Hmmm. Is that a trend I see in today’s economic numbers? It sure looks like we’re seeing a recovery led by business and manufacturing, and where consumers still lag.
Today’s (February 26) revised numbers for U.S. GDP (gross domestic product) show the economy grew at a faster than expected 5.9% in the fourth quarter. That’s above the 5.7% growth in the initial numbers for the quarter reported last month.
The extra growth came from inventories—which accounted for 3.9 percentage points of growth, more than initially reported—and from business investment in software and equipment. Investment in those categories grew at the fastest rate since 2000. Purchases of equipment and software increased at an 18.2% rate in the quarter.
Contrast those positive economic trends with the bad news today and earlier this week on consumer confidence.
University of Michigan index of consumer sentiment fell to 73.7 in February from 74.4 in figures announced today. On February 23 the Conference Board reported that its index of consumer confidence dropped to the lowest in almost a year. The index of current conditions, the part of the Conference Board survey that looks at attitudes about the economy now fell to its lowest level in 25 years.
Not surprisingly, consumer spending isn’t exactly growing by leaps and bounds. The revised fourth quarter GDP numbers show that in the fourth quarter consumer spending rose at a 1.7% rate. Economists were looking for a 2% rate of growth. In the third quarter consumer spending had grown at a 2.8% pace.
You don’t have to look very hard to find an explanation. Consumers who don’t have jobs don’t spend money.
The unemployment rate is 9.7% (by the official count) and number of people filing initial claims for unemployment has been on the rise in recent weeks.
Economists are projecting that unemployment will be 9.5% to 9.8 by the end of 2010.
But employment is a lagging indicator. In fact the official unemployment rate usually goes up in the very early stages of an economic recovery as workers who had stopped looking for work or who had accepted part-time work start looking for jobs again. Discouraged and under-employed workers don’t get figured into the official rate of unemployment.
At this stage of an economic recovery businesses, who have a real time read on current inventories and the direction of future orders, usually have a more accurate read on the pace of the recovery than consumers do.
At least that’s usually the case. And if this recovery is going to follow the historical road map, investors can expect consumer sectors to lag the industrial sectors as long as unemployment remains near current levels. For more on what sectors do best at what stages of a recovery see my post https://jubakpicks.com/2010/01/26/for-after-the-correction-think-industrial-stocks-market-history-says-this-is-their-time/
Here’s the deal folks. As long as we have housing prices going down, we have a deflationary effect caused by the destruction of wealth which is contained in that real estate. We would need a huge amount of CPI inflation to counteract that (that would create other problems).
Frankly, I’m not aware of any historical precedent for this specific economic situation.
Ideally, our government should be deregulating the banks to allow them to open their credit spigots. Mind you, that is NOT my suggestion, but merely the most effective way of getting our economy back to normal. Absent that solution, the only way to get the economy back to normal is to pour money on consumers, and hope that their temporary spending spree will snowball.
what made for such a buoyant economy was that you gave money to people for them to buy houses and whatever, which they could never have repaid.
States are penniless, we don’t want to pay more taxes, demand can at best keep level and I have a growing itch it will soon be time to jump to the side lines.
Warren goes to work tap dancing and says you should buy when others fear: Jim, any idea what?
The BusinessWeek article that goes with my previous post:
http://www.businessweek.com/magazine/content/10_10/b4169016613365.htm
Just to make sure you don’t think I am making things up… (Some people do.)
There is always politics in everything discussed in this site. Why is it an issue to determine that there inflation in this country. Who are the ones who claim inflation? Conservatives or liberals? Republicans or Democrats? Who is in the White House? Who benefits in the next elections if people are scared there is inflation? Who benefits if economy gets worse as a result of non-stimulation for fear of inflation? It’s all about politics…
OK… Officially, there is no deflation in America because the CPI index went up .2% in January. Well, I am not sure if that .2% would be -.2% if they recorded the price of potatoes, instead of onions. What I am trying to say is these numbers come with + or – error limits and we might as well be officially deflating.
Some people say the price of commodities (namely food and energy) is important too. Price of commodities while China is trying to deflate its own bubble? Come on!…
Some people say it is unfair in this housing mess to give sheltering costs 30% weight (in the calculation of CPI) . Let’s take housing out, include food and energy but let’s count the percentage of items that went down in price instead of their contributions. 44% of the items in the PCE index went DOWN in price!
Remember, guys (and gals)… We are not debating inflation/deflation to tell each other how our living standards got worse or better. We trying to see if the economy is picking up. 27.4% of our economic capacity is lying idle. It is insane to expect the businesses to raise prices in this climate. It is not ‘manufacture it and they will buy.’ It is ‘show me the money.’
Inflation is here?!! Where pray tell? I’ve just bought new car, re-roofed my home, added a deck and sunroom..all at bargain prices! A friend just bought a new Acer notebook for $400. An Alaskan cruise that I took last year is now 30% cheaper. Restaurants are offer twofer specials right and left. My wife is finding attractive bargains in clothing. The best cuts of beef are frequently on special. Where do you see “nascent” inflation? I see only “deflation”.
Iron ore price negotiations – 80pct hike seen by Chinese
http://steelguru.com/news/chinese_news/MTM0NDk5/Iron_ore_price_negotiations_-_80pct_hike_seen_by_Chinese.html
Let’s take a deep breath…:-)
China has not stopped buying our treasuries!
Here is the revised report:
http://www.treas.gov/tic/mfh.txt
We don’t need to increase taxes and tighten the belts to balance the budget.
To the mall!… We have shopping to do…
I am not going to pretend that I am expert, because I am not, but, arn’t all sustainable recoveries driven by final consumer demand ?
A business lead recovery,, what is that ? Business building up inventories in hope of consumer demand ? Or more likely, it is to re stock their inventory.
The fed, and the banks are holding back money, keeping it out of the economy, in the hope that a high level of unemployment, and a resulting lower velosity of money will hold down inflation.
It seems to be working, folks arn’t spending and inflation is here, just not rampant.
My guru says that we will know when this depression is over when we see a sustainalble growth in the jobs numbers, … that will signal that banks are lending. And with the lending we will see a rise in the numbers of building permits, and with that, we will see resulting inflation, And until we see that, there will be no sustainalble recovery.
But if the banks lend, the inflation will become rapidly rampant, and that will stimulate a rise in interest rates, and that will kill the recovery.
It’s not just Target …
“Kroger lays off 93 part-time pharmacists in Columbus area stores”:
http://www.dispatch.com/live/content/business/stories/2010/02/26/kroger-lays-off-93-parttime-pharmacists-in-columbus.html?sid=101
The rise in unemployment is not just people returning to the job marketplace. Companies are still reducing staff. If Target was seeing the upswing from conversions from consumers that downgraded to Wal-Mart during the Great Recession, then why are they converting formerly salary team leaders to hourly and reducing pharmacy hours to elimiate pharmacists even in stores that had exceeded goals by 5%? Jim, what if Wal-Mart’s sales decline was an indication of consumers tightening the belt further? The reeds tell me it’s getting worse.
We has a similar inventory build-up phenomenon in April 2009.
As far as I understand, businesses just try to follow demand levels which don’t seem to show a clear picture. Manufacturers built up inventories in Q1 and Q4. Why didn’t they build up Q2 and Q3? They should have, if we had a really healthy recovery. Actually Krugman raised this issue back in April in this article:
http://krugman.blogs.nytimes.com/2009/04/08/the-bounce-and-the-revision-thing/
Just like unemployment, inventory is a lagging indicator. Companies express their inventories in terms of sale-months, like 6-month inventory which means inventory that could take 6 months to sell. This also means that businesses optimize their inventory levels based on sale levels. If the policy is to keep 6-month inventory and more goods were sold during the last 6 months, production is increased MUCH MORE THAN SALES to adjust the inventory level to 6-month target. This all means that there is no one-to-one relationship between inventories and sales in transitory periods like the current one.
For an example of inventory cycle calculations, see http://www.calculatedriskblog.com/2010/02/inventory-cycle-and-gdp.html
The slowdown in inventory growth is the low hanging fruit and is often present at this stage of an economic recovery. However, in order to really push a dynamic sustainable recovery the consumer has to kick-in and drive growth and I don’t see that happening anytime soon.
javos
Good point.
Aaah…after reading further, we now know that the term “inventory growth” is NOT REALLY inventory growth, but a SLOWING of the inventory. “Nearly two thirds of the growth in GDP in the fourth quarter was accounted for by changes in inventories, not by final sales. Businesses had been reducing their overstocks at the fastest pace in generations earlier in the year, and then sharply slowed the pace of reductions in the fourth quarter. The slowdown accounted for most of the fourth-quarter growth.” Now THAT makes some sense!
I should have included this. I’m always suspicious of stock market elation over a “per cent growth” announcement that is NOT accompanied by an absolute growth measure. Example: a lot of stock portfolios were up 25% or more last year, but is that from a level that was down 50% in 2008? If it is, then the portfolio is still down 37.5% from 2008. So, a GDP growth of 5.9% SOUNDS good, but the absolute level is important to know.
Inventory growth? (3.9 (66%) of the 5.9% GDP growth)…now just how does that measure affect GDP. Inventory is “stuff” that is on the shelves ready to buy (or materials to build “stuff”). An efficient business wants to manage to “just in time” inventory, i.e., just enough inventory to meet sales demand and not much more. So does “inventory growth” mean “stuff” is not selling (that would align with what we read of consumer sentiment and consumer buying), or does it mean businesses see demand picking up and are re-stocking (that doesn’t seem likely at this point.) Given the 66% contribution to the recent GDP growth, we really ought to understand this effect.