Bob’s Journal for 3/14/19

How much should we rely on recent economic data?

I say, “Not much.” There are major anomalies in recent data, creating more noise than usual.

Two major reports from last Friday are prime examples. Retail sales for December declined sharply, yet January’s sales increased briskly, especially after excluding autos and gas.

But as I explain below in the more detailed review of these reports, other data aren’t consistent with the recent Retail Sales reports from the Census Bureau. Likewise, the Employment Situation reports said only 20,000 new jobs were created last month.

Yet, the unemployment rate declined while the work force participation rate hardly moved. The ADP Employment Report, released a day before the government reports, showed a significant increase in private sector jobs.

There are several likely reasons for the anomalies. One is the partial government shutdown that lasted from December through early February. It appears to be a major factor. It also is apparent the data weren’t collected and processed as thoroughly as in the past. The reports covering the shutdown period probably include more estimates and partial data than previous ones, though no government officials have stated that.

The government shutdown also reduced economic activity. Government workers weren’t spending as usual, and many government contractors also lost income. The reduced spending flows through to other sectors of the economy.

Some unusual weather this winter also had an effect on the data. Most of the country experienced uncommonly cold temperatures. Also, precipitation levels, for both snow and rain, have been unusually high.

Extreme weather constrains economic activity. Housing starts, for example, typically fall during bad weather. Shipping and other transportation sectors also can be affected. In many areas, governments and businesses shut down or had reduced staffing for an exceptionally high number of days this winter.

The good news is none of these effects are permanent. They temporarily make the economy appear to be worse than it is. But the effects generally are balanced over time. In fact, some of the most recent data already are showing substantial increases from the levels of a month or two ago. I believe some analysts are misinterpreting this as a return to strong growth rates when it’s more likely the economy is catching up from the temporary decline in activity.

That’s why it’s important not to rely on one piece of data. We need to examine a range of data to assess the economy.

It also is important to look at trends over several months instead of reacting to one month’s number, especially with government reports. Many are subject to significant revisions before final numbers are issued. Other data, such as retail sales, normally are volatile from month to month, so it’s more helpful to examine the average over several months.

We can conclude from the recent data that economic growth declined in late 2018, but the economy is not at recession levels. The growth rate probably declined by about half, from a rate of over 3% to less than 2%. Still, the economy is growing.

I think growth is likely to decline further. So far, though, my reliable indicators aren’t saying a recession is imminent. This is a good time to hold the investment positions we have while watching the data closely.

The Data

Retail Sales in December were worse than initially reported but very good in January, according to the Census Bureau’s Retail Sales report. December sales, which initially were reported last month, were revised downward to a 1.6% decline from a 1.2% decline. January retail sales increased only 0.2%. But after excluding autos, the increase was 0.9%. After excluding autos and gas, the increase was 1.2%.

Though other data indicate economic growth slowed late in 2018, none of the other data are as bad as this Retail Sales report. The report also says online sales declined more than 5% in December and increased less than 2% for all of 2018. That’s not consistent with other data, especially from the online retailers themselves, and hard to accept. But even if we exclude December’s data, retail sales have been weak. Of the recession indicators I follow, this one is closest to saying a recession is imminent.

Durable Goods Orders increased 0.4% for the month. That’s well ahead of expectations but less than last month’s 1.3% increase. Excluding transportation, which includes the volatile aircraft sector, orders increased only 0.1%. But new orders for capital goods, a measure of business investment, increased 1.8%, to make three consecutive months of solid increases.

Small business owner optimism increased, according to the NFIB Small Business Optimism Index. The increase ended five months of declines, the longest such streak since 1998. The index registered 101.7, compared to 101.2 last month. The government shutdown was identified as the main cause of the recent declines in the index, and this month’s increase in the index was attributed to the end of the shutdown.

Inflation remains low. The Consumer Price Index increased 0.2% for the month, up from no change last month. The 12-month increase is 1.5%, compared to last month’s 1.6%. Excluding food and energy, prices increased only 0.1% for the month but 2.1% over 12 months.

The Producer Price Index increased 0.1% for February, up from a negative 0.1% last month. Over 12 months, the PPI increased 1.9%. Excluding food and energy, the PPI increased 0.1% for the month and 2.5% over 12 months.

Housing starts increased significantly in January, but the data are misleading. Starts dropped significantly in December largely because of the California wildfires, and January’s sharp increase was merely a return to previous levels. Housing starts still are well below the highs of early 2018.

New homes sales declined 6.9% for January, compared to a 3.8% increase for December. This is one report that’s still behind because of the government shutdown. It doesn’t reveal new information, because the data are old.

Consumers still are cautious about their use of credit. The latest Consumer Credit report showed a slight increase in the use of credit, but most of the increase was concentrated in vehicle and student loans. Credit card use increased only a small amount. Reluctance to spend also was evident in the increase in the savings rate to 7.6%.

Last week’s Employment Situation reports were full of anomalies.

New jobs in February increased by only 20,000. But January’s 304,000 increase was revised higher to 311,000. Expectations were for February’s new jobs to be about 180,000. Yet, the unemployment rate declined to 3.8% from 4.0%.

These anomalies occurred at least partly because the numbers come from separate surveys. The unemployment rate is based on a survey of households, while the payroll number is based on a survey of businesses, or establishments.

Also, average hourly earnings increased 0.4% for a 12-month rise of 3.4%. That was well above expectations and recent trends. Rising wages are a sign that employers are having trouble finding qualified workers for their job openings.

New unemployment claims increased by 6,000. But the four-week average decreased by 2,500.

The Markets

The S&P 500 rose 1.45% for the week ended with Wednesday’s close. The Dow Jones Industrial Average added 0.19%. The Russell 2000 increased 1.28%. The All-Country World Index (excluding U.S. stocks) gained 0.20%. Emerging market equities lost 0.09%.

Long-term treasuries gained 1.29% for the week. Investment-grade bonds rose 0.68%. Treasury Inflation-Protected Securities (TIPS) added 0.66%. High-yield bonds increased 0.54%.

On the currency front, the U.S. dollar declined 0.31%.

Energy-based commodities rose 1.80%. Broader-based commodities increased 1.20%. Gold gained 1.95%.

Bob’s News & Updates

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