, and obviously as Amazon pulls a little bit of the share away, we can't tell how much of it is because they're losing share to Amazon and how much of it is because of fundamental reasons. But the shopping environment is clearly not strong, in my opinion, and that's a bad sign for the economy.
Stipp: So even before the crisis started to occur in Washington, the retail sales figures that you were looking at were at the lower range of what you'd like to see. So it's not like they were strong and suddenly took a dip here in October.
Johnson: Right. For some time, retail sales have been a little soft, and everybody thought maybe it was people buying new homes, buying cars, and spending less at the store, which probably had a little bit of truth to it. But now housing has slowed down a little bit, and autos have begun to slow. September was a relatively poor month for auto sales compared to August. Now, some of that was some seasonal factors and the way they counted Labor Day, but nevertheless, autos are not as strong as they were. That's been the real strong part of the economy. So certainly, that's not been wonderful. Again, neither of those metrics are falling apart--not negative sales, not back to recession levels--just not growing.
Stipp: Homebuilder sentiment also was data that we got this week, and it did come back down a little bit. It had been very strong, even stronger than other housing data would suggest it should be, but now it's maybe starting to feel not quite so positive.
Johnson: Right. It dropped from 58 to 55, still a pretty good number, but obviously people are backing off a little bit.
Stipp: What about on the international scene? Are we seeing negatives and positives for global growth in the economy?
Johnson: Last week we talked a lot about the IMF data, the International Monetary Fund world forecast, and they brought it down almost 0.3%, I think, for the overall worldwide economic growth for 2014. They brought down the numbers for China and some other BRIC countries as well, so not a pretty picture. And maybe Europe went up a tenth. So whatever we got back from Europe, which was a little, we lost all back again with the Brazils and the Chinas and the Indias of the world, which hurt those calculations. Certainly not a robust situation there, and I think the emerging markets are still feeling it.
I think Europe's a little better. I think I saw today car sales were a little better there, industrial production is up a little. So their improvement seems to continue, and it's just that things got unusually low, and now there's got to be some inventory rebuilding. So I think they are doing a little better. There's no denying that in Europe; I'm not going to try to do that at all. But it's not robust, and it's still a little bit of fragile about what's going to happen to Greece, because they need another round of funding somehow, soon. So how that all ramps through and how Italy shapes up and Spain are all big issues yet.
Stipp: On any given day the market's focus moves from one thing to the next. It's certainly been on Washington recently. When we get past this crisis and the market maybe shifts back to look at fundamentals from earnings or fundamentals from the economy, do you think it's going to see less that it probably does like than it doesn't like after we get past all this focus on Washington.
Johnson: We usually have a big relief rally, maybe it's all come before we actually got the deal this time. But we didn't sell off much before. Other years we've been off 10%-15% when we've been through one of these crises. We didn't go down near that much this time, so I think there's less to bounce from.
Then there are issues that once we get back, what's in front of us? And it's kind of lackluster earnings growth. The third quarter looks like growth will be about 3% in the S&P 500, which is a relatively low number, and it's been lackluster for a few quarters here. Now there's big hope that the number for the fourth quarter is 10% year-over-year growth in the S&P 500 earnings. I don't believe those for a minute. I think people, when they get done with reviewing their third-quarter numbers, that the fourth-quarter numbers will come in, perhaps a lot.
Stipp: Last question for you. When you look at the damage that's possibly been done, economically speaking, from the shutdown and also just sentiment from the fact that we have come so close to this debt ceiling and all of the possible outcomes that could happen afterward, how much damage do you think has been done fundamentally to the economy, just because we've had to go through this drama and crisis?
Johnson: I think, if we solve today, it'll take at least 0.3% to 0.5% off of the GDP growth in the fourth quarter. If you're only looking at 2% or so growth in that quarter, that's a big deal. But the psychological impact, people saying, I'm not sure whether I'm going to do this or that, or maybe I shouldn't do that house, and then some people literally not having a check for a few weeks. A lot of the services businesses, which are such an important part of the economy, you can't make those up overnight. Those airline seats are lost for good. That hotel room in September is gone.
Stipp: Let's not forget that they're not solving necessarily the debt ceiling issue. They're just perhaps going to have this drama play out again in a few months. There's hope that they might sit down for a bigger negotiation, but if you're a business person and you're saying, if we have to go through this again in December or January, maybe I will wait again…
Johnson: … Until that one comes through. But I will tell you that one thing that I've seen so far in the extension is we're still going to continue to sequester. Remember, we had that in the last part of 2013; we have a bigger impact in 2014, and on top of it, some of the spending authority that was cut in 2013 will actually turn up in less checks going out in 2014. It really didn't have that big an impact on 2013. So, the sequester is certainly something that's still alive and well, apparently, and it's going to hurt the spending numbers.
Stipp: All right, Bob. Potentially good news on getting this crisis resolved in the short term, but not necessarily amazing news about what we may see once the smoke finally clears.
Thanks for joining me.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.