Indicators: A Changing of the Guard

This week's data looked good, with two of my key themes showing some signs of life as exports and the balance of trade data were better than expected. The cheap dollar and lower oil imports are beginning to work their magic. Secondly, consumer and retail data also came in above plan. Better consumer balance sheets and net worth, as reported by the Federal Reserve Bank on Thursday, should give the consumer the wherewithal to spend even more money in the weeks and months ahead.

I continue to believe that greater clarity on bonuses, the lifting of salary freezes, and restarting 401(k) matches can provide further impetus to consumer spending. A broad combination of better consumer spending, more exports, additional stimulus spending, and inventory restocking are the basis for my GDP forecast of 3.5% growth for 2010.

That said, looking at December and January indicators is always trickier than it is during many other months of the year. Shortened work weeks, seasonal hiring and firing, year-end budget flushes, and severe winter weather all wreak havoc with the numbers. While most of the statistics do try to include some seasonality factor, shifting trends by just a week or two can strongly affect monthly data. For example, later-than-usual hiring by retailers this holiday season may have negatively affected the October jobs report.

Indicators: a Changing of the Guard
My indicators are undergoing a changing of the guard, with early cycle favorites such as the ISM purchasing managers' survey and some real estate indicators stalling out, and late cycle data such as employment jumping to life. I caution our readers not to panic just because the early indicators start to look a little tired. The market has a decent understanding of the manufacturing issues ahead, but I am a little more concerned about the reaction to potentially sloppy real estate numbers. Since the summer, we've had several months of improving housing prices in many markets. However, our housing analyst, Eric Landry, believes that we're poised for several negative price reports during the months ahead, perhaps lasting through the spring. Again there are some seasonal factors baked into the calculation, but in weaker markets seasonal factors get exaggerated.

Retail Sales Shock to the Upside
A better-than-expected retail sales report and higher consumer sentiment numbers were the highlights of the week. The notoriously difficult-to-forecast retail sales report showed sales rocketing up 1.3% versus expectations of just 0.5% and the prior month's reading of 1.1%. Even excluding volatile auto sales, gasoline, and building material, sales were still up 0.5%, which is above consensus. More importantly, only two major categories, furniture and clothing, showed sequential declines from October. Also, for the first time since the fall of 2008, sales were up not only on a sequential basis, but also when compared with the same month a year ago.

University of Michigan mid-month sentiment figures leapt from 67 to 73. After a few disappointing months, it's good to see sentiment moving in the right direction, especially just before the holidays. However, this has proven to be a less than useful indicator for short-term sales growth.

Holiday Sales, a Giant Game of Chicken
I have warned in my past couple of columns that we needed to see improved consumption numbers to support some of the healthier statistics that we have seen from the manufacturing sector and the economy in general. The last couple of months' worth of retail sales data has been supportive of that need. A strong close to the holiday shopping season would add more fuel to that fire. I still feel confident that holiday sales will be up from a year ago, but it's unclear exactly how much retailers may have to reduce prices to make this happen. My gut tells me that if sales falter toward the end of the season, retailers will flinch first and cut prices.

At Least Some Consumers Have Money to Spend, Net Worth Up
News from the Federal Reserve showed improvement in the consumer balance sheet and net worth for the September quarter that might inspire consumers to part ways with more of their cash. Net worth includes all assets, including cash stocks, bonds, and real estate, and subtracts all debt, mortgages, and liabilities. Consumer net worth moved up from its March low of $48.5 trillion to $53.4 trillion, but remains humbly off its 2006 high of $64.5 trillion. To add a little perspective, in an average year, consumers spend about $11 trillion. The six-month jump in net worth by almost $5 trillion looms large compared with the $11 trillion annual spending number. With stock market gains continuing and more debt getting paid down, another improvement of a couple of trillion dollars is a real possibility for the fourth quarter. The debt-to-net worth ratio, while still elevated, has dropped from 29% in the March quarter to 26% for September.

Don't Panic Over Some Backtracking in Initial Unemployment Claims
The most disappointing number this week centered on initial unemployment claims, which moved back up (from 457,000 to 474,000) after two weeks of fairly sharp declines. I have been warning for some time that the Thanksgiving holiday may have given a boost to the last couple of weeks' worth of data, so I was not surprised by this week's increase. The less volatile four-week moving average continued its decline, from 482,500 to 474,750, compared to the recession high of 658,750. To show how far we have come psychologically during this recovery, most of the major media outlets trumpeted the decline in the four-week moving average, and were dismissive of the short-term bump in the weekly data. That is a dramatic change from last winter's headlines that presented any data in the most negative possible way. It wouldn't surprise me if the next initial claims numbers reflected weakness for a couple of weeks, as human resource departments make the last of their employment cuts to hit their year-end targets.

Company Scuttlebutt Sounding Better; Toyota Cranks Up the Overtime
For some time, I've been most worried about small and medium-sized businesses. Increased regulation, uncertain health-care initiatives, potentially higher taxes, and tight lending conditions have weighed heavily on this group. Given that most of the jobs in a recovery come from small businesses, it's not surprising that employment growth has been lackluster. This week, GE Capital provided some good news. On a conference call attended by our analyst, Daniel Holland, management indicated that there had been a considerable pick-up in middle-market lending activity since Labor Day. The improvement included conventional lending as well as leasing activity. Prior to Labor Day, there wasn't much demand from small to medium-sized businesses that were too wary to spend on future projects.

In bigger company news, our auto analyst, David Whiston, noted that Toyota continues to increase North American production, with each and every plant now on overtime. Texas Instruments, a major player in technology, noted in a mid-quarter update that demand was now ahead of their supply capability in some product categories.

Next Week: Prices, Manufacturing Data, and Housing Starts on Tap
While this was a very quiet week, next week will provide a wider array of data. Industrial production, one of the broadest, coincident indicators, will be released on Tuesday. After strong growth in August and September, October's production number dropped back to just 0.1% growth. Given that auto production increased in November, I would suspect that industrial production is likely to grow faster than October's dismal showing.

Also, the Empire State and Philly Fed Manufacturing surveys should give us an early read on manufacturing for December. Unfortunately these two surveys have been contradictory the past couple of months, with the Empire State Survey showing greater accuracy lately.

I suspect that both the consumer and producer price indexes will be relatively benign, with no big increases or decreases expected. Producer prices are likely to show bigger gains than the consumer numbers.

Housing starts, after showing general improvement for most of the year, fell back in October, at least partially due to the potential that the housing credit would expire. Now that the credit has been extended, it is just a matter of time--a month or two--until housing starts begin to show new life.

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