Saturday, February 27, 2010

The Mixed Tone of the Economic Data

The various economic reports in the last few weeks have been mostly on the disappointing side, raising some uneasiness over the prospects for the economic recovery. While it was well understood that the inventory-driven pace of GDP growth in the fourth quarter was not sustainable in the early part of 2010, the latest data, taken on face value, suggest that the economy's momentum may fizzling in a disconcerting fashion.

The housing sector indicators have been particularly disheartening. Sharp declines of 11.2% and 7.2% in both new home and existing home sales respectively, with spikes in the inventory of unsold homes in both reports, highlight the still precarious state of the housing market, contrary to some tentative evidence of stabilization that had emerged previously.

The significance of a 3.0% gain in durable goods orders last month was undercut by the fact that it was entirely driven by a 15.6% surge in the famously noisy transportation category, excluding which orders were down 0.6%.

But perhaps the single most unnerving message from the various economic indicators since the beginning of the year comes from the stalling of the previously solid downtrend in initial jobless claims.
After a nearly relentless decline since the spring of 2009, the series has drifted modestly higher since early January. Although noise in the weekly claims data around the turn of the year is hardly surprising, a resumption of the earlier downtrend in the coming weeks becomes an almost pressing issue to provide reassurance that the improvement in underlying labor market conditions (as reflected in the monthly payroll data) has not been disrupted meaningfully.

Despite the above, the data have not been uniformly weak recently.

The manufacturing statistics remain overall healthy, despite today's moderate drop in the February ISM to a still healthy 56.5 from 58.4. (Important to remember that this is a diffusion index, meaning that, as long as it remains above 50.0, the sector is still growing, albeit at a somewhat slower pace than in January). Besides, industrial production rose by a robust 0.9% in January, with the key manufacturing component up a solid 1%.

Also, retail sales for January posted a reasonable (although unimpressive gain) of 0.5%, with the key ex-autos category rising by 0.6%, indicating that personal consumption is still holding up.

What is then one to make of the inconsistent tone of the various reports recently?

The decidedly mixed, and often soft, tone of the data should not be viewed as downright worrisome bur rather as a reflection of the reality that this is only a 3.25-3.5% GDP growth type of economic recovery, as opposed to a more typical 5.0% to 6.0% kind of recovery in past cycles. With so much damage inflicted across the economy by the most recent economic downturn, the moderate pace of economic growth that is unfolding is not strong enough to make the data look, and feel, consistently healthy. Setbacks and pauses should be viewed as almost the norm in that setting and it will probably take several more quarters before the economic recovery engages all of its cylinders on its way to a full-fledged economic expansion.

Anthony karydakis