Economic Data Shows Improvement
The recent release of economic data have showed some improvements at the margin as of late. While these improvements in the data are certainly welcome it is important for us to look at the data in terms of their ongoing trends to determine whether the recent improvements are just bumps or a more sustainable improvement.
Two of the most recent data points in the manufacturing factor have come from the Richmond and Dallas Federal Reserve Districts which showed sharp increases in their most recent surveys. These regional surveys showed a much stronger level of confidence by manufacturers in June as opposed to the most recent Chicago Federal Reserve National Activity Index for May which showed some improvement but remained very weak across its broad index.
The Richmond Fed Manufacturing survey jumped from -2 in May to 8 in June with most of its underlying sectors showing improvement as well. The most recent bump up comes within the confines of a bumpy, but improving trend of data since July of 2012. However, with that said, the improvement comes within the confines of a downtrend in the data from the peak of the economic recovery in April of 2010. The chart below shows the changes to the overall index, and the individual sub-sectors, from April of 2010 versus June 2013.
The buildup in raw inventories is likely unwanted as end demand has remained weak. This has led to a reduction in finished goods inventories as companies run lean to protect profitability. Not surprisingly the data shows what we already expected in terms of employment as wages have only increased modestly as the work week has expanded sharply. The pressure on wage growth, due to a large and available work force, is ongoing.
The rest of the sub-sectors from employment to shipments have all worsened significantly over the last 3 years. Despite many bounces in the data along the way the negative trend of the data remains intact currently.
However, tet's take a look at the single strongest region in the entire country. The Dallas Fed Region, which has vastly benefited by Texas and its booming economy due to shale oil and gas production, would be expected to show a much stronger economic survey than Richmond, right? Not so fast.
As you can see in the chart above even the Dallas region has been drug lower by the ongoing economic malaise that has plagued the broad economy since the end of the "Great Recession." The composite index is sharply lower than it was 3 years ago along with every other single category of the report.
The problem is that we are now more than four years into the current economic "recovery" and the economy should normally be moving towards 4% GDP growth versus current expectations by the Federal Reserve of 2.5% for 2013.
The recent improvement in the monthly surveys after a very weak first quarter of this year is certainly encouraging. However, the concern remains as to whether the broader economic drag on the economy, particularly on exports from the Euro-zone recession, are actually beginning to dissipate or if the most recent reports are just a bump within an ongoing downtrend in the data.
Consumer Confidence Up
Consumer confidence continued to improve in June reaching its best level since the bottom of the recession in 2009. At 81.4 in June, up nearly 7 points from a downwardly revised 74.3 in May, pushed the index higher for a third straight month. The assessment of the present situation index also rose for a third straight month to 69.2, also up from a downwardly revised 64.8 in May, along with the expectations index which hit 89.5. All of these numbers hint at general strength in the economy currently, however, like the regional manufacturing surveys above, confidence is an "emotional bias" survey and is subject to very sharp corrections given changes in the economic landscape.
The two real negatives in the recent report is that consumer confidence as a whole has finally attained levels normally associated with the onset of previous recessions. Despite some moderate economic improvement over the last four years the psychological damage to consumers remains severe.
The second negative in survey was the uptick in the "jobs hard to get" category which now stands at 36.9 for June. This is important from the standpoint that despite seeing some economic strengthening in the data as of late it is not translating into job growth that is lagging general population growth.
The chart below shows the "confidence gap" which is the difference between the "present" and "expectations" index. That ratio fell from -15.8 to -20.3 in June and is down sharply from the -3 reading in March. The chart also shows the index of "jobs hard to get" overlaid with "jobs are plentiful" index.
The decline in the "confidence gap" has historically indicated the onset of economic recessions. However, given the fact that the "confidence gap" never recovered to positive territory post the last recession it is somewhat currently in uncharted territory. However, in terms of employment the gap between jobs being either "hard to get" or "plentiful" never recovered to their respective normal levels.
Clearly, despite much commentary to the contrary, the employment situation for most Americans remains very weak along with their overall economic confidence. The good news is that there has been a slow and consistent recovery in overall confidence which is consistent with the "muddle through" economic state that currently exists. The problem, however, as stated above, is that we are very long into the current economic cycle. While monetary interventions have been able to postpone the onset of an economic recession to date by pulling forward future consumption; there has been little organic economic growth currently.
Yes, housing activity has increased but much of that has been due to artificial interventions, financial supports, and hedge funds buying large blocks of homes to turn into rentals. The recent spike in interest rates is likely to slow that activity in the near future taking away one of the primary economic "growth" stories as of late. Automobile sales have also been strong but much of that support has come from dealer channel "stuffing" and the widespread use of sub-prime auto loans and dealer incentives. (Note: Auto loans are seeing sharp increases in delinquency rates mostly in the sub-prime area.) Likewise, higher interest rates deter buyers as monthly payments rise.
So, while there is certainly some encouraging news in the most recent economic data, let's be a bit patient and continue to monitor the developing trends. If we can get a few more consecutive months of recovery it should begin to turn the majority of the negative annualized data trends back towards growth. Currently, we are still a long way from returning to levels of economic growth that are consistent with normal economic recoveries in the past and we are already very late into this current cycle.