Consumers Lay Another Egg for the Economy
The consumer numbers were not encouraging this week, but don't get whip-sawed by short-term data.
Investing Specialists
This week's indicators started off with a roar, as Monday's productivity number exceeded expectations, boding well for a stronger economy. Productivity along with population growth will be the key drivers of the economy over the next five years, so I devoted a separate report to the topic this week.
The rest of this week's data was mixed compared with last week's uniformly positive news. The data this week for manufacturing and for prices was bullish, while the consumer laid yet another egg. Retail sales and consumer confidence both came in well below expectations and were also down compared with the prior month.
While I am still confident in my 3%+ growth rate for the second half, it now appears that exports, manufacturing, and inventory rebuilding will play a larger role in that improvement. I caution readers that just as I shouldn't have gotten so overly confident in last week's great statistics, none of us should necessarily get bearish on the economy based on one week's worth of bad data--just more vigilant.
Turning to specifics, retail sales dropped 0.1% in July while most analysts, including me, were looking for a small increase, especially since the month included at least some of the "cash for clunkers" program. While the retail sales report is one of the most revised series (June's number was actually revised up making the comparison harder), almost all of the individual categories ranging from food to electronics showed declines. It didn't help that Friday's Consumer Price Index, while flat overall, showed declines in several specific categories. Given that the retail sales numbers are not adjusted for either deflation or inflation, the numbers are probably just a bit better than they looked. Our retail team also reported that a shift in some states' sales-tax-free days from July to August also potentially affected the numbers. But enough excuses--I will need to see some better numbers from the consumer over the next month or two, or alternatively identify other areas (exports?) to support my growth assumptions.
The University of Michigan consumer sentiment numbers Friday morning weren't any help either, as the reading fell from 66 to 63.3, its third monthly disappointment. Granted, I am not a huge fan of this series, but given the much better stock market, stabilizing housing prices, and far fewer job losses in July, it is shocking to me that confidence could be down. I wonder if some of the health-care and budget debates might be at least partially at fault. I suppose that some of the numbers earlier in the year might have been a bit inflated, reflecting relief that we weren't heading into the Great Depression 2.0. However, now it is sinking in that we aren't back in 2005 or 2006 either.
On the plus side, industrial production was up 0.5% in July, its first increase in nine months. The results were not unexpected as the ISM purchasing managers' survey has been signaling a turn for some time. Given that the auto manufacturers are ramping up production again, I am optimistic that there are at least a few good months in front of us on the manufacturing front. A decline in inventories reported mid-week also indicates considerable room for restocking over the next several months. One of our software analysts also indicated that computer-aided design (CAD) software specifically used by manufacturers was seeing sequential increases in demand in an otherwise soft market for software.
Looking ahead, I expect that housing starts next week will show continued improvement. I also expect continued improvement in two regional manufacturing surveys due next week, and I will be closely examining the employment segments of these reports. However, initial unemployment claims next week will include one of the larger seasonal adjustment factors, which will make it harder for that statistic to look good. This week's claims data was basically flat after several weeks of improvement.
The second version of the June quarter GDP report that comes out later this month is also likely to show a bigger decrease than the initial report. The key is not to get whip-sawed by short-term data, some of which looks more likely to be negative. The bears would argue that an over-leveraged and increasingly frugal consumer, a poor commercial real estate market, and potentially higher interest rates could keep a lid on the economy. But I think pent-up demand in autos and housing, inventory restocking, and improved productivity will be the key to longer-term growth.
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