This past week financial markets paid little attention to positive economic news and tread water while awaiting announcements from the US Federal Reserve and the European Central Bank (ECB). Given some very strong statements by the ECB the prior week, markets were expecting concrete action from it on Thursday. When the ECB merely rehashed old bromides, markets fell apart. But a far better-than-expected US jobs report on Friday, as well as a favourable report from the Institute for Supply Management (ISM) on the non-manufacturing sector, set markets on fire on Friday.
Participants could no longer ignore the fact that the US economy was clearly not falling apart. With central banks distracting investors, many failed to notice that not only did the economic data not get worse, but also July data showed improvement from June. US home prices were up, auto sales came in as expected, construction spending was up, personal income continued to inch up, and initial unemployment claims continued their downward trend on a three-month, moving-average basis. Same-store sales reports on Thursday truly took markets by surprise. The monthly ICSC data showed same-store sales growth of 4.6% in July, the best showing since March. Then on Friday, a stronger-than-expected employment number forced all the nattering nabobs of negativism to reconsider their "we're in a recession now" mantra, a least for a day.
Markets Loved the Employment Report; I Liked the Retail Sales Data
While investors went gaga over the employment numbers, I was a lot more excited about the US retail sales data for July and continued improvement in the S&P/Case-Shiller Home Price Index. The employment data had a little short-term help from seasonal factors and shifting auto industry summer shutdown practices. And taken on a year-over-year basis, July employment numbers were little different from their 1.8% long-term trend. On the other hand, the July retail sales report finally reversed several months of weakening spending data. The recent weakness in spending seemed odd because consumer incomes have seen some of their best improvement during the last two quarters, compared with the recent past. With increased spending in July, the income numbers make a little more sense again.
The Economy Is Neither a Roller Coaster, Nor a Sporting Event
The media loves to talk about an economy that races ahead and then slumps, like some poor Olympic competitor. But the reality is that the world is a little more stable and flexible than the media would have you believe. When something goes amiss, consumers react and adjust. Gas prices go up, we buy smaller cars. Jobs get scarce, we go back to school. We adapt, but sometimes not fast enough for the short-term economic indicators.
It is really easy to fall into the trap of looking at monthly and quarterly numbers and annualizing them--and seasonal adjustment factors that have run amok aren't helping any, either. The table below shows an economy that is flowing at a steadier rate than many give it credit for.
The US Economy Is More Stable Than You Think
