Economic events sure are heating up these days. Let’s take a closer look at some of the key indicators and reports of recent days.
A week ago, we saw a very positive GDP number. With all the talk of recovery, I’ve generally shrugged off better than expected numbers because they’re largely a reflection of government intervention. The 4th quarter GDP went beyond public support and actually had some positive signals. Let’s look at some of the highlights courtesy of the BEA News Release:
Real gross domestic product — the output of goods and services produced by labor and property
located in the United States — increased at an annual rate of 5.7 percent in the fourth quarter of 2009,
(that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the
Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent.
The Bureau emphasized that the fourth-quarter advance estimate released today is based on
source data that are incomplete or subject to further revision by the source agency (see the box on page
4). The “second” estimate for the fourth quarter, based on more complete data, will be released on
February 26, 2010.
The increase in real GDP in the fourth quarter primarily reflected positive contributions from
private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which
are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private
inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that
were partly offset by decelerations in federal government spending and in PCE.
Taking a closer look, 3.39 of the 5.7% (0r almost 60%) of the increase was due to restocking inventories. In my October economic outlook, I noted GDP would eventually turn positive because inventories were so seriously depleted and had to eventually be restocked. It appears most of this activity took place in the 4th quarter. While this was both predictable and mathematically inevitable, it’s still a positive sign to see it come to fruition. There will still probably be more to come in future quarters, and I’d expect this number to stay elevated over the next few quarters before resuming declines.
Beyond this number, there was very little noteworthy items. Government spending remains high but at its already lofty level had very little opportunity to increase further. Exports and imports both increased, although exports increased at a more rapid rate. Consumption increased very minimally.
I personally think this was a very good report and an encouraging sign for recovery. With that said, it’s far too soon to uncork the champagne because there was a lot to be skeptical about. In order for this growth to go beyond a government propped, business cycle surprise we have to see a recovery in consumption. Current consumption levels are only marginally better than 2008 levels and haven’t shown the increase we’d typically see in a recovery. We also saw a major slowdown in residential investment during Q4 and have yet to see any recovery in personal income. The positive signals simply appear transient datapoints following the major interruption of 2008-2009.
Next we go to today’s unemployment report courtesy of Bureau of Labor Statistics…
In January, the number of unemployed persons decreased to 14.8 million, and the unemployment rate fell by 0.3 percentage point to 9.7 percent. (See table A-1.)
In January, unemployment rates for most major worker groups–adult men (10.0 percent), teenagers (26.4 percent), blacks (16.5 percent), and Hispanics (12.6 percent)–showed little change. The jobless rate for adult women fell to 7.9 percent, and the rate for whites declined to 8.7 percent. The jobless rate for Asians was 8.4 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)
This release includes new household survey tables with information about employment and unemployment of veterans, persons with a disability, and the foreign born. In January, the unemployment rate of veterans from Gulf War
era II (September 2001 to the present) was 12.6 percent, compared with 10.4 percent for nonveterans. Persons with a disability had a higher jobless rate than persons with no disability–15.2 versus 10.4 percent. In addition, the labor force participation rate of persons with a disability was 21.8 percent, compared with 70.1 percent for those without a disability. The unemployment rate for the foreign born was 11.8 percent, and the rate for the native born was 10.3 percent. (The data in these new tables are not seasonally adjusted.) (See tables A-5, A-6, and A-7.)
Now this report leaves me incredibly skeptical of the so called good headline results. We see a major contradiction in results as the unemployment rate drops from 10% to 9.7% despite a reduction in non farm payroll employees (-20,000). On top of this, we actually saw an increase in the labor force, which means jobs really had to grow to get to the 9.7% number. Now granted, the surveying methodology is different between unemployment rate and payroll data so there’s not some error or manipulation. The disturbing part is that unemployment rates are difficult to trust when every other data point suggest negative employment trends. Emergency claims continue increasing, initial claims are still above job growth levels, and non farm payroll is still declining. I trust these corroborating measures more than the unemployment rate personally.
On top of this, we see a tremendous gap in the seasonal adjustments. The non seasonally adjusted total unemployed people are 8.8% higher than the seasonally adjusted January numbers. This is not without historical precedent, as the number unemployed is almost always highest in January. Seasonal adjustments have also been done similarly in the past. The part I question is whether we should be using past assumptions to determine the seasonal adjustment amount now. The reason why January is typically a high unemployment month is because temporary holiday jobs are cut, while many businesses begin layoffs after year end figures don’t meet targets. In 2008, however, this trend reversed and the number kept shooting higher after January. With retail in perpetual contraction and most businesses in downsizing mode, I don’t think this year is merely a seasonal trend. As continuing and emergency claims data demonstrates, unemployed people are not finding new employment. I think the BLS models need to be updated to account for this factor rather than chalking up bad results to seasonality and assuming they will quickly find new jobs. If not, we’re in for quite an uptick in the next few months when seasonal adjustments work in the opposite direction.
Finally, in my unemployment forecast last month I predicted we’d see the work week increase and temporary hires be the lone bright spot in new employment. Both of these measures saw increases, which helps prove the 9.7% rate is not due to an upswing in business attitude toward hiring. Many believe this is a leading indicator, but I think it’s simply the start of a long lasting trend.
The most important economic indicator in the US economy is credit. Consumer credit guides both GDP and employment measures and should thus be the best indication of future trends. This is one of those few instances where the headline represents an accurate portrayal…
Consumer credit falls for 11th straight month
Consumer credit declined in December for the 11th straight month, but the pace slowed considerably, according to a government report released Friday.
Total consumer borrowing fell a seasonally adjusted $1.8 billion, an annual rate of 0.8%, to $2.456 trillion in December, according to the Federal Reserve.
Economists predicted a decline in total borrowing of $10 billion in December, according to a consensus survey from Briefing.com. November saw a downwardly revised 10.6% decrease, or $21.8 billion, in total consumer borrowing.
Maher said he expected November to be revised upward, but instead it was even more negative — so December’s more upbeat data “doesn’t mean we’re out of the woods.”
It’s time to take an updated look at my graph of consumer credit…
In October I stated credit would need to continue falling until it made it closer to the sustainable trend line. As you can see, despite having fallen 12 consecutive months, it has a long way to go. The fact that this is occurring essentially means a V shaped recovery is impossible but I think it’s good to see these results. Despite all the government action to prevent this correction, it is happening nonetheless. As soon as we near the trend line, the economy can embark on a more meaningful recovery process. Long term, this indicator is very good, however, it will cause much hardship in the short term as the economy purges its excess.
Even though economic reports are plentiful, I thought these were three important trends to analyze in greater detail. Tomorrow I will take a look at capital markets and see how they represent the core economic trends, while forecasting where we go from here.
consumer credit graph tells it all…….we have a long way to go in recovery. danny…….is it possible to put links in your posts when you reference other Muwabi posts?