Economic Trends Don't Paint A Robust Picture
Last week was spent in Carlsbad, California at the 9th Annual Strategic Investment Conference. Because of my absence I did not have a chance to follow up with many of the very important economic reports that hit the wires. Over the last several months we have been cautioning against the bullish exuberance due to the varied anomalies that were skewing the economic data. This past week is showing the early development of those warnings on a variety of different measures from manufacturing related data to employment.
We wrote early last week after the release of the ISM report that: "This [ISM] report, however, is a bit of head scratcher given the weakness in a variety of previous manufacturing related weakness in recent weeks. Here is the rundown of the recent reports so far:
- Chicago Fed National Activity Index (a broad index of 85 components) declined from .07 to -0.29 in March
- Chicago PMI declined from 62.20 to 56.20 in April.
- Richmond Fed Manufacturing Index increased from 7 to 14 in April. This was a rebound after a sharp decline of 20 to 7 in March.
- New York Fed Manufacturing Index decreased from 20.21 to 6.56 in April
- Philadelphia Fed Manufacturing Survey dropped from 12.5 to 8.5 in April
- Dallas Fed Business Activity Index declined from 10.8 to -3.4 in April
- Kansas City Fed Manufacturing Index dropped from 9 to 3 in April"
It was quite evident that the quirk in the ISM report was an outlier from the bulk of the regional surveys. The chart above is the STA Purchasing Managers Index which is a composite of the Chicago Fed National Activity Index (a broad measure of 85 sub-components), ISM Purchasing Managers Index and the Richmond, New York, Philadelphia, Dallas and Kansas Fed District manufacturing surveys. We have then smoothed the index by using a 3-month average.
What is important to understand is that while we had a rebound in some of the manufacturing reports in recent months there has been deterioration in the overall trend of the reports. Currently, the 3-month average failed to attain a new high post last summer's economic slowdown and now appears to be rolling over. As we have stated previously, the decline in the economy last summer due to the Japanese earthquake related interruptions, consumer contraction due to the debt ceiling debate and the Greek crisis was very close to a recession. However, the intervention by the Fed through "Operation Twist" combined with the LTRO's from the ECB combined with a bailout from "Mother Nature" all combined to give the economy a much need revival.
Speaking of the ISM, one of our favorite indexes is the ISM Composite index which is an average of both ISM surveys. As we stated previously, while the manufacturing index jumped in April it was more than offset by the services index. The composite index declined in April to 54.7 from 56.2 in March and 57.5 in February. While there has been much talk about "no recession" in the economy because of these recent improvements it is important to note that the composite index surged sharply to 55.4 just prior to the last recession. The index recently surged and peaked at 57.5 in March. Individual data points can be very misleading. This is why we urge you to look at the trends of the data.
I am not saying that the economy is about to drop into a "recessionary state," however, the trend of the reports are certainly not encouraging. The question of the sustainability of the rebound has most likely been answered and we will be hearing more talk about QE3 in the coming months ahead.
Corporations, as a whole, are the last to "fire" and the last to "hire". This is why employment is a lagging indicator of the economy but it is a critically key component to the strength and sustainability of it. The recent employment report released by the BLS of 115,000 jobs in April was very dismal once you dug below the surface. Yes, we created jobs in the latest month. However, as the chart shows you, we are currently about as far away from trend line growth as have been since the last recession ended.
Here are some of the important numbers from the latest report:
- Employment to Population Ratio - 58.4% and near the lowest point since the end of the recession.
- New Entrants To Unemployment - 1,384,000 which is only slightly below last months record peak of 1,433,000 which broke the 1983 record of 1,413,000.
- Full Time Employment declined by 812,000 jobs
- Part Time Employment surged by 508,000 jobs
- The ACTUAL Employment level (16 and over) DECLINED by 169,000 jobs in April following a 31,000 job decline in March.
- The percentage of individuals 16 and over participating in the work force declined to the lowest level since 1981 at 63.6%. The difference is that in 1981 the participation rate was on rising and not falling.
- The duration of unemployment still hovers near record highs at 39.1 weeks.
- The number of individuals considered "Not In Labor Force" surged to a new record of 88.4 million due to an increase 522,000 in April. This is the single largest reason for the decline in the unemployment rate to 8.1%. Roughly 1 in 4 individuals are not counted when calculating the unemployment rate.
The "real employment" situation is still quite dire and the large and available labor pool is keeping wages under extreme pressure. While inflationary pressures have risen, food and gas consumes more than 20% of wages and salaries, real wages have remained stagnant at best. This is why currently we see a record of more than 46 million people of food stamps, a record high of more than $8 million claiming disabilities and student loan debt soaring as it is used for consumption rather than education. The problem is that this is all very unproductive to long term economic growth and is ultimately unsustainable.
Without real aggregate end demand by consumers there is little reason for businesses to hire full-time employment. This is why we continue see temporary hiring leading the way. The secondary problem is that the jobs that are being created are lower wage jobs which continues to erode personal incomes. In order to sustain the standard of living the decline in personal incomes, as we stated in the "Consumption Dysfunction Continues", has to be offset either by a reduction in saving rates, currently near lows at 3.8%, or from increases in consumer credit. Unfortunately, this is the game that we have seen play out before with negative consequences.
The release of the consumer credit report from the Federal Reserve was the most telling when it comes to the underpinning of the economy. We stated in our report on the consumer that: "...never 'count the consumer out.' Individuals are very creative in finding ways to get the things they need to fulfill their lifestyle even when it is a detriment to their long term financial stability. However, there is a limit, or 'wall,' to the amount of the economy that the consumer can support on their own. This is why it is important to keep month to month variations in context with longer term historical trends. Personal consumption is ultimately a function of the income available from which that spending is derived. As such, the current decline in the growth rate of incomes, without the tailwind of easy credit, poses a much greater threat to the current level of anemic economic growth than we have seen in past cycles."
While the media continues to look at one economic report to the next I urge you to look at the "forest" of reports. The sustainability of the current economic environment is very questionable and is extremely susceptible to external shocks. The recent elections in France do not bode well for a resolution in Europe which is in desperate need of finding "cohesion" in the next 12 to 18 months to tackle the reforms needed in the Eurozone. The recession that is currently taking hold in the Eurozone also has negative implications to the domestic economy and, like a patient just recovering from extensive surgery, the U.S. "immune" system is not strong enough to fend off a contagion from Europe.
This is why Ben Bernanke, along with the Federal Reserve, continue to reiterate an accommodative monetary policy stance. While these short term fixes may keep the economy from slipping into a recession in the short term - the long term consequences may be far more damning to the living standards of average Americans.