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RAPID RESPONSE Comments (Normally available by subscription)...
HERE ARE A FEW ECONOMIC NEWS ITEMS ABOUT WHICH I RECENTLY COMMENTED.
Here’s my quick take re Employment (3/5/10):
1. The numbers. Nonfarm payrolls fell 36k for February. There were considerable worries that very disruptive weather in the East during the survey week (which always includes the 12th of the month) would have a depressing effect on payrolls. Undoubtedly it did, to some extent. For instance, the average workweek did fall 0.1 hours (mfg = -0.4 hours). The Household Survey figures are less affected by weather, because a person can report being employed even if he was unable to show up for work. The unemployment rate was unchanged in February, at 9.7%. Furthermore, the Household Survey saw the labor swell 342k, those counted as employed increase 308k, those not in the labor force decline by 176k, and the employment-population ratio increase one-tenth of a percent, to 58.5%. These are unquestionably good indications.
2. Declare victory and move forward! In the context of February’s inclement weather, this report is a favorable reading on the labor markets. We can only guess how many net-jobs would have been created if the weather had been less disruptive. Fundamentally, things have stopped getting “less bad,” and now are “improving.” It appears that the labor market has turned the corner, and we should expect to see cyclical job increases from here. March = +150k? The way this works is that the labor markets will get progressively stronger. 2010:H2 could see 250k monthly job increases.
3. Tells. Manufacturing payrolls increased 1k. This is much more impressive than it reads! First, the secular trend is down, so even this tiny rise is counter-trend. Second, all the concerns re weather disruptions are relevant here, too. Hence, manufacturing is leading the rebound. Another tell: temporary help. February saw another substantial increase: +47.5k. The record shows that its rise is a leading indication for the labor markets in their entirety. So stand back and get ready to see some real job creation!
4. Back down to earth. The market may be turning, but that does not mean it is currently “strong.” For February, construction = -64k (probably some weather effects here); wholesale and retail trade, about flat; transportation/warehousing = - 12k; information = -18k; professional/business services ex temporary help = just +3.5%; financial activities = -10k; other services = -6k; and government = -18k. Small gains were registered by education/health services (+32k) and leisure/hospitality (+7k).
5. Supply-Demand. One laggard to expect: wage growth. February’s rise of average hourly earnings was just 0.1%, with the y/y = +1.9%. Due to the slack labor markets, wage growth will probably decelerate further. Being neither good nor bad, this is “capital’s” time (profits, rents, and interest payments) to shine and achieve a rising share of national income
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I do not always comment on the non-manufacturing ISM report, but it makes an interesting data point (3/3/10.
So here’s my quick take:
1. The numbers. The Non-Manufacturing Index (NMI) rose 2.5 points in February, to 53.0. By design, a reading above “50” indicates the non-manufacturing economy is generally expanding. The business activity/production measure advanced 2.6 points, to 54.8.
2. All ahead, medium speed. The NMI was below 50 for most of 2009. Today’s reading (for February) demonstrates that the economy is making incremental but broad based gains towards improvement. We’re not setting any records for speed of rebound, but the economy is heading in the right direction. Recovery is a process, not a destination.
3. Knock, knock. Anybody home? Hey, National Bureau of Economic Research (NBER): make the end-of-recession call! Two quarters of good growth are already in the bag. Growth in Q1—maybe around 3 ½%--is highly probably. The four measures you place great emphasis on have turned higher. These four measures are summarized by CV Econ’s Recession Indicator©, which bottomed last June. Declaring the recession over could deliver business and consumer confidence a shot in the arm.
4. Slack versus delivery times. There is clearly a lot of unused capacity in the non-manufacturing world, but delivery times are lengthening. Demands must be ramping up faster than output. There is a simple solution to this: hire more folks to produce more to provide better services.
5. Same here. This morning’s ADP tally of workers on payrolls fell “only” 20k. By this measure, things have progressively gotten “less bad.” The non-mfg ISM employment measure gained 4.0 points, but still remained a bit short of 50 (at 48.6). We are almost there, the point where we are consistently adding jobs.
6. Running on empty. Of the companies that had inventories, inventories contracted, and at a faster rate (survey = 45.0, -1.5 points). Are you going to let the shelves run bare? Time to order up!
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Here’s my quick take (3 for the price of 1, 3/1/10):
1. The numbers, part 1. Total personal income (which is about 84% of GDP) inched up just 0.1% for January. But personal consumption expenditures (71% of GDP) expanded 0.5% in money terms and 0.3% in volume terms. Lesson of the day: in principle, you can get to GDP by adding up all incomes OR by adding up all spending on final goods and services.
2. Is the economy growing fast or slow? It all must balance out, but the consumption numbers, which can be viewed in inflation-adjusted terms, probably will deliver the better “read.” January consumer spending alone already stands 2.2% (annualized) above the Q4 average. Any further spending increases will be accretive to this figure; so 2 ¾ % spending growth is a reasonable expectation for Q1.
3. A saving grace? The personal saving rate fell from 4.2% in December to 3.3% in January. We definitely need more income growth, but a drop of the personal saving rate is an indication of consumer confidence, so at least the mindset of consumers is still positive. Consumer will dip further into savings generally when they feel more confident over the economy’s prospects. Fears on the economy beget a higher saving rate.
4. And the reason was… Why was the rise of personal income so feeble in January? Actually, there was a pick-up in the growth of employee compensation, from +$6.3B in December to +$37.0B in January. That’s good. The problem in January was that proprietors’ income fell (-$3.2B), rental and dividend income retreated (-$20.8B), and with regards to disposable income, personal taxes increased (+$59.0B). That personal tax increase would have covered ALL increases in January personal outlays (+$53.0).
5. Gobble gobble. Meanwhile, total consumer spending prices advanced another 0.2% (y/y = 2.1%). Excluding food and energy items, the PCE price measure was unchanged (y/y = 1.4%), but consumers still have to shell out for the other items. Even at the modest 0.2% monthly pace of the total, in 30 years these price increases will eat up 51% of the purchasing power of today’s $1.00.
6. The numbers, part 2. The Institute for Supply Management (ISM) reported that the composite Purchasing Managers’ Index (PMI) dropped 1.9 points in February, to a reading of 56.5.
7. Not to worry! Hey, we all want to see these numbers zoom to the moon. But here’s the “bottom line:” a reading of 56.5 is a very healthy indication for manufacturing. Indeed, the ISM says that if this figure were to be sustained, it would be consistent with 4.9% GDP growth. Who would not be satisfied with that?
8. Details, details. The new orders component (59.5) and production component (58.4) were still very strong. On top of that, the employment component picked up 2.8 points, to 56.1. That’s approaching a “strong” reading, too. Hold on to your hats: within the next couple of months we are going to see some increases in manufacturing payrolls, by the official count.
9. Imports = 56.0; exports = 56.5. Trade is flowing in both directions.
10. A good solution to this problem. The ISM members said that their inventories contracted in February (with a reading of 47.3). Furthermore, the ISM members said their customer inventories were way too low (reading = 37.0). No wonder delivery times are lengthening, and at an accelerated pace (delivery times = 61.1, up 1.0): there are little stocks on hand as everybody is living hand-to-mouth. The simple, good solution to this “problem:” speculate on recovery and produce more!
11. Nagging problem. Price pressures are still building very fast. Even though the prices survey component saw a dip of 3 points, to 67.0, that level is still consistent with both a broad and spirited advance of prices. But Washington tells us that there is no inflation problem… (This could also be another reason why it might make some sense to build some inventories now.)
12. The numbers, part 3. Total construction spending for January receded 0.6%.
13. Res recovery? Well, to a little extent. Residential construction spending rose 1.3% in January, but with that increase, it is still a bit below its Q4 average. But increases in February and March might fix that.
14. Nonres is a nonstarter. Nonresidential construction expenditures plunged 2.1% in January, extending a trend: down! The weakness was across a broad front: office = -9.8%, commercial = -0.5%; health care = -0.5%; communications = -6.0%; and manufacturing = -4.8%. Ouch!
15. Public is puking! [Excuse, please, as I stretched for the alliteration.] Public construction spending contracted 0.7%, as budget cutbacks are not being offset by stimulus plan, shovel ready spending. Prediction: you are going to be reading this year about lots of states and municipalities who will be suffering severe budget crunches.
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Here’s my quick take re CPI (2/19/10):
1. The numbers. The total CPI for January rose 0.2%; ex food and energy items (= “core”), the CPI dipped 0.1%. The y/y: total CPI= +2.6%; core CPI = 1.6%.
2. Energy versus housing. Energy prices (8.6% of the market basket) increased 2.8%. Owners’ equivalent rent on primary residences (the cost of living in our own homes if we had to pay ourselves rent, and 23.6% of the market basket) decreased 0.1%. The former price is for a real cost that consumers must bear. The latter cost is a made-up cost that nobody ever sees (unless you sell your house). The CPI ex the housing factor was +0.3%.
3. Some standouts. Apparel prices fell 0.1%, as the winter clothing season ends with close-out sales. The dearth of new car sales (January prices = -0.5%) is putting a lot of upward pressure on used car prices (= +1.5%).
4. Longstanding, adverse trends. “In the emergency room.” (Medical care prices leapt 0.5% higher.) “Haven’t they learnt their lessons yet?” (Educational books and supplies = +0.4%, tuition = +0.3%.) “Smoke gets in your eyes.” (Tobacco products = +0.4%.)
5. One good trend back on track. Personal computers and peripheral equipment = -0.6%.
6. Take away. Washington policymakers will take some solace from the small reduction in core prices, concluding that underlying inflation pressures are nil. They may be wearing blinders. With so much slack in the economy, why are core prices down ONLY 0.1% (and up 1.6% y/y)? With all this excess capacity, why are total prices rising 0.2%? Why was there so much pressure with wholesale prices (yesterday), and won’t these come bubbling up to the consumer level? More constrained readings on the CPI are likely in the future, due to the heavy weight of the owners’ equivalent rent factor, even as consumers shell out more cash for real things for which they need to pay. I still think we’ll see 3% inflation before 2% inflation y/y, and probably by May.
7. Reminder. The purchasing power of a 1967 $1.00 is now 15.4 cents.
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Here is my quick take re FOMC (1/27/10):
1. What they did. Again, nothing. The target for the federal funds rate remains 0 to 0.25%.
2. So why don’t you copy and paste your comments from the December meeting in here? Believe me: I seriously considered it.
3. Same old, same old. The Press Release continues to run the same language on important issues. First: “…inflation is likely to be subdued for some time.” Second: “…[conditions] warrant exceptionally low levels of the federal funds rate for an extended period.” Well, the first comment leads to the second conclusion. But is Dec/Dec CPI inflation of 2.7% (with a 10% unemployment rate and a rise of the y/y inflation rate of about 4.7 percentage points in 5 months) “subdued?” I think not.
4. Yada, yada, yada. “Information received … suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.” I agree.
5. Was there anything in there of interest? Yes. The Federal Reserve will be closing and winding down several of its special liquidity-bolstering funding facilities (such as the commercial paper, money market mutual fund, and the term securities lending facilities). This is the beginning of the “exit strategy.”
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