The economic news flow this week was almost nonexistent. Markets remained basically unchanged as investors awaited the results of yet another European summit. Despite all the troubles in Europe, U.S. exports to the region continued to grow, according to the latest trade report.
The Conference Board's predictive employment index was also highly positive when released this week, jumping 1.2% from October; it's now at its best level since September 2008. Seven of the eight components of the index, including temporary help hiring, initial unemployment claims, and consumer attitudes toward the ease of finding work, registered monthly improvements. Monthly government employment reports, weekly initial claims, the Challenger Gray layoff report, and private reports like the Conference Board report are all relatively consistent in their opinion that the employment market is improving.
Strong Economic Numbers Have Included Some Good Luck, for a Change The U.S economic data have looked relatively strong this fall reflecting better economic conditions but also reflecting a measure of good luck. That is in direct contrast to this spring, when an ugly combination of bad weather, a surge in gasoline prices (due to the Arab Spring), and supply-chain interruptions due to the Japanese tsunami hit U.S. economic statistics very hard.
I would refrain from getting too excited about GDP growth that accelerated from 0.4% in the first quarter to potentially as much as 3% in the fourth quarter. For example, the U.S. tax code includes a provision for accelerated depreciation that expires on Dec. 31, 2011. This is certainly helping auto sales and perhaps the market for some capital equipment. Employment numbers were helped a bit last month by a huge jump in retail employment as retailers focused on longer store hours to help generate additional sales. Those employees are likely to go away in January and February. Unusually warm weather and lack of snow in key parts of the country have also been a boon to most holiday shopping (cold weather clothing is a notable laggard, though).
A combination of slowing European growth and a glut of oil in the central U.S. have also pulled in gasoline prices--at least in the U.S.--faster than anyone would have guessed a few months ago. Changes in pipeline configurations early next year may reverse at least some of the overly favorable supply situation. Even excluding these factors, I still believe the U.S. is doing better than most of the rest of the developed world--just not as well as some of the data suggest.
On Deck: News on Price, Retail Sales, and Manufacturing In my opinion, the most important news next week is likely to be the inflation reports for both consumers and producers. Recall that prices on both the producer level and the consumer level were down for the month of October, breaking a trend of large increases for most of the year.
Overall, prices are expected to be flat for November, led by decreases in food and energy prices. Excluding those two items, prices are still likely to be up a very modest 0.1% for the month (1.2% annualized). It will be interesting to see whether holiday-related discounts--which seem unusually large this year--will have much effect on the CPI. Clothing and TVs are two categories that seem particularly under pressure. While the short-term news is great, prices are likely to show a 3.4% increase from last year. That's lower than the 3.9% level we saw in September, but still higher than I'd like to see. Full-year inflation for 2011, measured December to December, is likely to show even more improvement, perhaps to the 3.2% level. For 2012, my expectation is that inflation could slow to 2% or less based on lower energy and commodity prices.
Slowing Retail Sales Represents Less Inflation, Lower Gasoline Prices Retail sales are expected to grow 0.3% (3.6% annualized) in the Census Bureau's comprehensive report of retail and restaurant sales. That's a little lower than the 0.5% level of the prior month. Given the large discounts offered in November and lower gasoline prices, the slower rate is a function of pricing and not volumes. Also, some of the weekly retail data that I look at suggest that early November was slower and growth accelerated into the last two weeks of the month. That type of pattern should bode well for December, which got off to a good start during the first week, according the International Council of Shopping Centers.
November Industrial Production to Slow After Auto-Induced Spike in October Industrial production grew a very healthy 0.7% in October, recovering from an almost flat period in both August and September. Although almost every category showed some growth, autos and the transit sector were outsize gainers in October that may not grow as fast as in November. Also, supply chain issues--from Thailand, this time--may affect some U.S. manufacturers of information-processing equipment. Therefore, the consensus view is that industrial production will come back down to earth in November to a more modest 0.2%. Based on an improvement in the national purchasing managers report, I suspect November's industrial production report could beat the 0.2% consensus by a little.
Next week, two of the major regional purchasing managers reports, Philly Fed and Empire State, are likely to show at least some improvement. Both reports have been volatile lately and often move in opposite directions. I wouldn't read much into either of these reports unless the moves are relatively large and in the same direction. Only the Chicago PMI, which is issued a day before the national report, seems to have much predictive power.
Back in the U.S., the services economy, which had shown some nice improvement this summer, paused as consumers appeared to opt for more cars and sharply discounted retail goods instead of service-related offerings. Weekly retail figures would also seem to indicate that strong retail sales over the Black Friday period were no fluke. The International Council of Shopping Centers indicated that weekly retail sales for the period ending Dec. 2, 2011, were up 3.8% from a year ago. Initial unemployment claims and a Conference Board report both showed an improving labor market too.
This week, I will take a look at a lot of special and perhaps one-time factors that may be making some of the economic data look a bit better than it actually is. Don't get me wrong--I am still bullish on the U.S. economy, but for a change we are catching a bit of tailwind that we all need to understand.
More Improvement in the Balance of Trade The reported U.S. trade deficit dropped from $44.2 billion in September to $43.5 billion in October. However, the improvement occurred because exports fell less (down $1.5 billion) than imports (down $2.2 billion). The deficit is now at its lowest point of the year, a highly unusually phenomenon for an economy that has grown throughout 2011. During the previous recovery, the deficit spiked as high as the mid-$60 billion range. Rising U.S. energy production and, more recently, falling oil prices, have certainly contributed to a better trade situation. At a minimum it now appears the trade balance is unlikely to hurt the fourth-quarter GDP calculation, and it may actually help. That said, I'd still rather have seen exports go up (though they actually were up on an inflation-adjusted basis) indicating a generally strong world economy.
U.S. exports to Europe showed some weakening viewed on a year-over-year basis and a little bit of a gain sequentially from September. I suspect that sequential gain is related to seasonality. Recall that Europe represents just over 3% of U.S. GDP. On a year-over-year basis exports to Europe grew 10% in October compared with an 18% gain for all of 2011, indicating some moderation. Sequentially exports were up 1%. As brutal as the news has been from Europe, I am impressed that U.S. exports haven't really suffered.
Hard to Draw Conclusions from Purchasing Manager Survey on Services ISM's purchasing manager survey posted a surprise drop in October, with the index falling to 52.0 from 52.8, below consensus estimates. Orders and activity were both at healthy levels and improved while the employment portion was down (unlike almost every other measure of employment growth). That employment news is at odds with huge service sector gains in the Labor Department's November report.
While a disappointment, the overall ISM services metric does remain above 50, the level that generally indicates at least some growth. It appears from strong holiday sales reports that consumers are opting for physical goods at the expense of services. Booming sales of budget-priced TVs and a resurgence in auto sales are also hurting services growth at least in the short run. Note that last week's PMI for manufacturing improved over the same time frame and now exceeds the services survey results.
I'd prefer the services sector be performing better, because it is a much bigger portion of the U.S. economy compared with manufacturing, and services revenue tends to stay with U.S. suppliers, providing a bigger boost to GDP. A hefty portion of retail goods are produced overseas, aiding our friends in Asia and Europe. I hope that after the holiday season the services sector will step up from its current lethargic levels.
More Good News on Employment Initial claims for unemployment dropped to 381,000 on a one-week basis versus 404,000 the previous week. The less-volatile four-week moving average dropped to 393,500. Another week or two of weekly data below 390,000 would bring the moving average to the very best level of the recovery (389,500 reached in April 2011) and to its best level since the spring of 2008. Remember this data point peaked at almost 700,000 at the worst of the recession in early 2009.
On the other side, 290,000-300,000 was the very best level of the last recovery, and levels that low lasted for less than a couple of months in 2006. I do caution that large seasonal factors (substantially reducing the raw data this time of year) and odd holiday work schedules at employment offices make the data a little more volatile.
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