Income and Spending Data Look Weak Until You Adjust for Inflation
Despite the fact that most of the data were already in the negative GDP report released two weeks ago, the market seemed shocked that disposable income grew a measly 0.1% and consumer spending fell by 0.1%. However, the data showed an improvement in trend when adjusting for inflation. The inflation- and non-inflation-adjusted data showed opposite trends. Inflation-adjusted consumer incomes were up 0.3% in June (3.6% annualised), their best performance since January. The non-inflation-adjusted data showed the worst growth of the year. The media choose to focus on the non-inflation-adjusted data, which is the wrong way to look at it. For July, continued tame inflation, a jump in employment, and the largest monthly increase in hourly real wages of 2011 mean real consumer incomes are likely to experience growth just as fast as June's 0.3% jump.
Consumption Lacklustre, Held Back by Autos and Gasoline Purchases
The story on the consumption data was much the same if not as dramatic or quite as positive as the income data. The recent income gains will take a month or two to work their way into the spending data. Note that the trend in the non-inflation-adjusted consumption data look horrendous, while the inflation-adjusted data show we have broken a modest downward trend. May and June consumption data were also sharply depressed (both inflation- and non-inflation-adjusted data) by falling auto sales more than anything else (related to Japanese supply chain issues, depressed inventories, and resulting high prices). Given a general positive chain store sales report for July and improving auto sales, I suspect July consumption figures will be even better on both an inflation-adjusted and a non-inflation-adjusted basis, as shown in my estimate below.
Auto Sales Rebound from Supply Chain Issues
Auto sales had been a real bright point in the economy in the early part of the year before falling apart in May and June because of a shortage of Japanese cars. U.S. dealers took advantage of the opportunity by raising prices and cutting incentives on all cars. That in turn cut demand even further. As the Japanese factories based in the U.S. return to normal, I suspect more discounts and higher unit volumes are just around the corner. Even with just a small rebound in supply and no price relief, July sales looked a lot better than June. July car sales are not consistent with an economy that is falling apart.
Employment Data Muddled by Seasonal Adjustment Factors
It now seems clear to me that the seasonal adjustment factors have seriously blurred the monthly jobs report. The numbers this spring were aided by seasonal adjustment factors, while the May and June data were overly deflated. A decent jobs report for July, a month reasonably untouched by seasonal adjustment factors, reinforces my view. Also looking at the data on a year-over-year basis (where the same messed-up seasonal adjustment factors are applied to equally to both years) and using a three-month moving average to smooth the bumps, the employment data become a lot clearer and a lot steadier. The trend looks better, as well.
The 1.6% figure represents job growth of 150,000 jobs per month, which I believe represents an appropriate benchmark for employment growth. The low 80,000 growth rate that we saw in June and the high of 261,000 we saw in February were equally unrealistic. I admit to being faked out by the strong data early in the year; I'll try not to let it happen again. While an improving auto industry, a stronger gas production industry, and better health-care data might get us close to a 200,000 rate, we are going to be hard-pressed to get much better than that without housing beginning to kick in. For more details on the July jobs report, see last week's employment video.
Initial Unemployment Claims Trending Down Again
Initial unemployment claims trended down through most of 2011 before beginning to rise sharply in April. I can't say whether it's just happenstance, but the upward spike did coincide with the U.S. production problems of the Japanese auto producers. As those production problems were fixed in June and July, claims started to fall again. While seasonal adjustments are appropriate, unadjusted data for the most recent week were at the lowest level of the recovery: 339,348.
Nonresidential Construction Data on the Mend
Even though I usually don't bother to report on construction data, I wanted to show the true breadth of at least slightly positive data that we got last week. News on nonresidential construction is improving if not quite what one would call booming. Nevertheless, it does show slow and steady forward progress. Both the sequential and the year-over-year data look better. Again, this is not indicative of an economy that is falling apart at the seams.
Manufacturing Data Looking Weaker
The only bad news last week in my mind was a sloppy manufacturing sector. Below, Adam Fleck, a member of industrials team, sums up the data; It's not all that pretty, either in the U.S. or abroad. However, I caution that manufacturing data aren't particularly good at predicting recessions. The PMI index slipped below 50 four times during the 1990s and proceeded to produce just one recession. Also, though the PMI has been on a relatively strong downward trend lately (after some pretty hefty increases during the last 12 months), employment data point to a manufacturing economy that has steadily added new jobs, albeit at a glacial pace. It seems to me that employment growth in manufacturing would not have continued if company managers were fearful the wheels were coming off the wagon.
ISM manufacturing survey confirms near-term growth is slowing, but input price declines are a positive. Last week, the Institute for Supply Management's Purchasing Managers Index (PMI) measured 50.9 for July; while still indicative of growth, the metric is the lowest since July 2009. Although the index of input prices--at 59--showed the slowest growth in about a year, the overall reading reflected the worrisome tone we've heard from most industrial companies' management during recent quarterly earnings reports. Most troubling, new orders fell below 50--the key demarcation between expansion and contraction--for the first time since June 2009. Inventories also fell dramatically.
Eurozone Markit manufacturing PMI was also markedly slower. According to the authors of the report, the eurozone region's final July 50.4 PMI reading (in line with earlier flash estimates) was the lowest since October 2009 and fell from 52 in June. Only Italy showed sequential strength, climbing back above 50. Both Spain's and Greece's readings remained below 50, and Germany, France, and the Netherlands showed slowing expansion. Per Markit, declining new orders drove the reduced PMI, another negative sign for European manufacturers.
China's HSBC PMI is indicative of reduced industrial production growth, albeit at a high level. China's final July PMI slipped to 49.3 from 50.1 in June, its lowest tally since March 2009. That said, HSBC noted that this level will still support 12%-13% industrial production growth, allowing the Chinese government some room for additional tightening in an effort to further curb input price inflation. Raw material prices, according to the authors, remained muted during the month, a positive sign for industrial manufacturers in the region. In addition, although new export orders reportedly fell for the third month in a row, the rate of decline slowed in July.
Comments on the U.S. Debt Downgrade
Just as we were at our publishing deadline, Standard & Poor's reduced the credit rating on U.S. government debt. Although there might be a knee-jerk negative reaction to the news early this week, nothing new fundamentally was revealed by S&P in its downgrade announcement. The alternatives to U.S. debt for investors looking for large, liquid markets are extremely limited. Even with the Sword of Damocles hanging over the market all of last week (namely the potential for an S&P downgrade), U.S. debt markets were strong all week, at least until Friday. Although rates could back up a little on the downgrade, I am not expecting a large increase in U.S. interest rates.
GDP Table to Appear in This Week's Column
I promised a new GDP contribution table this week, but I ran out of room. Next week will be a slow news week with just some warmed-over retail numbers that should actually look pretty positive. The trade balance is also due, and I suspect that news won't be as good there, as the Japanese begin to ramp up production and exports again. That lack of data should allow plenty of room for a fuller discussion of GDP. A quick hint: the highlight is the important role of exports and the amazing disappearing inventory adjustment that walloped the revised GDP numbers. Stay tuned and stay calm.
