Hard Data versus Anecdotes

There are significant inconsistencies between the major economic reports, and it’s important to resolve them.

I’ve pointed to the inconsistencies several times in these weekly updates. Sentiment surveys and anecdotal reports have been extremely positive.

The Small Business Optimism Index and consumer sentiment surveys surged to multi-year highs a few months ago. While they’re below recent high levels, they still are close.

The monthly manufacturing surveys by the Federal Reserve regional banks also spiked in 2017. They indicate manufacturing is recovering rapidly. The surveys by ISM and PMI also have been very positive for the most part.

But we’re not seeing the optimism reflected in the hard economic data. Industrial Production and Factory Orders have been very tepid, and the important core business investment components haven’t been strong at all.

Retail sales growth also has been modest, except for a few brief spurts. After adjusting for inflation, real retail sales growth is weak. Job growth is the only area where the hard data consistently match the soft data.

One explanation for this inconsistency is found in the details of the surveys.

When the Consumer Sentiment Survey from the University of Michigan is broken down to its components, we see that the optimism is not uniformly shared, as explained in this report.

Americans who don’t have college degrees report having their highest levels of optimism in the almost 40 years of the survey. Those with college degrees or more education have reported steadily less optimism since mid-2015, and their level of optimism is now about the same as in the early days of the financial crisis. Traditionally, more educated Americans report higher levels of optimism than less educated Americans, but the direction of optimism for the two tends to track each other, with few exceptions. But the two diverged sharply after the election, and the less educated now are more optimistic than the more educated.

Likewise, optimism among older Americans surged after the election while optimism fell for those 34 and under. Normally, the younger age group reports being more optimistic than the older group, but now the two are about equal.

Less educated people and older people are the least likely groups in the country to have major increases in income or to go on spending sprees using savings or credit. That is likely why their optimism in the surveys isn’t being translated into hard economic data. Most of the discretionary spending is done by higher-income people, and they aren’t in the mood to spend. Also, when asked specific questions, those with higher overall optimism still say this isn’t a particularly good time to buy a home or expensive items, such as cars and major appliances.

Until we see higher real income increases paid to workers, we aren’t likely to see economic growth match the surveys and anecdotes.

The Data

The Small Business Optimism Index from NFIB dropped again, but not by much and less than expected. It fell to 104.5 from 104.7. The index surged to 12-year highs after the election before peaking. But we’ve still had six straight months of very high optimism, which hasn’t happened since 1983. The future business conditions component of the index did fall by eight points, which indicates a big dent in business owner optimism.

Last week’s Employment Situation reports were a mixed bag. The headlines were impressive. The unemployment rate dropped again to 4.4%, and 194,000 new jobs were created. The average work week increased by 0.1%. But wages increased by only 0.3%. That’s a little better than during most of this recovery, but it’s still tepid by historic measures. Over 12 months, wages increased 2.5%. Once again, that’s better than during most of this recovery. But with 12-month inflation at 2.4%, households aren’t seeing much of an increase in purchasing power unless it is from working longer hours or adding an additional job.

The JOLTS (Job Openings and Labor Turnover Survey) also tells an interesting story. Firings are low and the growth of job openings is strong. But hiring isn’t as strong, with many unfilled jobs. Employers say they can’t find qualified workers. But it also could be they aren’t willing to pay what the qualified workers want.

New unemployment claims declined by another 2,000. Continuing claims are at 29-year lows, and the four-week average is at a 43-year low.

There’s a dichotomy in the labor market. We’re at full employment, but employers aren’t being forced to pay higher wages at the rate they normally would when there’s full employment. Are higher wage increases yet to come, or is low wage growth a continuing condition of this economy?

Consumer credit was healthy in the headline number but not in the details. Most of the increase in credit was in the standbys of automobile and student loans. Credit card debt increased a modest $2 billion. That’s less than in recent months and indicates a continuing reluctance in consumers to spend.

Inflation, as measured by the Producer Price Index, bounced back in the last month. Prices rose 0.5% compared to a decline of 0.1% last month. After excluding food and energy, prices still were up 0.4%. The 12-month increases are around 2%. The Consumer Price Index will be issued tomorrow morning.

The Markets

The S&P 500 returned 0.54% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.09%. The Russell 2000 gained 0.66%. Internationally, the All-Country World Index added 0.81% and emerging market equities rose 0.97%.

Long-term treasuries tumbled 1.49%. Investment-grade bonds dropped 0.43%. Treasury Inflation-Protected Securities (TIPS) declined 0.71% and high-yield bonds lost 0.03%.

The dollar rose 0.49%.

Energy-based commodities fell 1.12%. Broader-based commodities lost 1.33%, while gold dropped 2.24%.

Bob’s News & Updates

Most retirees leave a lot of money on the table by not carefully considering how and when to take their Social Security benefits. Avoid that mistake by educating yourself about the choices. Start with my report, Secrets to Boosting Social Security Benefits.

You should read my latest book if you’re retired or planning to retire. It covers the latest strategies and research on all the financial issues of retirement and retirement planning. Learn more in the revised edition of “The New Rules of Retirement.”