Consumers: Watch What They Do, Not What They Say

Despite last week's horrible consumer confidence reports, consumers really opened their wallets in January and February. Data from individual stores and from the International Council of Shopping Centers reported same-store sales growth of 4% and 3.7%, respectively, compared with 2009 results--by far the best numbers of this recovery and far above expectations. More comprehensive consumer data for January from the Commerce Department showed a one-month jump of 0.5% (or almost 6% annualized) for total personal consumption.

The employment data, which I thought would be potentially affected by poor weather, showed little change with job losses of 36,000 compared with 26,000 jobs lost in January on a base of about 130 million jobs. While I think we might have eked a small gain without weather effects, the overall storm damage to the statistics was smaller than I feared. Meanwhile, manufacturing results were a bit more neutral this month as weather and auto issues kept a lid on results that were positive, albeit not as positive as in January.

Real estate data continued showing the usual winter weakness, probably worsened by storms and vanishing homebuyers' credits, as pending existing home sales continued to slide.

Contemplating Raising GDP Forecast to a range of 4.5%-5.0%
When I put it all together, a lot of the week's data was just noise, but nevertheless consistent with a slowly growing economy. However, the strong consumer spending data, which is almost always on the front of an economic recovery, should continue to pull the other data sets up in the months ahead. Given a strengthening consumer, I'm tempted to raise my 4% real GDP forecast for 2010 to 4.5%-5%. However, I will wait to see next week's inventory data, as well as export results, before adjusting my forecast.

February Retail Sales Up 4% from Last Year
Retail same-store sales jumped more than 4% year over year--the best performance in more than a year and considerably ahead of expectations according to a Thompson-Reuters survey. Stores produced outstanding sales results even in the face of winter storms that battered the East Coast not once but twice in a month.

Fully three fourths of the companies in the survey beat expectations, with only drugstores showing disappointing results. The strength was also broad-based, as high-end retailer  Nordstrom (JWN) posted a 10.3% gain at the same time discount retailers  TJX (TJX) and  Ross Stores (ROST) reported sales increases of over 10%. Even  Abercrombie & Fitch (ANF), a poster child for high-priced goods retailers that were ravaged by the recession, produced year-over-year sales growth of 5%.

The positive retail sales report isn't a one-month fluke; this report has produced better-than-expected results over the last four months. It's not just one source of data either. A separate report from the International Council of Shopping Centers (ICSC) showed that retail sales were up 3.7% in February, the best performance since 2007 and well ahead of the Council's own expectation of 2% growth.

As good as these numbers appear to be, I should point out that February 2009 was a relatively weak period. Also, the monthly store data do not include results from major retailers such as  Wal-Mart (WMT),  Best Buy (BBY), or  Amazon (AMZN). That said, the ICSC is projecting 2.5% sales growth for March. Our retail team also notes that an earlier Easter this year means that March results will look a bit stronger than they would have otherwise, and April could look a little weaker.

Powerful Manufacturing Sector Takes a Pause
The ISM's national purchasing managers' report showed a February reading of 56.5 versus 58.4 in the prior month and was modestly below expectations. Anything above 50 indicates that more companies were seeing improvement than those seeing declines.

The ISM runs correlation reports that compare future GDP growth to the overall PMI number. The average of the January and February PMI numbers is consistent with GDP growth in excess of 5%, which is the primary reason I am contemplating raising my overall GDP forecast.

However, the report was not all wine and roses. Both current production and new order index readings dropped about 10% from the prior month, although remaining well above the critical 50 level. I think part of that was a little hangover from an unusually strong January, bad weather conditions, and issues at  Toyota (TM) and the auto industry in general.

I will be looking for a bounce in these subcomponents after the March data come in. On the plus side, the employment subcomponent jumped to 56.1 from 53.3 the prior month, representing the third month in a row where manufacturers planned to do more hiring than firing. The ISM's employment index is one of the reasons that I believe that without weather issues, employment growth in February could have been positive.

Employment Data a Nonevent, Wall Street Sighs with Relief
Friday's employment report turned to be a nonevent, as only 36,000 jobs were lost in February compared with 26,000 jobs lost in January. There were fears that as many as 100,000 jobs would be lost in February, as a major snowstorm hit just as the employment data were being gathered. Past storms, including one in 1996, had a major impact on the employment numbers. The unemployment rate remained steady at 9.7%, raising hopes that we may have seen unemployment peak for this cycle at 10.1% in October 2009.

By sector, the employment report was business as usual: six of the 12 sectors I track showed growth, including manufacturing, education and health, and business and professional services. Construction continued to be the biggest loser, with losses totaling 60,000 workers. There was almost no contribution yet from the mass hiring of census workers expected in the first half of this year. Hours worked were down modestly, primarily because of weather, while hourly wages were up almost 0.2% sequentially.

Real Estate in the Winter Doldrums
On the real estate front, I was surprised that the pending new home sales index declined a strong 7.6% in January. The National Association of Realtors is blaming the decline primarily on weather. Unfortunately, they noted that weather was even worse in February, which potentially means yet another bad number for that month.

The Association is also positing that favorable affordability and the need to get a deal done prior to the April 30 homebuyers' credit deadline are going to cram a lot of contract-signing into just two months: March and April. This would in turn boost existing home sales in May and June.

Watching Exports and Inventories Next Week
A lot of data showed up this week, but next week will be blessedly quiet. The trade balance is due on Wednesday, and I expect that number to be worse than last month's $40.2 billion given the strength in consumer spending in recent months that tends to pull in more foreign goods. However, lumpy oil imports, one of the largest components of the trade balance, always make this number a bit of a guessing game. Lower imports of Toyotas (as some Toyota automobiles are subject to the recall for sudden acceleration issues) in February could prove to be an offsetting positive factor.

Next week we will also see a number of different inventory reports that will help me determine how far along we are in the inventory restocking process. Last week's data seemed to show some very modest growth in manufacturing inventories in January. Next, data for total business inventories as well as inventory levels at wholesalers and retailers will be released. If overall inventories just manage to stay flat for the entire quarter, GDP would be around 1% just on that factor alone. The inventory contribution would be even greater than that if inventories increase, and I believe they will.

The federal government's version of the retail sales report is also scheduled for release. This report won't be as glowing as this week's store-based reports because autos, oil products, and many other categories of goods are included in this survey. Autos are likely to be a meaningful negative contributor, as a combination of Toyota issues and bad weather caused February auto sales to slip modestly from January. My belief is that these represent sales deferred to another month--not permanently lost.

Finally, some of the storm-related problems will begin to work their way out of the initial unemployment claims data in next week's numbers (barring any more processing delays), and I am hoping new jobless claims drop under the 460,000 level.

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