Jason Stipp: I'm Jason Stipp for Morningstar. Throughout the depths of the downturn Morningstar's Bob Johnson was keeping close tabs on a lot of economic indicators. But now that we're well into a recovery what are those indicators saying today, and what does he turn his attention to? He's here to tell me a little bit about that.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: First question for you, you had a lot of favorite indicators throughout the downturn, things that you were watching very closely. Can you just give us a sense of the levels of improvement that you've seen on some of those?
Johnson: Sure. Absolutely. I think there were three keys that really got us excited about the market a year ago spring. And certainly the purchasing managers survey, the ISM survey of purchasing managers, it was a great leading indicator.
That number got as low as 0.3 and change. And now we've kind of come all the way back to 0.6, and the typical peak is only 0.7.
Stipp: So a lot of ground has been made up there.
Johnson: A lot of ground has been made up in that one.
Initial unemployment claims, at the peak again, about five-tenths of 1% of the population was claiming unemployment every week. That's half a percent every week. And now that number has gone down to 0.35, so we've had a pretty dramatic improvement. And kind of a typical number might be 0.25 or 0.3. So we're more than halfway back. That's another one that I've looked at that has come way back.
Consumer spending is the third one that really keyed us off that the market was turning. That one has certainly bottomed. In December of 2008, that was at its lowest level, and we've been up pretty much every month since then, since way back in December of 2008. So that's been another great number for us.
Stipp: Certainly some of those have seen dramatic improvement. At this point, then, in the recovery, what are those indicators doing? Are they kind of plateauing, or what are you still seeing with them?
Johnson: This is what becomes really tricky with indicators. A lot of people get all caught up and want to use the same indicator all the time, and watch every little jiggle. But I think you have to be careful. There are certain indicators that are good at certain times in the cycle, and some that are better in other parts of the cycle, and you've got to be really careful.
For example, the purchasing managers survey. When I first started following it and mentioning it, ISM, many people said, "IS what?" And now it's on everybody's tongue, and if it goes from 60 to 59, everybody gets all upset. Now everybody's focused on it.
This is the part of the cycle where the ISM data, as much as I like it, really doesn't mean very much. We've had the big bounce off the bottom and typically the number stalls out here a little bit. In fact it even comes back down a little bit without any harm to the economy.
Stipp: What do you see on the unemployment claims front? What are those doing at this point?
Johnson: We're about halfway back to normal on that front, maybe a little bit more. And that typically happens. It happened in the 1990 and the 2001 recession. We kind of came halfway back, but then we stalled out. But in the case of those two particular recessions, we actually got stuck there for almost two years. And again, the economy still improved, but the indicator was kind of meaningless.
Stipp: So if we didn't see vast improvement in that figure going forward, it wouldn't necessarily be surprising, based on past history?
Stipp: OK. So if some indicators are going to be a little bit better in certain parts of the cycle, at this part of the cycle, what do you think is a more meaningful indicator?
Johnson: I think our listeners will appreciate this. It's more some of the metrics they touch and feel every day. I think any metric that deals with the consumer and their wherewithal to spend more money.
So far in this recovery most of the improvement in consumer spending, which has been vast, has been from people taking money out of their savings. And now we need those incomes to actually get better.
And so anything that measures incomes, the number of hours worked each week, is a great indicator. The employment, or number of jobs, I'm thinking we need 100 or 200,000 every month from here on out at least. So that's another one that I want.
And I want to continue to see consumer spending and real wages go up. Those are kind of the wherewithal issues.
Then, like I said, I want to see the just plain consumer spending. And whether you look at the number that comes out tomorrow from the government--the monthly number, which is kind of always a month behind--or whether you look at the weekly, or the retail sales numbers, either one is good.
And I'm keeping a very close eye on those to see what they are actually spending, because the consumer is 70% of the economy. I want to see them spending, and I want them to have the income to do it, the wherewithal that I talked about earlier.
Stipp: Now is their time to kick into gear.
Johnson: That's right. And the third one is kind of a more obscure one. I want to see continued improvement in business capital spending. That has shown some improvement, but that's typically a later cycle thing. I want to see that really begin to take off.
So those are the three that I would give you: the wherewithal indicators, consumer spending, and business capital spending.
Stipp: OK, Bob, last question for you. I think a lot of people have had concerns about sustainability of the recovery or how long is it going to last. Are you looking for signs of a top yet, or is it too early for that?
Johnson: I'm keeping eyes on things here and there. But I'm not basically worried about a top right now. I think it's too early to be worried about a top. I did mention consumer spending as kind of back to where we were last time, but typically it usually grows. So I would expect there's room in that number.
I've mentioned many times in my writing that production is only a third of the way back to its previous peak; a third of what we've lost has come back. So I think there's considerable room in manufacturing yet to go. I think we're still seeing room in some export things that can go up yet. So I think there's a lot of room. I think it is a little soon to be looking at a top.
With that said, there's one that I always like to keep my eye on, and that's the real wage number. That's how much people get paid per hour, and then adjusted for inflation. That number showed vast improvement last year, because wages went up a little, and we actually had deflation. So adjusted for inflation, the number was up actually a fair amount--almost the most it's been in the track record.
Now this year the number is looking a little bit more flat. Nominal rate, wages are still pretty flat, but now inflation has come up a little bit. So I'm going to be watching that number in the months ahead very closely. It's a little bit of a horse race, because even if wages were flat but we got a lot more jobs, I'm still OK. But if jobs stay really low, and we get this low real wage, then I've got an issue. So I'm watching that one most closely of all.
Stipp: Bob. thanks so much for your insights, and for talking with me today.
Johnson: Great to be here.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.