The economic data this week continued the pattern that has dominated for months now – manufacturing strong, real estate and consumer weak. The recovery from this recession has been a more traditional inventory cycle recovery. Whether it morphs into something that is sustainable beyond restocking is the $64 question and one for which we don’t yet have enough evidence to answer. If you’ve been reading along here for the last year or so, you know I suspect it will, but so far there is little evidence to support that presumption. Of course that is true of every recession; all you can do is wait and interpret the data as it comes in.
The week started with the Case Shiller home price report which rose on a month to month basis for the seventh straight month (up 0.3% seasonally adjusted). Year over year prices fell 3.1% which is also an improvement but obviously still a decline. If prices continue on this trend, we should see year over year prices rise around mid year. The big improvement in prices is in the West while the southeast continues to decline. Sales in the trouble states are still rising on a year over year basis though. New home sales and existing home sales were also reported this week and both showed large month to month declines. That isn’t all that surprising; a lot of sales were pulled forward due to the anticipation of the expiration of the first time home buyers tax credit in November. The credit was ultimately extended but not until just before it expired. In addition, sales have probably been hurt by the bad weather. The housing market is scraping along the bottom but all that really means is that there is a lot of room for improvement. At least it isn’t subtracting from growth anymore.
There were conflicting reports on consumer confidence with the Conference Board report plunging while the U of Michigan report showed a milder decline. Stocks sold off Tuesday on the Conference Board report but frankly I’m not sure why anyone would trade off this report. Consumer confidence is not correlated with the stock market or other economic data. If anything it is slightly inversely correlated with confidence low at bottoms and high at tops.
Durable goods orders were higher than expected but that was mostly due to higher aircraft orders which are very volatile. Ex aircraft, orders fell 0.6% but December numbers were revised significantly higher. In the core components, the big drop was for machinery while computers and electronics and communications gear both rose smartly. One disappointment was the drop in non defense capital goods ex aircraft (-2.9%) which is a good proxy for capital spending. These numbers are very volatile and the trend is higher but choppy.
Jobless claims rose again. I don’t know how much of this is weather related and how much is real but it is disconcerting to say the least. Of course we shouldn’t be too surprised by a slight retracement – it happens every recovery. And it always engenders a lot of angst and fear of a double dip recession. Here’s Paul Krugman in August 2002:
A few months ago the vast majority of business economists mocked concerns about a ”double dip,” a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I’ve repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.
If you don’t remember the double dip recession of 2002 don’t worry – it didn’t happen. You might also remember the slogan from Bill Clinton’s first campaign for President in 1992 – It’s the Economy Stupid. Except it wasn’t because the recession was already over and there was no double dip back then either. The only double dip in most people’s lifetime was the back to back recessions of the early 80s which were caused primarily by lousy monetary policy. I’d be the first to admit that our current policy isn’t exactly great but it is a hell of a lot better than back then when Paul Volcker was experimenting with monetarism and gold was moving from $300 to $800 and back to $300 in the course of two years. Even Bernanke isn’t that bad. The point is that you shouldn’t worry too much about the double dip scenario because it is a low probability event.
The last two reports of the week were revised GDP and the Chicago PMI. 4th quarter GDP was revised slightly higher but there was no surprise in the report. The Chicago PMI, on the other hand, was much better than expected at 62.6 versus an expectation of 60. This report is one of many showing a robust recovery in manufaturing. Deliveries jumped to 62.6 from January’s 55.3. What that means is that deliveries slowed and there are some strains on shipping and warehousing, an indication of economic strength. This was confirmed earlier in the week by a report from the American Trucking Association which showed a further rise in their truck tonnage index:
New orders, backlog orders and production also rose in the Chicago report. Inventories were drawn down which was probably related to production needs rather than just liquidation. Finally, prices paid remained elevated but CPI last week showed that there isn’t any pass through to consumers….yet.
The economy is in the midst of a traditional, inventory led recovery. Like every recovery it isn’t a smooth transition from recession but so far it looks on track. The last component of recovery will be employment and hopefully we see some improvement there soon. If we don’t we might actually get the dreaded double dip but the amazing thing about this recovery so far is how utterly normal it is. The recent retracement of jobless claims is even fairly typical of past recoveries and as such is nothing to worry about yet. The biggest impediment to recovery at this point is the uncertain political situation. I continue to believe that swing state/blue dog Democrats will not be willing to fall on their sword for Obama, Pelosi and Reid – heathcare reform will not pass. When it finally fails, expect the rest of the year to be a great big nothing into the mid term elections. As that unfolds the market and the economy will continue to improve.
