Consumer Balance Sheets Continue to Improve
The Fed's Z1 report showed that consumer balance sheets continued to improve in the first quarter of 2011 as consumer net worth moved up from $57.1 trillion in the fourth quarter of 2010 to $58.1 trillion, a 1.7% increase (4.1% when annualized).
To put that number in some perspective, the US GDP runs about $15 trillion per year and consumer incomes run about $12 trillion per year. In terms of the last economic cycle, net worth got as high as $66.7 trillion when the economy was going full steam ahead in 2007 before stocks and real estate simultaneously collapsed in 2008 and early 2009, driving the figure as low as $48.7 trillion. Now consumers have recovered just over half of what they lost. Stocks and other financial assets have accounted for the largest portion of this recovery with decreased debt not far behind. However, falling real estate prices have continued to weigh on the data as total real estate held is down for both the quarter and for the full recovery.
Another interesting way to look at the Z1 is to look at debt in the major sectors of the economy.
Consumer debt continues to fall (for the seventh quarter in a row). Business debt is growing again, though modestly. (And I would guess if I net corporate cash against debt, there would have been no increase in the net corporate debt.) Federal government debt increased at double-digit growth rates for seven quarters in a row before settling down to a 7.8% growth rate in the first quarter.
Overall Debt Growth Fell From Near 10% to Just Over 2% During the Last Six Years
The overall slowdown in total debt growth is truly astounding. In the 2000s, debt growth for the whole economy ran consistently at a 7%-9% rate. Over the last two years, debt growth has run a much more meagre 2%-4%. In fact, in the first quarter, debt growth was just 2.3%. And the small increase was a result of the federal government deficit increase swamping declines for consumers and state and local governments. By the way, none of the debt data or growth rates are adjusted for inflation, which would probably just about erase the increased debt levels. Later this month I hope to offer a more detailed analysis of the Z1 report, which is only issued once a quarter.
Headline Retail Sales Likely to Show a Decline in May
The consensus forecast for combined, comprehensive retail sales as calculated by the federal government declined by 0.2%, led by a drop in auto and gasoline sales. Excluding autos (but not gas, which will also decline both in gallons and price per gallon), sales are forecast to rise 0.3%, which is still off from April's 0.6% jump.
The numbers themselves don't worry me. In fact, adjusted for inflation (see below), there is likely to be little change in growth rates between April and May. However, I am sure the media will latch on to a potential decline in retail sales as "proof" that this economic recovery was finished. The fact that the decline is due to Japanese supply chain issues and falling oil prices (and maybe poor apparel sales due to cool weather) will be buried well under the negative headline number.
The news this week won't be new--auto sales were released on June 1, individual chain store sales including the poor apparel numbers were released June 2, and gasoline prices are available daily from many sources, including AAA. About the only new data in the report will come from the volatile restaurant sector that was hard hit in April. The normally stable grocery sector has also had its share of violent ups and downs lately.
Inflation: Is Some Slowing Possible in This Week's CPI and PPI Data?
Consensus estimates for this week point to a sharp deceleration in inflation led by lower energy prices. The CPI is forecast to be flat and the PPI to grow a very modest 0.2%. If these results come to pass, they would represent a dramatic improvement over the 0.4 % and 0.8% levels of just a month ago and even higher numbers the month before that.
Falling gasoline prices are certainly helping, potentially taking 0.2%-0.3% from the overall inflation rate. However, I think the projections for no CPI inflation for May could prove a little optimistic. I believe that higher rents and new and used car prices will push the headline inflation number into positive territory, perhaps to 0.1%-0.2% for the CPI. Still, I will take any improvement I can get in this absolutely fundamental indicator.
Maybe Manufacturing's Declines Will Slow in May
Based on adding up individual Japanese auto companies' production figures, auto production in May should remain relatively flat compared to April, after a hefty decline in April. Honda (HMC) and Nissan (NSANY) data look a little better, while Toyota's (TM) production figures were pretty dismal.
Given that auto production was basically unchanged between April and May, combined with some warm weather on the East Coast (driving utility usage), I expect positive small growth in May's industrial production figures. My May growth estimate of industrial production is 0.2% compared with 0.0% growth in April. I suspect that both the Philly Fed and the Empire regional purchasing manager surveys are likely to improve after April's declines, which were largely due to auto issues. Most of the Japanese transplants are starting to gear up for a return to more normal levels of production in June.
Will Inventory Growth Slow?
Inventories moved up 1.1% in April, slower than overall sales growth. Inventories should grow even less in May as production slowed, as did imports, even as consumers continued to buy. Slow growth in inventories, if not reversed by the end of the quarter, could prove to be an impediment to GDP growth in the second quarter.
Housing Starts: More of the Same
Housing starts look to increase modestly from 523,000 in April to 535,000 for May. High prices (relative to existing homes) and poor employment data continue to weigh on the sector. Recall that at their peak, starts ran over 2 million units on an annualized basis. Current run rates aren't meaningfully above the lows of this cycle.
