Economy Serves Up More Warmed-Over Gruel

For a second week in a row, the U.S. economic data was nothing to write home about, and for a change the markets acted accordingly and fell sharply.

The week started with a weak report on manufacturing from the ISM, a soft ADP payroll report in the middle of the week, rising initial unemployment claims on Thursday, capped off by a seemingly disappointing employment report on Friday.

Auto sales were mercifully on target, though not booming, and weekly shopping center data stabilized but is not out of the woods yet. Firmly in the bullish camp was news that gasoline prices slumped,  CoreLogic home prices boomed (crossing the magic line into double-digit growth), and the trade report showed a shrinking deficit.

More Warmed-Over Gruel of Slow Economic Growth
Last week I noted that market optimism seemed a little out of line with data showing that some of the February strength was a mirage. This week's data only confirmed the mirage scenario. On the other hand, this isn't a start of a new economic slump, either. It's just more of the same warmed-over gruel of slow growth (I am sticking with my 2.0%-2.5% growth rate for 2013) that refuses to convincingly break out to the upside or fall back into the abyss.

A pattern of ups and downs in recent data, with a lot of above-plan data followed by a disappointment the very next month, suggests our statistical limitations in a low-growth backdrop. This is not the start/stop economic roller coaster scenario the media seems to have latched on to with a vengeance.

Employment Growth Weaker Than Expected, but Not an Indicator of More Bad News to Come
Before digging into all gory details of the employment data, it's important to remember the pitfalls and strengths of this very complex report. First, it's important to remember that employment is a badly lagging indicator. Generally, employment changes follow the broader economy with a 6-9 month lag, sometimes more. Though the economy clearly bottomed in mid-2009, employment growth didn't really kick in until mid-2010. Employers don't hire people until they feel really confident in their business, with painful layoffs still fresh in their minds. And during a decline, employers will avoid layoffs as long as they can. So, looking at employment data for the future direction of the economy, especially at turning points, isn't particularly helpful.

Commonly Practiced Analysis of Month-to-Month Employment Gains Is a Fool's Errand
Although I admit to occasionally trying to play the role of the fool, I usually manage to avoid the volatile, error-prone, oft-restated, and frequently poorly seasonally adjusted monthly data points on employment. We are talking about an economy with about 135 million jobs, maybe 100,000-200,000 job gains, and seasonal adjustment factors that can take as many as 900,000 workers off of employment rolls. Add in strikes, shifting weather patterns, rearranged school schedules, and a complete retooling of the auto industry--it's lucky that we can interpret anything out of the data.

Averaging together three months and looking year-over-year does a lot to remove these difficulties. But even that isn't perfect, as this year's bad weather and last year's nearly perfect spring weather and shifting gasoline price spikes are even wreaking havoc on this normally reliable data set.

However, Employment Data Can't Be Ignored, Either
Employment data is important because it supplies wage income that fuels consumer spending. And consumer spending does drive the economy and represents 70% of U.S. GDP.  However, in the short run, consumers can dip into savings, sell assets, or get funds from other sources (unemployment insurance, rent income, business income, etc.), making the connection less than perfect. In fact, wage income represents just over 60% of consumer incomes. And if prices are going down, wage income can be stretched a lot further by the consumer.  

Employment Reports Slow-to-Act Tendency Is a Strength and Weakness
While I knock the employment report for being a lagging indicator, when analyzed properly, it doesn't provide a lot of false readings, either. Sometimes when manufacturing data is jumping all over the place along with the GDP report (driven by inventory data and the vagaries of government spending), the employment report is a better marker for the real performance of the economy as a whole (along with retail sales and inflation). This past winter, when a lot of people were panicking about the state of the economy, I was continually reassured by stable employment data. 

Headline Employment Data Disappointing, Longer-Term Data Reassuring
The headline data showed private sector job growth falling from an upwardly revised 254,000 private-sector jobs added in February to 95,000 in March. Headlines trumpeted "worst job performance in nine months." These are all true, but these are volatile data sets. Good months generally follow bad months, and bad months are generally followed by good months, indicating statistical issues and not the stop-start performance that others are so widely proclaiming.

The year-over-year data is barely showing a jiggle, although the trend has softened just a little (from 2.1% in December to 1.9% in March). Rising initial unemployment claims and a greater number of nationwide layoffs in the Challenger Gray Report also suggest at least some modest slowing in the trend. Given some really adverse weather and the payroll tax increase, I view this as a stellar performance and not the start of a disaster.

Temp help, usually a decent forward indicator, was one of the stronger performers this month, so all is not lost just yet. And there were several mitigating factors in this month's report that we discuss in this week's video--including weather, massive seasonal adjustments, and large revisions to prior months' data (which now have that too-good-to-be-true look. 254,000 jobs in February? It just can't be true, in my opinion).

  

Inflation-Adjusted Wage Data Looks Stable, Too
This hourly wage data was basically unchanged and the number of hours worked were up a little sequentially. These two data points are every bit as important as the headline employment growth figure that everyone cites. In addition, the rate of inflation also has a meaningful impact on the figures. The table below rolls together employment growth, hourly wages, hours, and inflation to take an accurate temperature of the consumer.

Though the recent trend shows the same slow erosion as the employment growth rate, the data certainly doesn't appear to be a real game changer.

Retail Accounts for the Majority of the Employment Report Disappointment; More Bad News to Come
Perhaps retail was the most noticeable sector in the employment report. Normally, this sector has been adding more than 30,000 jobs per month, and in March this large sector lost 24,000.

Some of this weakness is probably a belated reaction to the payroll tax increase, which I thought would have shown up in February (it didn't). Certainly, the shopping center data remains in the doldrums, too. However, I think there is probably a little more at work here. I think  Amazon (AMZN) and other electronic retailers are having an ever-increasing impact on bricks-and-mortar stores. This could affect employment in the retail sector for years to come.

Purchasing Managers' Report Slips After Months of Recent Strength
For several months, I ignored a lot of the manufacturing data because it is not very relevant to the performance of the economy at this stage of the recovery (the consumer is what really counts). However, last month, even I couldn't ignore the positive data. I was just in time for the indicator to roll over yet again.

Unfortunately, the data under the hood was even worse. The New Orders Index slipped from 57.8 to 51.4. This is often one of the most forward-looking parts of the index. Given a pause in the housing industry, and stable but not growing auto sales (sequentially anyway), the slippage isn't a total surprise. I suspect that with better weather and the normally stronger spring season, as well as  Boeing (BA) eventually shipping its 787 again, the manufacturing data will not stay down for an extended period of time. I also note that a reading over 50 for the index and sub-indexes generally means growth, even if that growth rate is a little slower.

Auto Sales Remain in the Safe Zone, No Slump Here
Auto sales remained stuck in the same range as the past several months neither deteriorating nor accelerating. Sales for March matched expectations, depending on how many decimal points one chose to use. It's very hard to give up on the consumer when auto sales continue to hold their own. Dave Whiston, our senior auto analyst, felt good about the March report:

"Automakers reported another strong month for March new light-vehicle sales on Tuesday. Sales increased by 3.4% to 1,453,038 while the seasonally adjusted annualized selling rate per Automotive News was 15.25 compared with 14.13 million in March 2012. This March was the fifth straight month the SAAR exceeded 15 million. We see no reason to change our expectation of full-year sales coming in at a range of 15.2 million-15.5 million units. Interest rates are low, the vehicle fleet is still at a record age of nearly 11 years, and there are plenty of great products to choose from regardless of one's vehicle segment or brand preference. We are also encouraged to see full-size pickups continuing to far outperform the industry. We see this trend as a good sign for consumer spending, housing and for  General Motors (GM), which will have its long overdue next-generation Silverado and Sierra trucks out later this year.  Ford (F) estimated full-size trucks to be 11.6% of the market in March compared with 10.5% in March 2012."

Retail Shopping Data Stabilizing at Slower Growth Rates

The weekly data seems to have found a bottom without crossing into negative territory. The averaged data could hit bottom by as early as two weeks from now (it probably won't happen next week because of the way the Easter holiday fell). Given the payroll tax situation and the weather differences, the softness isn't quite as worrisome. And some of the spring shopping could show up in the April and May data, causing a "surprise" on the upside at some point. And, if we follow the script, another supposed boom in economic activity.

Falling Gasoline and Commodity Prices Make Me Believe the Consumer Will Feel Better Soon
While the market's worry level seemed to really pick up this week, I am feeling a little better. Gasoline prices have weakened again and a lot of commodities are down, especially food-related commodities. Gasoline prices ran up and fell back a little earlier than in 2012 as the data in the table below suggests:

This should relieve some of the pain of the payroll tax increase instead of compound it, as it did in February.

Commodity prices are off, too, which should eventually manifest itself in lower food prices and selected manufactured goods. Corn, soybeans, sugar, and wheat are near yearly lows. Corn is now well under $7 a bushel. Most metal including copper are down a lot, too. Given the pivotal role that prices play in consumer behavior, I am pleased by the recent softening. At the same time I'm cognizant the prices are weak because of real slowing in Europe, a shifting Chinese economy and the alleged slowing in U.S. activity.

Only the Retail Sales Report Has Much Significance Next Week
With the shifted trade report, there really isn't much news next week. The budget deficit for March is announced next week along with the Producer Price Index and the retail sales report. The retail sales consensus is for sequential growth of 0.4%, which strikes me as way too high. Something nearer to zero seems closer to the mark given flat gasoline prices and relatively poor shopping center growth rates. Remember that the February report showed a stunning 1.1% growth rate that set off the most recent jump in the stock market. That report had a boost from both autos and gas prices that will not help the March report. Cold weather may also slow home center sales, and there weren't a lot of new electronic gadgets introduced in March, either, depressing electronic sales. This may not be pretty.