<<The View From Kashdan 1/24
Deconstructing last month's retail sales figures shows a weakening long-term trend, with or without the juice provided by auto purchases. And the picture emerging from various economic indicators, along with anecdotal evidence from Corporate America, looks a lot like a double dip in formation.
-- Retail Sales: The Big Picture
Retail sales put in a relatively strong showing in December, rising 1.2% on the month. What makes some observers less than jubilant, though, is that the gain came entirely from auto sales, and the month's overall trend continued to be weak on an historical basis.
It may be tempting -- for those of a bearish persuasion, at least -- to strip out auto sales and then decry the weakness of the report. But if consumption is what we want, then why should it matter if people buy cars instead of, say, DVD players? In either case, one can argue, we've merely borrowed from future demand. What the results indisputably show, however, is that consumers are quite sensitive to price. Auto sales have spiked whenever the major companies showered buyers with incentives.
More important, perhaps, is the long-term trend. With or without auto sales, the year-over-year growth in nominal retail sales has remained in a fairly narrow band of between 2% and 5% over the past couple of years. Compare that to the more than 10% growth rate that prevailed in late 1999 and early 2000, and to a similar peak in the mid-1990s.
Although we happen to be part of a minority who thinks that consumer spending does not necessarily make a healthy economy, we are watching consumption closely because we are convinced a slowdown will signal that consumers are being forced to repair their balance sheets. That would be a healthy sign, but it would not come without short-term pain. Nonetheless, when that fateful day finally arrives, some people will at least be enjoying their shiny new cars -- unless the repo man gets there first.
-- Recovery Watch
The market's quick surge at the beginning of the new year made it fashionable once again to expect the imminent return to trend growth for the economy, and if not bull market returns, at least a respectable showing for stocks in 2003. Surely, with all the stimulus in the pipeline, not to mention a look at the average length of recessions and bear markets, the doom-and-gloom set has had its day in the sun, right? Well, apparently not yet. The economy just isn't falling into line.
Even the stock market has reneged on its early promise. Pretty much all the market leaders have been forced to dampen analysts' enthusiasm for a recovery that is looking not so imminent. The list of party poops includes General Electric, Microsoft, IBM, Sun Microsystems and Intel. To take one example, Intel beat the numbers (if anyone still cares), but another machete-like cut to capital spending did not exactly inspire confidence. Sun Microsystems didn't even bother making a forecast for its fiscal third quarter, leaving some Wall Street analysts with nothing to talk about.
The pervasive gloom is also reflected in the recent economic data. Nonfarm payrolls fell again in December, and the prior-month figures were revised lower as well. Of course, as everyone is quick to point out, payrolls and unemployment are lagging indicators. But few had imagined that employment would still be lagging at this point, nearly two years after the official start of the recession. The Fed's "Beige Book" survey also noted "sluggish" activity through mid-January (the Dallas report used "anemic" as its adjective of choice), "consistently weak" consumer spending and "weak demand and excess capacity" in the manufacturing sector. Dean Baker, writing for the Financial Markets Center, points out that the regional Federal Reserve Banks are predicting an upturn two quarters down the road -- it's the same prediction that's been repeated since the fall of 2000.
Even the phrase "double dip" is making something of a comeback (and not only with Stephen Roach of Morgan Stanley). The drop in industrial production during December was an unwelcome surprise, and foreshadowed a much less impressive GDP report in the fourth quarter compared to the third. Since January 2000, factory output has risen less than 1%, the worst showing since 1983. Capacity utilization is also on its way down again, as seen in the following graph.
On the plus side, housing starts showed a surprising jump in December, rising 5% to their highest level since 1986. Since this increase is largely the result of lower interest rates, can we rely on starts to continue to boost consumption? The Economist remarked recently that, "even if house prices do not plummet and interest rates do not rise, but both merely stabilize, the boost to consumer spending will surely fall away." The reason is that the pace of mortgage-equity withdrawal depends on the change in interest rates, not their level. About the best you can say for the economy's near-term prospects is that inventories are low, which means higher production if demand picks up, and fiscal and monetary policy is stimulative. The problem is, "stimulus" isn't what it used to be.
A Fed official did his best in a recent speech to emphasize the good news: "While there obviously are still downside risks in the outlook," said Alfred Broaddus, president of the Richmond Fed, "for the first time in a while, I think the chances that actual growth will exceed the consensus forecast somewhat are about equal to the chances that it will come in below it." We want to party with that guy!>> |
