Dare We Say the Data Looked Good?

Jason Stipp: I'm Jason Stipp for Morningstar. I almost don't want to say it for fear of jinxing it, but we actually saw some pretty good economic data this week.

Here with me to dig into the numbers and talk about the implications of that data is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, we did see some good data this week on a number of fronts, and I think the one we want to start with is the consumer front, because we've talked over and over again about how the consumer is the most important thing to really keep an eye on right now. We got some retail sales data. How good did it look to you?

Johnson: Well, the numbers were much better than expected. I had a little bit of worry that the number would be a little soft this time around, but we actually got almost seven-tenths a percent of growth. So, that was a great number, and that's a one-month number. So, that was really good to see and it was a broad-based strength in the retail spending data, and it really surprised people on the upside; the consumer has not given up by any stretch of the imagination.

Stipp: So this data is from last month. Do you have any current data that would tend to suggest that this trend might continue?

Johnson: Sure. Now, this is a comprehensive government report. It includes the autos and gasoline and restaurants--all of those are rolled into that number. So, it's the most comprehensive report. So, it's really good to see that number, and it does mean a lot.

Now, I do look at a weekly set of numbers, as you know, the International Council of Shopping Centers that releases numbers each and every week. And that metric has also been good the past several weeks. So, it's not just that October was a particularly good month. In fact, the week that included Veterans Day was a particularly strong period. I think there were a lot of promotions going on during that period, but that week was a particularly good number in the series. So, the consumer is really, probably if anything, accelerating some of their spending in the last couple of weeks compared to October.

Stipp: So we also got some inflation data this week, and I know one thing that can make consumer or retail sales look better than they actually are is if prices increase. So, are the price increases that we're seeing in the market, are they responsible for that boost in retail sales?

<TRANSCRIPT>

Johnson: You know that's a very good point. A lot of time gasoline prices will be up a lot, and that kind of inflates the overall retail sales number, and it makes it look good when it's really bad. But the news this time was that energy prices in particular in the Consumer Price Index were down a ... couple of percent. So, that's certainly helped the index in a big way, and certainly inflation didn't inflate the retail sales numbers. It was a pure number.

In fact, that's really what's exciting about the report, because sometimes you see a decent top-line number, but you've got to take off a couple of tenths for inflation or three tenths for inflation. This time, we have to add back a tenth, and that's a nice little benefit to have. That will make the consumption numbers, which come out later this month, look really strong.

Stipp: So, inflation not a huge issue for the consumer, at least in that most recent report. We also got a producer inflation report, or Producer Prices, and that can give you a sense of what the consumer might see looking ahead. What did those numbers say?

Johnson: Those were even better. We were down three tenths of a percent on that front, and food prices in particular were little soft in that report. So, I think that bodes well for the months ahead as well.

Stipp: So, certainly good news on the consumer and the inflation front for right now.

Another thing that we got this week was initial claims, initial unemployment claims. And they actually looked pretty good. What do you see in that number and what is that trend saying to you?

Johnson: Now, again, to kind of focus back, we've talked about retail sales and consumers have been a great spenders. And people have been a little afraid, where are they getting the money from? And certainly this dip in inflation and lower gasoline prices have really helped. The other side of the equation where I think consumers are getting some of their money is, I think the employment market has been a little bit stronger than people realize.

I think that we saw it last week; we talked a little bit about the so-called JOLT Report, the job openings report from the government, being the highest since 2008. It's still not a wonderful number, but certainly more than halfway back from the low. So, there are more openings now than there have been this entire recovery. So, that's certainly a good news.

And initial claims are down yet another week. It's kind of sounding like a broken record that every week the number's lower than the week before, which is really very surprising--especially this time of year--that we've really fallen back so far. We are now under that 400,000 level that some people watch closely. In fact, we are under 390,000 this week. So, that's a really good thing.

Corporations, even if they are not hiring, are certainly laying off a lot less people, and if you've got the employment data looking better based on the JOLT report on the openings and less layoffs, it certainly bodes well for the employment report ahead, and it certainly bodes well that maybe there is more consumer income than people think. And we certainly had some revisions in the employment data last month when we got it, and that number is going to creep into the income report this time around.

Stipp: That four-week moving average also below 400,000 at this point?

Johnson: Yes.

Stipp: So, that's a good sign certainly--400,000 is something we look at.

On the housing front, we also had some data and we know that housing has been a sticking point for the economy for quite a while. What does the housing data say to you and is there enough for us to have a glimmer of hope here?

Johnson: Well, we did see a glimmer this week, and I'm excited about that because that's what's really been holding back this recovery, and I don't know how long the trend continues. But earlier in the week on Monday, we got the sentiment report from builders. And that number has been 13 one month, 11, and then 13. It hasn't been very high.

And now we have had two months in a row, where it's increased, and we actually got to 20. It's been a long time since we've gotten to that 20 level. Now, obviously it's on a scale of 100, where we like to see 50, which is considered a pretty strong market. So, we've got a long ways to go, but just to even have it tick up at all, and then to have it happen two months in a row is certainly a positive sign.

Stipp: I know sentiment is not necessarily one of that your favorite things to look at, so I have to call you out a little bit. Can we really hang our head too much on the sentiment number or is there other data that might support this?

Johnson: The sentiment data was certainly interesting to look at. You're right. I like to watch what people are doing, not what they're saying. The builders do have to put their money where their mouth is, but we did get the housing starts and the housing permits data on Thursday, and so those were certainly good numbers. People would have thought in the starts... we had a very good September, and we all had felt that that was kind of an anomaly, and then it would fall back.

Well, instead, we got a little bit of reduction in the September estimate and the October estimate was almost the same as in September, we're basically flat in housing starts at 630,000. Again that's well off the 1.5 million replacement demand and well off the 2 million high, but now we've gotten off of that for 450,000-500,000 level, that was kind of really scary. I think we really have come off the bottom here a little bit. So, that's good to see.

And then if you want to look one step further ahead, the same report has housing permits in it, and that was up at the 10% level. So that bodes well for starts in the months ahead. So, maybe builders weren't imagining things on Monday.

Stipp: So, you spoke a little bit about the natural demand. So, I know that inventory overhang is a concern for a lot of folks. So, when you look at housing starts moving up, do you think that that's in conflict with all of the supposed housing stock that we see out there? Or is demand really going to be able to soak that up?

Johnson: Well, again, the single-family homes have done well this last month, both in starts and permits, but certainly a lot of the improvement has been on the apartment side of the house, where people don't want to buy necessarily a single-family home, and we've had some pretty good news on the multifamily side. With rents being up a fair amount, it has certainly given people more room to go ahead and try to build a building and rent it out and make money. So, there is some good news and bad news in that. I mean, I'm glad to see that the single-family is doing better, but right now the real strength is in apartments.

Stipp: Lastly, Bob, just a little postscript based on some recent travels that you did this week. It has to do with the energy industry. Can you speak a little bit about what some of the insights and glimmers you saw from that?

Johnson: Well, I usually don't watch the oil industry real closely other than what happens to the price of gasoline. One of the interesting things that I noted this week as I traveled is that the energy industry in this country is really coming back, and it's a big deal. I think that oil is kind of shifting. I think some of the fields in the Middle East, because they're volatile and because they're older, I think those will be the less growing in the years ahead.

In the U.S., we have now got some things happening in North and South Dakota here in the U.S., and even in Texas where they are reviving some old fields--all primarily because of new technologies that are out there, as well as higher prices have now allowed them to go back after fields and back after things that they've known are there on an economical basis.

In North and South Dakota, there is the potential that that could be as big as Alaska, the Prudhoe Bay development anyway over the next five or six years, which I think is really stunning. What that does is it dramatically helps our balance of trade situation, which helps the dollar.

It certainly makes us less dependent on foreign oil. I think it's a real game-changer, it really is. And I don't think people have fully grasped how strong it is. I mean, it's impossible to get people to drive oil equipment and tanker trucks in Texas. They can advertise in Detroit and can't find people to come down there. There are shortages of people even to hire in restaurants in North Dakota, because so many people want to work in the oil industry where the wages are higher. It's just a very, very interesting situation.

Stipp: Well, certainly a great bright spot. It's nice to end the week on a positive note with you, Bob. I hope we can have similar conversations on a positive tone in the future as well.

Johnson: Well, if Europe doesn’t blow us up, I think we'll do just fine.

Stipp: All right. Well, thanks for joining me. For Morningstar, I'm Jason Stipp. Thanks for watching.