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Six Lessons from the Economy

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar.

Although 2010 is in the record books, it never hurts to look back and examine some of your good and bad calls, and see what insights you can pull from the prior year.

Morningstar's Bob Johnson has some lessons that he learned in analyzing 2010's economic data, and he is here with us today to share those insights.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, the first lesson that you brought up to me as something that you learned in 2010 or something that you thought about was how this recession was not your father's or your grandfather's recession. It is kind of an overarching theme. What do you mean by that?

Johnson: Yes. Certainly it's been a little bit slower recovery than most typical recoveries. It's like the recovery of 1990 and the recovery of the 2001 recession, but it's much slower than most of the rest of the recoveries that we've seen since World War II. So, certainly it's moved slower. It's been a recovery that we've had without any help at all from housing, which is really kind of surprising. This time around, a flood of imports. When consumers had money they tended to spend it on imported goods, which, especially in the middle of the year, really hurt the statistics. So, there really are some things that are very different this time around.

Stipp: So history maybe doesn't repeat somehow as it rhymes, but you have to remember that everything is just a little bit different from the time before.

One of the things that I know that you deal with is just a flood of data. You get data on manufacturing, you get data on imports and exports, you get data on inflation. But there is one area of data where you told me you really learned last year that you just really have to keep your area of focus, because it's so important. What is that?

Johnson: That's the consumer, the various types of consumption numbers. You don't want to get carried away and look at indexes of consumer confidence, but you need to watch things the consumer actually does. Whether it's retail sales, whether it's how many cars they're buying, all those things are the real indicators of confidence--what they're actually doing. The consumer is 70% of the economy. So, without the consumer we won't have these changes in inventory. The businesses won't invest unless they think the consumer is spending – or the consumer already is spending.

So, I've learned that a focus on a consumer is amazingly important to kind of set a direction. Yes, you may get some magnitude by, "oh yeah, you've got an inventory thing that kicked in, oh yeah the factories are going to kick in," but you really got to keep your eye on that consumer, and that will keep you from going silly--like by looking in the summer at some of the purchasing managers surveys that seemed to indicate there would have been a double-dip. If you had just kept watching the consumer, he kept spending a little more each month, that would have kept you on the right side of the track.

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Stipp: So I know one thing that you like to look at is what the consumer is doing versus consumer sentiment, but it seemed like there were a few shocks that we got last year, some global shocks maybe. How do you think about the global environment when you're looking at the economic situation, and how does that impact the consumer?

Johnson: Sure. I think one of the really big lessons out of 2010 is that this is clearly not a U.S.-centric recovery, and other countries besides the U.S. are having a big driving impact on this recovery, probably like no other recovery that we've had before.

I think you can see that in the data, both good and bad. When China has looked up and their manufacturing is picking up and their consumption is picking up, the U.S. markets do very, very well on the days that those statistics are announced.

On the other side of the coin, the European debt crisis probably single-handedly upset the consumer recovery that we were having this spring. So, you've really got to watch the international data a little bit. I mean I tend to follow it from a U.S. point of view, but you can't take your eye off that we're part of a global economy.

Stipp: Now digging in a little bit Bob, you're dealing with lots and lots of numbers on a day-to-day, week-to-week basis. What have you learned about the actual analysis of those statistics that you might apply going forward?

Johnson: You've always got to look behind what's making those numbers. If they seem really good or really bad, you really have to look at it both ways. If I had any guilty thing when there was a problem, I tend to look at them and find a reason for it. Probably sometimes when things were really good, I didn't dig as deep maybe as I should have. Certainly things like an early Easter holiday driving numbers much better this spring, which caused me to raise my forecast higher than I probably should have.

So you've got to look at those special factors. Auto production had some strange things in the number this summer, because they didn't shut down this summer. So you didn't have the big comeback in the fall, which artificially depressed manufacturing numbers. So you really have to look behind the numbers. You can't take one number in isolation. You got to cross-check them against each other and when they're too good or too bad, it raises a flag.

Stipp: If something is too good to be true, it probably is.

Johnson: Yes.

Stipp: So Bob, one thing that I think maybe is something that you've known for a while or you've expressed to me, but sometimes there's a disconnect, is the way that the markets move and the way the economy moves and ... when people say the economy is better, you get good economic data, but the market is down. What lessons would you impart about the market versus the economy?

Johnson: Well, we certainly saw it this year, and it's always – like you say, things never quite repeat the same pattern, but even this recovery, the markets started moving up in March of 2009. The official end of the recession wasn't until June of 2009, three months later.

It's pretty typical that economic data is a little bit behind where the markets are sometimes. So that's always a very interesting phenomenon. People kind of sometimes look at the economics report and say, well, if I had followed that advice I would have bought too much into the stock market. I'm really not trying to forecast the stock market. I try to talk about the economy. That's hard enough, frankly. We've seen days when the economy looks really strong when the market's actually down.

Stipp: So the market's always trying to look ahead, and it's discounting a lot of different factors. The economy, economic situation is one of those, but they're not always going to be moving in lockstep.

Johnson: Exactly.

Stipp: So the last thing, Bob, and I think this is also on the topic of disconnects, and that's the idea that we've been in recovery for awhile now according to the official statistics, but that doesn't mean that everything is all hunky-dory out there.

Johnson: Unfortunately you're exactly right. And that's one of the big lessons, too. The recovery doesn't feel quite as good as it seems in retrospect sometimes. We've been at this recovery 18 months, and the unemployment rate is still unbelievably high, causing a lot of personal pain out there. Even in my neighborhood there's people that are still in bad layoff situations. Number of people out of work for more than 27 weeks is a high number. It really does take a personal toll. It can cloud your judgment, though, if you take all of that stuff too personally. When you start looking at the data, we have recovered, we have come back. It's going to take time. You need to hang in there. But believe me, I understand the personal pain.

Stipp: So when you say you are excited, when you get a certain good piece of data, that's from a data perspective, that's from an economic perspective. But the things like the job growth that will eventually come back, hopefully some more wage, income growth, those things will happen over time, but when you're looking just at the data, the situation does show a recovery that's looking to be sustainable.

Johnson: Yes, it looks sustainable, but it sure may not feel like it. If you are a construction worker out in California with 15% to 20% unemployment, you sure aren't feeling the love just yet.

Stipp: All right, Bob, well, it was really a pleasure tracking the economy with you in 2010. We look forward to 2011.

Johnson: I do as well.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.