Economic Hopes a Step Ahead of Reality

Jeremy Glaser: From Morningstar, I'm Jeremy Glaser. As the stock market continues to hit new highs, and there is lot of excitement about the future of the economy, Bob Johnson says we are not seeing it in the real-world data yet.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's look at some of the data that we are seeing right now in terms of expectations versus reality. In terms of expectations, the ISM index on manufacturing had really exceptional month again.

Johnson: It sure did. They came in at 57.1 on that index, and of course 50 separates growth from contraction, and we spent most of the last year in the low 50s. We've been kind of gearing up the last few months, and now it's at 57.7. They run a correlation, and it always is a little bit optimistic, but they say that that type of number, that type reading correlates with the GDP growth of over 4%. Now keep in mind that's not a forecast, but that's what they say when they see readings of this, that's the type of thing that typically happens.

So, it's an outrageously bullish number. There is a lot in the report that suggests it's backed up internally. Sometimes in a typical month maybe 12 of 18 industries is up, maybe 13 in a really good month. We had 17 out of 18 industry categories up in a single month, according to the ISM. So, it's indeed broad-based and you read the comments there's probably at least dozen of them are just incredibly bullish. People talking about, there is enough new business here that maybe we are going to think about doing some expansion even. So, some incredibly bullish underlying comments in that.

Glaser: So a very strong report there. But then when you look at the durable goods numbers that also came out this week, it just isn't showing up there yet.

Johnson: It's one of those really odd things. I mean again maybe they are slightly different months, but in any case the January durable goods orders were down month-to-month, not a lot, but they were down following a pretty good fourth quarter, as were the capital goods category. Then you look year-over-year the capital goods category, like industrial production, year-over-year was pretty much flat. Durable goods looked a little better on that measure, up in the kind of 2% to 3% range year-over-year. So, a little bit better on that side but still nothing that suggests the kind of wild numbers that we are seeing out of the ISM.

Also, an interesting note is that the number out of the Markit, the other agency that kind of tracks these numbers, said there was actually some deceleration from January to the February set of data. So, I'd be a little careful with that ISM report. But that certainly suggests everything is bullish. You look at durable goods, industrial production in Markit, and it says well things might be a little better, but not as good as ISM suggests.

Glaser: If we have mixed readings in the manufacturing sector, how about the consumer? We had consumption numbers this week. Any signs that wallets are being opened a little bit further?

Johnson: No, the data there, as we've been anticipating, was terrible. And again, we always look at the number on inflation-adjusted basis. The numbers looked a little better on the nominal basis but there was a pretty fair inflation adjustment this time, month-to-month 0.4% increase in inflation, and so you subtract that out of the nominal numbers, you actually ended up with a negative number in consumption. Consumption for the month of January was down 0.3% which is a pretty hefty number. A lot of that was due to utilities, another good portion of it was due to automobiles. But nevertheless, we always think that, well, if utilities is weak than the consumer should have a little bit more money to spend on something else. And even if it took a month for it to kind of seep in, if you will, at least you should have seen people doing more outdoor activities not being held up by bad weather.

So interestingly lot people say, skip the utilities. But I am not so sure you can just throw them out of the equation. I just don't think it was a gangbuster consumption number at all. And the other thing that backs that up is that we always track the disposable personal income, too. That was down 0.2%, suggesting that it wasn't down to 0.3%, like consumption was. But they are getting close suggests that utilities was not the only problem.

Glaser: Overall then, where do you think we are in terms of the state of the economy, with all these conflicting signals?

Johnson: I think that people are wanting to be optimistic. I think that there are a few things that are getting better, but I tell you, there is a lot of industries that are kind of looking plateau-ish to us. So, we are not terribly bullish, or terribly bearish, either, for that matter, on the current situation. We are kind of stumbling along, and maybe slightly better growth is what it looks like to us, but certainly not the strong data as the stock market and the ISM data would seem to indicate.

I think there is a lot of hope in all of that data. That indeed we'll have some changes in economic policy, and we heard more about that on Tuesday evening from the president. Certainly, there is some feeling that maybe we'll get some deal there. Of course if you had 10% or 20% tax cut, well then all the past numbers that we are looking at are kind of like, well, who cares? We've got this new regime now. I think that's what people are looking through. But I don't think people are considering that these bills aren't law yet, they are not even bills yet--that the proposals haven't even become a proposal yet. So, we've got that, and it's going to take a little longer to implement. In the mean time we've got higher interest rates, higher inflation all of which could hurt the economy.

Glaser: Bob thanks for the update today.

Johnson: Thank you.

Glaser: From Morningstar I'm Jeremy Glaser. Thanks for watching.