In Search Of The Economic Recovery
The ongoing message from the mainstream media, analysts and most economists is that the economy has turned the corner and we are set for substantially stronger growth in the coming year. While that sounds great on the surface the economic data has yet to hint at such a robust recovery. What is worrisome is that CNBC has started using the term "Goldilocks economy" again which is what we were hearing as we approached the peak of the market in early 2008. As David Rosenberg pointed out in his morning missive:
"Maybe, it's just this: so long as there is a positive sign in front of any economic metric, no matter how microscopic, all is good. After all, you can't be 'sort of in recession' - it's like being pregnant...either you are or you are not. And currently, the consensus view among the economics community (not that I would hang my hat on this given its record in at least the last three cycles) is for no more than 20% odds of an outright contraction from taking hold (which makes this all the more intriguing if not confusing because the monthly U.S. real GDP data published by MacroEconomic Advisers who a visible peak in economic activity in July, a decline in three of the ensuing four months, and at a -1% annual rate to boot .. though admittedly, the data so far only go as far as November, but have already shown slippage even as the stock market has made new highs...and this then goes back to the point I made last week that part of the 'new normal' is that the S&P 500 has no higher correlation today than with the direction of the Fed's gloated balance sheet with a surreal 85% relationship."
We have discussed the relationship between the Fed's balance sheet and the stock market in our missive on the end of this current secular bear market, however, the chart below shows the economic data from MacroEconomic Advisers. While Rosenberg discussed that the monthly data was showing deterioration - the annual rate of change has deteriorated much more sharply. This is hardly an indication that the economy is set to achieve "escape velocity" in the near term.
Further evidence of a weak economic environment came from the National Federation of Independent Business (NFIB) Small Business survey for January which showed only a modest improvement from the plunge that came following the election. Even the resolution of the "fiscal cliff," and the temporary fix for the debt ceiling, did little to provide the clarity needed by business owners to make plans for the future.
More concerning is the number of firms, as stated above, expecting economic improvement in the next 6-months. This index plunged post the election as concerns about continued excess spending and debt buildup weighed on the outlook of business owners. That outlook has failed to improve much even with the resolution to some of the "manufactured crisis's" coming out of Washington.
As stated by Bill Dunkelberg, the NFIB Chief Economist:
"The Optimism Index barely budged in January. The only good news is that it 'budged' up, not down. If small businesses were publicly traded companies, the stock market would be in shambles. While corporate profits are at record levels as a share of GDP, small businesses are still struggling to turn a profit.
With the dismal news that our economy actually contracted in the fourth quarter of 2012, it isn't any wonder that more small firms expect their real sales volumes to fall, few have plans to invest in new inventory, and hardly any owners are expanding or hiring. Owner pessimism is certainly not surprising in light of higher taxes, rising health insurance costs, increasing regulations and just plain uncertainty. The President will address the state of our nation tonight, but he apparently won't have much that's positive to relay to our small-business community—not while the pall of uncertainty over economic policy continues to depress investment spending and growth."
In that regard Mr. Dunkelberg was correct. There was little good news for small businesses in the latest State of the Union address - most specifically being the potential increase in the minimum wage to $9 an hour which is an additional tax on small business owners already struggling to make a profit. This weak economic outlook, as shown in the chart below, which is at record lows is also curtailing plans for hiring and capital expenditures which are required components to create stronger economic growth.
IMPORT - EXPORT PRICES
Import and export prices both improved marginally in the most recent reporting period yet remain in recessionary territory as shown in the chart below. Negative net export prices (export less imports) are likewise at levels that are more normally associated with weak economic growth and a negative impact to corporate profit margins. Of course, this is why we continue to see fairly weak revenue growth with the bulk of corporate profitability driven by accounting gimmickry, cost controls, temporary hires and increases in productivity.
What net export prices do tell us currently is that the economy can continue to struggle as long as the Federal Reserve maintains the liquidity drip. However, outside of life support, the economy would likely have already slipped back into an coma.
Lastly, the retail sales data came in weak, as expected, as the impact of the payroll tax hike bit into discretionary incomes. For the month of January retail sales increased by a very modest 0.1% which was about in line with expectations but well below the gains seen during December.
In terms of the economy, however, it is not the single data points that we are interested in but the trend of the data that paints the broader economic picture. Consumption makes up more than 70% of the economy so the trend of retail sales tells us much about the current state of economic growth. The chart below shows that retail sales have peaked for the current economic cycle and even with a sharp surge in incomes in December, have been unable to do more than temporarily stabilize.
The dotted red line in the chart above is the weekly retail sales data from ICSC which confirms the weakening trend of retail sales data. The latest data point showed a sharp 2.5% decline in retail sales in the latest week pushing the index to the lowest level since May of 2011.
These are just a few of the most recent data points which do not currently support the views of a strongly recovering economic environment in the months to come. However, it is important to understand that the economy can, and most likely will, continue to "struggle" along its current path as long as the liquidity pumps remain turned on.
There are several issues in the near term from the continuing resolution, debt ceiling debate and sequester which could derail the economy if they are not handled correctly. The concern, economically speaking, is that a fiscal policy mistake could lead to effective increases in taxes with simultaneous decreases in spending that negatively impact growth. With a stock market that is currently priced for perfection - such a policy mistake could lead to a very sharp reversion in price.
The bottom line is that ex-artificial stimulus, and other fiscal supports, there is little in the way of an economic recovery currently going on. In order for the economy to reach "escape velocity" it will be on the back of sharply rising employment and wages which are needed to prime consumer spending. This is not happening as the the gap between wages and rising cost of living continues to drive the consumer to shore up that shortfall with more debt.