Return from Thanksgiving

I went ahead and skipped the end of last week in observance of the holiday, but now I'm back. Despite my absence, we had a number of releases on Wednesday of last week (a few were moved up from Thursday—thanksgiving). November 25 releases included personal income, personal spending, Personal Consumption Expenditure Prices (alternate measure of inflation), Initial Claims, Durable orders, Michigan Sentiment revision, and New Home Sales. Before I begin breaking these releases down, I want to say that this is the first time I'm optimistic about the future. It's not that any one of the releases is positive, but that the entire set is positive.

Starting with personal income and spending, this is generally a rather unimportant release. This may seem counterintuitive, but consider that all month we get releases that form the components of this one. Most of the time when this release comes out, it merely summarizes what we already know. However, this report shows personal income growing at twice the rate expected (.2% rather than .1%) and personal spending growing at .7% (up from last months -.6%). These numbers are great news.

Personal Consumption Expenditure (also PCE) is an alternative measure of prices. The traditional measures, CPI and PPI, watch the prices of a basket of goods. PCE measures prices based on what people are buying. It doesn't break down prices changes into different parts like CPI and PPI do, but it more properly weights the effect of certain changes on people's lives—who cares if the price of a typewriter increased 300% in october, does that really affect your price level? The PCE reading came in at .2%, in line with a 2.4% annual inflation rate. This is a solid number, and the level that the fed typically aims for.

Initial Claims dropped to 466,000, much more than expected. This is a huge movement and puts us within spitting distance of the 450,000 marker that signals stagnation (rather than contraction). This is unbelievably good news.

The Michigan Sentiment Revision (an alternate measure of consumer confidence) came in at 67.4 an upward revision of this month's earlier number of 66, and again more than expectations. However, even with the revision, this month's number is a decrease from last month's 70.6 and September's 73.5. That being said, the revision is about as good as we could have hoped for with this release (revisions rarely to never vary much from their preliminary).

There's not much to report in the housing market, other than sales are continuing. Existing Home Sales (out last Monday) and New Home Sales (out last Wednesday) both showed increases, and both beat expectations. It's likely there is a fair amount of noise in this number due to the housing tax incentive expiration (it has now been extended).

The last piece of information released last week is durable orders. In October durable orders fell -.6%. While on the surface this is bad news, if we pull apart the data we find a silver lining. Durable orders consists of 2 parts: Defense orders and Nondefense orders. The significance is that defense orders in no way represent consumer demand for durable goods. This release had new defense orders down 18.4% and new nondefense orders up 1.2%. While this isn't as good as a positive overall (which would be good news from manufacturers and consumers), this is a good release for consumer demand.

In conclusion, people are making more and spending more, the housing market may be stablizing, employment is showing signs of quickly leveling off, inflation is still well under control, and to top it all off releases exceeding expectations means that the recovery is moving faster than the market had expected—we are likely in for steady increases in the market in the upcoming future. I don't want to be overly bullish, but it's hard not to smile when the data comes in this good.

Since I didn't review it last week, I'm moving the recession clock to 3 minutes to midnight.

Consumer Confidence

Consumer confidence for November increased from 48.7 to 49.5. The direction of the move is good news, but it's still below September and August's numbers (53.4 and 54.5). We could be in for a very rocky holiday sales season.

GDP release

The Bureau of Economic Analysis released the GDP report for the third quarter today. It breaks down growth into categorical components.

First, the good news. GDP increased at an annual rate of 2.8 percent in the third quarter. This included increases in lots of sections:
-Equipment and Software increased 2.3 percent
-Real Personal Consumption expenditure increased 2.9 percent
-Real residential fixed investment (houses) increased 19.5 percent (inflated due to tax incentive)

Now, the bad news. Motor vehicle output added 1.45 percentage points to the overall number, and now that the cash for clunkers program is over that is going to disappear. Plus, we can't discount the impact that the cash for clunkers program has had on other industries (car dealer makes money, buys things, others make money, buy things, etc.) We also saw a decrease in real nonresidential fixed investment (business investment) of 4.1 percent

Two pieces of information that hurt the numbers, but are good signs:
-Net Exports is decreasing: increases in both exports and imports, but imports increase is larger
-Inventories are decreasing: When inventories increase, it adds to GDP (as though the company purchased them). However, decreasing inventories shows that in the big picture people are buying more than is being produced. It signals likely increases to come in employment.

Last, actual federal government spending increased 8.3 percent. Take this how you will: it definitely helps the economy, but it is unsustainable and may distort markets away from their efficient equilibrium (i.e.- building a "green energy" industry, despite the lack of a supportive market).

Finally, the analysis. This release looks like a mixed bag, maybe even beginning to look positive. December's numbers will tell us a lot.

Evaluating the Recession Clock

Wow, what a week. I wish I could tell you that the information we've gotten amounted to something, but I can't. We aren't any closer to moving in a positive direction, but in a glass-half-full kind of way, we aren't any closer to things getting worse. The positive releases continue to be offset by negative releases, so I'm keeping the recession clock at 2 minutes to midnight.

For details on why the data we received doesn't really tell us anything, see my previous post. Suffice to say there is a lot of noise in the economy. Many numbers are moving in the right direction, but may not be doing so for the right reasons. We should see less tainted information soon.

I'm still watching the housing market. At the beginning of next week, we'll get numbers for existing home sales. In my opinion, this is the money number: it represents demand for housing. It's been improving over the last few months, although that could be in large part due to first-time home buyers taking advantage of a fairly significant tax incentive. The incentive should expire Nov. 30, so expect a drop off, but I think the December numbers will exceed expectations.

I see no reason to describe the employment situation anyway other than bleak; again, see my previous post for more information. More and more, employers are finding ways to produce without as many employees. GDP is growing (and we'll get preliminary numbers next week on how fast) but lots of workers who lost jobs still haven't gotten them back.

Analysts talks about the "fundamentals" of the economy quite a bit, although I doubt many of them know what these are. The "fundamentals" is an abstract group of numbers comprised of Consumer Spending (via permanent income hypothesis-see note at bottom), Inflation, and Stability (and borrowing ability) of businesses.

The fundamentals are not strong right now. Consumer Spending is down, except for the spending artificially induced by the Federal Government. Businesses are facing poor sales numbers and tightening lending standards. Inflation is where we want it, but this isn't good news, it's just not bad news.

I'm hoping for better information for Christmas.

Note: The permanent income hypothesis argues that consumer spending is dependent not just on their current income but on the income of their foreseeable lifetime. It clashes with Keynesian philosophy which says that current income is all that matters. Consider the example: a person is given a sizable bonus at work. The permanent income hypothesis argues that this would increase spending but not by as much as an equivalent increase in salary. Keynesian philosophy argues that a bonus would change spending by the same amount as an equivalent change in salary.

Under the permanent income hypothesis, you also look at the existing value of assets. So if an asset like a house decreases in value, the person behaves as though there was an equivalent decrease in his permanent income.

Think of the permanent income hypothesis like linking current spending to your foreseeable lifetime's monetary net worth. It takes into account everything you make and everything you own.

Employment Thursday and Catchup

Since Monday there have been lots of economic releases. Normally each would be covered in it's own post when it came out, but none of these releases gave us significant information.

On Tuesday and Wednesday we saw Producer and Consumer Inflation numbers, Industrial Production, and Housing Starts. The inflation and industrial production numbers were uninteresting in that they were skewed by the Cash for Clunkers program that just ended. However, it appears that the effects of that may now be over, meaning we'll see some accurate information coming soon.

Housing Starts is not that interesting because, again, it is expected. Until we see housing inventories start to deplete (or Existing Home Sales start to increase), don't expect people to build new homes.

The initial jobless claims number stayed roughly constant, coming in at 505,000. I'm trying to find the foothold that will pull us out of a recession, so much of my analysis is optimistic. However, this number more than anything else should tell you things are bad and getting worse. 505,000 people lost their jobs this week and are looking for work, and while many will find new jobs, many will not.

If nothing else in this post sticks, take away this: recessions are not timed events. Something always causes a recession: 1930s it was bank defaults (yes, not the stock market crash), 1970s it was the oil crisis, 1980s it was the Fed combating inflation, 2001 it was 9/11, and our current one the housing bubble. By the same token, something always causes a recovery, history just doesn't take as much note. Businesses and Consumers don't just say "OK, it's been 9 months since the start of the recession. Let's start spending again."

All too often, analysts put recessions in terms of timing, comparing it to other recessions. This isn't like other recessions. Until one market picks up, we will stay in a recession pattern. That is why it is so important to look at all the markets, success in one will indicate coming success in all the others.

Side Note: I read that congress is finally starting fear that the job market won't recover before elections. This is cause for panic, much more than the job situation. Call me a skeptic, but I'm actually cringing at the thought of a group of people, who know nothing about economics, attempting to craft a spending bill to "create jobs".

October Retail Sales

October's retail sales numbers are out, and the news is good. Retail sales posted a better than expected 1.4% gain. Retail sales numbers generally follow pro-cyclically with recessions, so this increase is a very good sign.

We had seen a drop in consumer sentiment not too long ago that I feared would show in retail sales numbers. While that drop wouldn't have had its full effect until November's retail sales numbers came out, a strong showing in October is a very good sign.

Breaking down the numbers we see some interesting trends. Retail sales only includes sales of goods (not services) which is less than half of total consumption. Pulling auto sales out of this number, we only saw a .2% growth—less than September's .4% and far less than August's 1%. What's interesting is that the Cash for Clunkers program has ended, yet we still see growth in the auto market.

All-in-all this is a great news. Regardless of the size of the increases, retail sales have established a clear upward trend.

Evaluating the Recession Clock

Not much has changed since last week. For the time being, I will hold the recession clock at 2 minutes to midnight.

Consumption:

The University of Michigan releases a monthly Consumer Sentiment Survey. The release for November saw a drop when a rise was expected. This underscores a disconnect between academics and people. For an academic, the most important economic numbers involve GDP and output, but for the standard person, the most important number is unemployment. Academics have declared the recession over, but until people can feel secure with their jobs, the standard person will see the recession as ongoing.

A drop in consumer sentiment is particularly bad right now. Retail stores are expecting higher sales than last year, and many forecasters are watching holiday retail store numbers to determine their projections, investments, and lay-offs for the next few months. If people are worried about the economy, they will spend less, and we are in for a bumpy road.

Investment:

Businesses and consumers got bad news for lending/borrowing this week. Interest rates remain low, but banks are continuing to tighten lending standards.

A bit of good news though: Housing prices may have bottomed. We don't have enough data to even establish a trend yet, but it is the first glimmer of hope in that market in years. A recovery could easily get people spending money again and pull us out of this downturn, but don't expect it to be quick.

This week we have some potentially very good news mixed with some more-of-the-same bad news. I still think that things could get worse before they get better, and bad holiday sales numbers would make things a lot worse. I put the risk of falling back into recession at very high.