Economic Trifecta - But No Winners
In the latest data barrage of economic numbers Friday saw the release of the Personal Income and Expenditures report, the Chicago Purchasing Managers Index (PMI) and the University Of Michigan Consumer Sentiment Index. While the PMI and Sentiment Indexes did come in slightly higher it is important to always segregate out the month to month noise from the bigger pictures. The glass-half-full crowd continues to jump on each piece of economic data like it was the last bit of cheese, however, what is more important to know is whether that particular bit of cheese is the lure into a trap.
Let's start with the University of Michigan Consumer Sentiment Index. The index did tick up to 59.4 as the final reading of the month of September from the mid-month estimate of 57.8. However, even with that slight uptick in confidence(?) the index still rings in at levels normally associated with the depths of economic recession and despair. Consumer confidence is critical for economic recovery in the future and the importance of consumptive behavior to create final aggregate demand on businesses is critical to priming the economic pump. As we have discussed in the past while boosting production is key to economic growth - businesses won't increase production until a demand push warrants it. Consumer confidence in the literal toilet doesn't bode well for that push in the near term.
Chicago Institute Of Supply Management Purchasing Managers Index (PMI) is one of the few economic regional indicators not yet in contraction territory and, honestly, is a bit of head scratcher given the other regional indexes that are. However, the PMI release showed that growth in new orders picked up in the Chicago area during September pushing the new orders subcomponent 8.4 points to 65.3. This is the strongest rate of monthly growth since April. This is also opposed to the more broad Chicago Fed National Activity Index (CFNAI) which showed a drop in new orders. The same went for employment which rose 8.5 points to 60.6 versus the CFNAI which also showed a decline. The composite index rose 4.9 points to 60.4
While the report was much better than expected, considering the weakness in a host of other indexes released recently, the important point to remember is that the trend of the numbers are much more important that the number itself. The index peaked in the current economic cycle earlier this year and is in a normal contraction cycle. As you can see from previous peaks this particular index is very volatile and one month upticks are common during the trend of the decline. Next week will see the releases of the Institute of Supply Management Indexes for both Manufacturing and Non-Manufacturing. We will look for other indications of strength to see if the economy might be stabilizing from recent downward pressures.
The final release of the day, and probably the most disconcerting since it deals with so much of the economy, was personal incomes and spending. The numbers were just not good with incomes actually contracting on a month over month basis and spending dropping off dramatically. Personal income in August slipped 0.1 percent, following a 0.1 percent gain the month before. The wages & salaries component declined 0.2 percent after a 0.3 percent boost in July. The weakness in wages & salaries is consistent with the 0.4 percent drop in private aggregate earnings in the employment situation report. Weakness in wages & salaries was led by privates services but private goods-producing industries also declined in August. Not to go unnoticed was the rise in government wages which still goes to show that our tax dollars are hard at work while the average American suffers.
Consumer spending rose a modest 0.2 percent in August and goes to the reason why we most likely will see manufacturing reports still under pressure in the coming months. Spending on durable goods edged down 0.1 percent after surging 2.2 percent in July which is a huge swing to the negative. Spending on nondurables advanced 0.3 percent along with services which rose 0.2 percent. Both of those numbers are significantly slower than the last month.
Inflationary pressures came in a bit softer due to the recent decline in commodities and oil, however, year-on-year, headline prices are up 2.9 percent and the core is up 1.6 percent. The takeaway here is that as wages stagnate and decline consumption is decreased as prices rise. Personal income growth has decelerated with employment growth and personal spending has decelerated outside of catch up in auto sales from supply disruptions. More importantly we are still witnessing food and gas eating up more than 20% of wages and salaries which, for the average American, is keeps the budget under tremendous pressure.
The key point here is that the pent up demand factor appears to be losing steam as employment has not made typical cyclical gains and overall economic growth will need another source of strength-possibly exports. However, since Europe makes up 20% of U.S. exports and they, along with China, appear to be on a brink of a recessionary track it is unlikely that we will find a boost anytime soon.