Cusp Points & Consequences: a Little High Frequency Data
Well this week will bring some eagerly awaited economic data - particularly on home sales and the advanced GDP guestimates. The latter in particularly tends to get revised severely so it'll be hard to put too much stock even though it will be taken that way on it. There are a couple of critical crossing points that will start to surface here though.
Update:Northern Trust Daily Commentary (July 23):
- Q2 Real GDP Growth Forecast: Chicago Fed at 2.7%; Consensus at 3.2%
- Inflation Expectations: Tolerance Threshold is Tough
One way to approach this is to look at the higher frequency montly data and see what it tells us about the outlook for consumer spending, now and in the future, as well as the business outlook. Let's start with a little table of the key variables and then take a look at some charts - which always help me see things a little more clearly.
But before diving into the high-frequency data let's set the table by reviewing the basic consensus that has emerged and key points therein:
- First, the general consensus is that growth (& therefore/thereby profits and earnings) is slowing but decent for the last half of the year. In fact the expectation is for something between 3-3.5% annualized growth even though everyone admits consumer spending is slowing. The expectation is that business investment will make up the difference along with an improving trade picture. The problem (as we discussed in an earlier post looking at relative contribution and performance of the various components) is that a lot of ground might have to be made up. Of course this gets even more interesting when the Fed's implicit growth rate has been lowered as it was last week.
- Part of the problem is that while it's being grudingly conceeded that GDP growth might be lower than expected that the impact of housing, MEW and the ripple effects of a widening credit crunch are likely being under-estimated. We've been hearing for well over a year that the end of the housing downturn is in sight only to be surprised by yet another set of homebuilders announcements and housing data. The problem there, and the outlooks are now moving toward - at best - a bottoming in late '08 not early this year as was true not to long ago, is that the lag timing of housing downturns keeps getting under-estimated. There is no more sticky market than housing so it takes a long time for prices to adjust down. Similarly it takes a long while to permit and start construction so the current employment levels haven't been as impacted as expected because a lot of work is still going on. Finally consumers used their houses as ATM's but with the re-pricing of home equity that's coming to an end.
Part of the problem is that the high-frequency data updates thruout the month so at any point in time some will be missing and in process. Hence some "missing" entries. Here we have YoY% changes in som key data, oftentimes a smoothed 3MoMA to dampen things a little bit. For Consumption indicators we have monthly real consumption (PCER), real retail sales and auto sales. For future consumption we have wage and job growth - wages drawn from average real weekly earning data. And New Home sales. And for the business outlook we have industrial production and durable goods orders ex-aircraft.
Take a look at the chart - that's not a set of numbers that makes me feel sanguine just on the base economy - more sanguinary. And that's before we factor in the various deeper and more
hidden issues mentioned above. One thing to notice about last year that shows up clearly is the clear upkick created by lower oil prices on last year's consumption. Last Spring's expectations of lower spending, lower growth and increased inflation risks were pretty well grounded until we got a huge drop in oil prices. That "tax" is going to be working the other way now. Well real consumption recovered but is showing a downtrend while real retail sales falterred a bit in June after a slight uptick in May but both are consistent with the trend (shown) downward. Meanwhile Auto sales (on the r.h. scale) took a huge drop last year but are still showing negative growth - despite the chances for better YoY comparisons. Longer-term indicators aren't particularly strong either. Employment growth seems to have, at best, floored off at about 1.5% which doesn't increase demand while real wages, after showing a strong uptick - and the first in this "recovery" - are showing a much stronger downtrend. In other words there are not indicators of sustained consumer demand, let alone growth in demand.
Shifting to the business side of the house take a look at the accompanying chart. For comparisons PCER is left as is New Home sales (partly because residential construction is the "other" major driver of investment spending and has been so crucial this cycle). The other two key indicators are Industrial Production and durable good orders ex-Aircraft. And I have to say those definitely don't look well. Take a look and see what you think. Orders have shown a fairly steady downtrend. It doesn't look as if the much ballyhooed recovery in business spending is underway, or at least to the extent it might be, with much strength. But it's industrial production that shows this the most clearly and most recently, since the June data came out last week. In fact after a very slight May uptick which in now way disturbed the fairly steep downtrend it tipped back down again in June.
Taken all together then one would have to say that an outlook for Q2 GDP growth of 3.5% is pretty optimistic. And an outlook for the last two quarters that results in 3% or better growth for the year seems highly unlikely. Paul Kasriel of Northern Trust has suggested, as have others, that we might see an uptick in business spending in Q2 as inventories are re-built but that the 2nd Half outlook is not particularly good. Calculated Risk put up an interesting post a while back (discussed in our prior post on GDP components and outlooks) that used the available two quarters of consumption data to make guestimates. For the first two months of Q2 personal consumption spending rose at a rate of about 1.7% annualy. That means that the factors supposed to get us over the hump will have to have big upticks.
As they say - may you live in interesting times. Oh, I forgot. We ARE living in interesting times. Sorry