So, Dearie, What Time IS It, Anyway ?
Well, first off, it's time to dive into some of the latest economic data again and see where we stand. In an earlier post on the nature of this economy we raised the question of whether this was Goldilocks' or Cinderella's economy. In other words was everything just right in this best of all possible worlds or was it a party with the clock ticking away. Hopefully we made a case that it was Cindy's economy and the real debate was what time was it ( Here and Here) Then we argued that the slowdown all the headlines had been talking about for the last several weeks was in fact visible for the last few quarters.
Well the "Slowmotion Slowdown" is continuing based on quarterly GDP data but the higher-frequency data is less encouraging. Not to mention that the critical variables are investment and the housing component thereof and investment is slowing fairly rapidly while the bust in housing, if you really dig into things, looks to really just be getting underway. Just as a sidebar note the spring selling season seems to be a real bust indeed. Bottonline the slowmotion slowdown is continuing and accelerating - we might say that it's moved from 9 p.m. to, let's say, 10:30 p.m.
We'll dig into that argument in two passes. Here on the quarterly data and in a follow-up on the higher-frequency, monthly data that tells us how the minute hand is ticking along.
Let's start with a little data- in this case a table of GDP, Consumption, Investment and related data:
Remember Consumption is 70% of the economy and drives the overall current performance while Investment is the acclerator/ deccelerator that causes it to cycle up and down. Investment is made up of business capex and housing investment, which move to very different rythms. The former on business anticipation and the latter largely on consumer housing decisions. Consumption, over the turn of the business cycle, is driven by wages and employment - slowdowns there mean lower spending eventually. And industrial production will influence business capex similarly.
While the preceeding table is the raw data it's easier to figure out what's going on by looking at the year-over-year (YoY) % changes:
While GDP slowed in Q1 it wasn't asmuch as the headlines had it but still significantly, while Consumption held up very well - all things considered.The rather abrupt decline in GDP has to be blamed on the drop in Investment, which at this point is largely due to an acclerating decline in residential investment. However the future looking indicators aren't that strong either. After an uptick wage growth slowed, industrial production slowed and retail sales (!) slowed seriously. Employment growth is also deccelerating significantly. It's usually easier to see the trends and structural relationships, especially cycles and turning points graphically so let's take that look:
Take a few minutes or so and give the accompanying chart a hard look, if you would. You can see the continuing slowdown in Consumption, GDP having a similar trend up until the last quarter when it turned down abruptly due to housing and Industrial Production not doing badly (bear that in mind when we look at the high-frequency data later).
We should also repeat a key point made in earlier entries - there's a repeated pattern to business cycles where Consumption -> GDP -> IndProd -> Investment. The slowdown from early '06 is pretty clearly visible.
The other ineresting question is how does it look for the future - which is partly (largely ?) a question of how's employment holding up. Let's take a look there then:
In the accompanying chart YoY growth in employment took a major cyclic hit in the bust. Notice that, and this is important, employment lags changes in PCE and GDP, not leads them. In other words the headlines are telling you what happened. The other thing to bear in mind is that, as much as capex, employment decisions are also investments made based on businessess' expectations about future demand growth. Here we see employment reaching a ceiling of about 1.5% YoY growth in the 'recovery' - which has been the weakest post-war recovery for jobs - and not even coming close (with a one quarter exception) to the sustained 2.5% growth we saw in the 90s. So not only is demand slowing but business expects it to slow further.
For all these reasons it seems fair to describe this a Cindy's Economy and to suggest, as above, that it's closer to 10:30 than the start of the ball. And to be fair, it wasn't a great party anyway. As you think about personal spending and investment decisions this is worth bearing in mind. As you think about business planning, hiring and investment decisions, as well as future valuations, it's even more important to keep in mind that it's getting closer and closer to midnight.
And we can see it coming - as much as Cinderella could. The rest of the analogy we'll leave to you.