Reading unclear economic tea leaves . . . . . . .
A Telegraph Column By Tony Paradiso
Published: Sunday, Apr. 17, 2005
The news came fast and furious. Deficits, retail sales and the Federal Reserve meeting minutes were among the myriad economic reports released last week. The data was sufficiently dizzying to confound experts and novices alike.
The stock market’s manic behavior illustrated the level of confusion. On Tuesday, with the release of the Fed’s minutes, the Dow experienced a 147-point turnaround to close up 59. However, when the retail numbers hit the next day, the market tanked, closing down 104.
Not that the stock market is a valid economic indicator. If it were, stock charts wouldn’t resemble a Rorschach test. Although, I must admit I enjoy the nightly recaps in which TV weenies attempt to explain why the market reacted as it did. As if they actually have a clue.
Nevertheless, at the risk of joining the ranks of the weenies, I thought it might be useful to try to make sense of it all.
- First, the less-than-stellar retail numbers. Excluding autos and gas, overall sales fell 0.1 percent. Clothing sales were hit hard, declining 1.9 percent, while department store sales dropped 2 percent.
Why exclude cars and gas?
Car sales are too volatile to be useful, and gasoline sales increased because prices were up. Omitting them provides a better indication of everyday consumer behavior.
- FYI: Following up on my General Motors diatribe, Ford reduced its 2005 revenue forecast, largely because of a decline in sales of big trucks and SUVs.
I’m stunned.
According to Ward’s Automotive Reports, first-quarter sales of large SUVs fell 14 percent, while sales of the more fuel-efficient crossover SUVs increased 15 percent.
Curious. Could it be that rising energy costs have altered consumer behavior?
The shifting auto sale patterns, combined with the retail numbers, indicate consumers may be running out of steam. Two consecutive downward months in the Conference Board’s confidence index seems to support this conclusion.
- As usual, I caution everyone that the data remains choppy, making extrapolating risky. Regardless, in evaluating the totality of data, I stand firm in my belief that growth is slowing more than most people are estimating.
Not that the bandwagon of those predicting slower growth is sparsely populated. With the World Bank and International Monetary Fund issuing downward reports, that bandwagon is getting crowded.
The IMF forecast calls for global growth to slow from 5.1 percent in 2004 to 4.3 percent this year. It estimates our economy will expand 3.6 percent, slightly better than its September forecast. They should have quit while they were ahead.
The World Bank believes growth has peaked and that the pressure to address global imbalances is growing. Although the World Bank segments things differently, it anticipates a decline in growth almost identical to that predicted by the IMF.
- Additionally, most analysts are now resolved to economic anemia for Japan and Europe. That might explain why our trade deficit hit another record of more than $61 billion in February.
The trade deficit, a measure of the difference between imports and exports, is an important indicator because any deficit must be financed by foreign investment. If overseas investors decide to go elsewhere - and there are indications this is beginning to occur - it could materially affect our economic growth.
- Speaking of deficits, the federal government reported its monthly financial condition. The suspense here isn’t whether things are positive or negative. Rather, it’s the size of the hole we’re digging each month. The answer: $71 billion for March. Unbelievably, that’s an improvement over March 2004.
To date, we’re about $294 billion in the red, slightly better than the $301 billion deficit at this time last year. Chalk up one for the president. He said he would reduce the deficit, and, by golly, he’s doing it.
The fact that it’s happening at a snail’s pace is a technicality. Patience is a virtue. Who cares that it will take a hundred years to return to the black? What’s important is that we’re making progress.
- Last are the minutes from the March Federal Reserve policy meeting. These provide insight into the thought process behind the Fed’s interest-rate decisions.
The market waited with bated breath to see if the Fed would maintain its current policy of “measured” rate hikes or lean toward larger increases. Believing the Fed would stay the course, the market reacted positively.
But the next day, the headline in the Wall Street Journal read: “Fed Hardens Its Stance on Inflation.” The article’s conclusion that higher interest rate hikes were in the offing was diametrically opposed to the consensus of the previous day.
Any wonder confusion reigns?
Despite many experts insisting things are peachy, I disagree. Employment remains lackluster, energy prices are taking their toll and key international markets are flatlining.
Mix in the Federal Reserve’s intent on stifling growth to keep inflation in check, and it adds up to 2.5 percent to 3 percent growth.
_ Author, professor, and radio and TV commentator Tony Paradiso is a marketing, management and corporate governance expert and CEO of Paramar Consulting. Additional commentary and information can be found on his company’s Web site: www.paramarconsulting.com.
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