U.S. Economy (Still) Not Falling Apart

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. There weren't a lot of marquee data reports this week, but Morningstar's Bob Johnson--our director of economic analysis--thinks there still were some clues as to what's happening in the economy.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with the small-business confidence report--that's something you watch pretty closely. How do business owners think about the state of the economy right now?

Johnson: Not so great--at least about their businesses. Their reading was 92.9; that was down from the previous month. It was the lowest in many months. I don't think we had a reading that low all of 2015. So, clearly, they are a bit worried, and I think a lot of the worry stems from earnings expectations, which aren't so good right now.

So, it was a disappointing headline number. We had expected that business owners would be a bit worried in December and January when the surveys came out, and they weren't as worried as we feared. That was, of course, when we had all the market turmoil going on. As it turns out, the panic seemed to hit more in February.

Glaser: Beyond that headline number, there is some employment data about expectations of hiring or wage increases. What did that show?

Johnson: Let's go with the hiring first: That was down a little bit. Their hiring intent was not as bold as it once was. The other thing that we always look at there is the number of people who said it was hard to fill a job, and that fell rather dramatically from the high 40s to the low to mid-40s between January and February. I guess that's not entirely bad news because it does mean that we were able to find more qualified employment, and that's good news.

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Glaser: And then on the wage front, do they expect to be giving a lot of raises?

Johnson: Well, those numbers dropped off--both in what they paid in actual raises over the last three months and in what they intend to do. Both of those numbers were down from really high levels in January. But they're still at pretty high levels. You pair the low expectations from being able to raise prices with the fact that they are still--although not as much as before--intending to raise wages, and that certainly put some pressure on incomes. I think that's what really has the small-business owner concerned; it's nearly impossible to pass on a price increase right now because consumers have so many outlets to shop and to choose from. So, it's clearly a big concern that they're not able to raise prices and, in fact, having to reduce them in some cases. And at the same time, their expenses are going up--namely, labor.

Glaser: Moving to Washington, we got an update on the budget deficit. What's happening there?

Johnson: The news there was surprisingly good through the first five months of the fiscal year, which started back in September. The budget deficit is about flat when you do all the adjustments compared with a year ago. Given some of the legislation we saw back in December and a couple of other factors, we still are expecting the budget deficit to widen for the full year. But so far in the first five months, it hasn't--primarily because tax collections have been unusually strong, especially on the individual side. And on the individual side, it's been strongest in people who are submitting taxes--people who work on their own or people who are doing their capital gains tax payments and so forth. That category was up well over 7%. So, clearly, that helped the "take" side, if you will, and probably made the budget deficit come out a little bit better than many of us had been expecting.

Glaser: So, if the federal balance sheet isn't getting any worse, the consumer balance sheet is also something we've been focused on. Did we get any information on the state of the consumer this week?

Johnson: We did, and that was a little bit worrisome. Well, I suppose it's great news if you are in the camp that believes debt is bad and that any slow growth in debt is good news. But we did add an incredibly small amount to consumer credit in January. We added only $10 billion, and the expectation was that we'd add well over $20 billion. That's often an indicator of what's happening with consumer spending, so it doesn't particularly bode well for the months ahead in terms of spending. It's an interesting measure of consumer confidence, and that debt that we are talking about includes credit cards, student loans, and auto loans. That number seems to have kind of stabilized. It was a pretty high number in the previous month; but in this reading, we've cut that expenditure in half. It's usually good news that consumers are being conservative because that means the numbers aren't being boosted by consumers borrowing unnaturally. So, on that side, it's good. On the other side, it might indicate their confidence isn't as high as we'd like to see.

Glaser: There were perhaps some mixed messages this week, but you still see no signs of things falling off a cliff.

Johnson: No, I don't see anything falling apart. But it might be the case that maybe a number here and there that we've seen that says things are all hunky dory and good again might just be a bounceback from the bad December data and that nothing special is happening here in February or March. So, we're still on track for a relatively low bottom of 2% to 2.5% for GDP growth in 2016.

Glaser: Bob, thanks for the update.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.