Growing Pain for the Green Sprouts

To be intellectually honest, last week was bad for our green sprouts. After a month or two of reported economic data consistently beating forecasts, we saw a few clunkers, and the stock market reacted in kind. We had grown complacent that all of the statistics we track would continue to make nice sequential, linear improvement. Unfortunately, that just isn't reality.

When we looked back at several metrics over past recessions, we found that the economy doesn't usually move in a straight stair-step fashion each month. More typically the economy has some improvement for a while, followed by some retracement, then some more advances, and then perhaps another setback. The key to monitoring a turn seems to be to watch several statistics and to be particularly vigilant if some of the numbers go on to make new lows for the cycle.

The latest new initial jobless claims moved in the wrong direction, but remained better than the cycle lows of March. April retail sales, while disappointing for the second month in a row, were less bad than the month before. The data for the week included some positive news, but these reports are more secondary indicators, including the Empire State Manufacturing Index. We also had relatively neutral news on the inflation front with April numbers, excluding energy, proving neither too hot nor too cold. Industrial production was also still down for April, but less so than March and generally in-line with expectations.

None of the reports was really bad or catastrophic; however, we will be raising our level of vigilance. We remain convinced that the June quarter will prove to be the end of the recession, and the September quarter is likely to show some growth. We believe that inventories had gotten a tad low as businesses panicked and cut production to the bone. We may see a similar phenomenon in employment, where cuts were made ahead of real problems, as businesses effectively took out insurance policies just in case things got really bad. As inventory and employment are restored to more normal levels, the economy could potentially bounce back more than anticipated, at least for a quarter or two. The stimulus plan, improved confidence by the public and by business, as well as the passage of time will also help to move us out of this difficult time.

The biggest disappointment of the week was the retail sales report for April, which showed a decline from March of 0.4%. We had hoped for a positive report given January and February both showed increases, and we had believed that March's 1.3% decline was an anomaly. The good news is that April was much better than March. The bad news is that declines were widespread among categories. Some restaurant sales, autos, building materials, and the usual health and personal care items were among the few categories to eke out gains. We are optimistic that the social security stimulus checks going out this month (for $250) as well as other stimulus plan tax and spending provisions will kick in by the end of the second quarter.

The second big disappointment was initial unemployment claims. We have made a big deal about this indicator being one of the more reliable, so this one worries us a bit. Claims for the week came in at 637,000, up from 605,000 the prior week but still below the cycle high of 674,000. The less volatile and more reliable four-week moving average moved up by about 6,000 jobs. A good portion of the increase was attributed to Chrysler's bankruptcy filing. Unfortunately, ongoing auto industry turmoil and dealer closings are likely to play havoc with this indicator over the next several weeks. Ultimately, many of these workers will find other jobs with remaining dealers (the same number of cars must eventually be repaired somewhere).

In better news, the Empire State Manufacturing Survey showed some nice improvement, moving from an index value of -15 in April to -5 in May and greatly improved from its March nadir of -38. This is often an early indicator of the broader ISM manufacturing survey, due on June 1. The ISM survey is one of the more important indicators that we have been watching this cycle. Manufacturing and construction job losses have accounted for a disproportionate share of the job losses this recession. Therefore, a turn in manufacturing could stem some of the job losses that have everyone so worried.