Download Retail and Food Services Sales,Circular reasoning

Services PMI
The best surveys for current US business activity came out today as
a pair, the bi-weekly unofficial Services PMI from Markit and the
“official” services or ISM Non-Manufacturing PMI. Both had been
showing a string of weak numbers since the turn of the year but
also both had stopped getting worse and were slowly improving.
Well, they both improved faster than expected in the last two weeks
for Markit and for the last month for the ISM.
Markit Services PMI rose to 52.8 vs 52.1 expected and prior, though
still well-down on the 2014-15 trend of 55 and over.
ISM Non-Manufacturing PMI was 55.7 vs 54.7 expected vs 54.5
prior,and a bit down on the 2014-15 average of 57.
Of some concern was a break in the long run of good numbers on the
jobs front as the April ADP Employment Change fell away from its
two year 200k per month growth down to 156k vs 196k expected and
200k prior.
1Q16 Unit Labour Costs showed a surge to 4.1% but because growth is
so low it implied the productivity result of -1%. Or is it vice
versa, productivity fell and because growth is so low unit labour
costs grew strongly. Or is it actually real growth is to nominal
growth being low due to tight money, meaning productivity improving
investments are just not worthwhile since demand is so weak. We
think the latter.
Service Sector Survey Indices
Today we got the simultaneous release of two surveys of the allimportant service sector. We had expected a modest recovery in both
surveys given very weak readings in January and February plus some
regional Fed surveys for March showing a bit of a pick-up. Both
came in a bit stronger than expected but showed no great recovery
from the lows. The US economy remains close to stall speed.
Markit’s bi-weekly Services PMI recovered to 51.3 from an expected
51.0. By their own calculations Markit reckon that combining their
Services PMI with their manufacturing PMI to create their composite
PMI is equivalent to a feeble 0.7% annualised growth rate in 1Q16
over 4Q15 – in-line with the current Atlanta Fed GDPNow forecast.
The “official” monthly ISM Non-Manufacturing PMI came in at 54.5
versus 54.0 expected. A small beat, but not much of a recovery from
weak prior readings.
How ‘solid’ is the employment report?
Maybe not as much as touted by many. Unemployment, at 5% is on the
low side and employment gains have been ‘strong’. 2015, for
example, was second to 2014 in jobs growth since 1999.
However, let us look at things from a longer perspective.
The chart shows:
1. The employment loss in this cycle was far bigger than in
previous ones
2. The dashed line represents average quarterly employment change
from 1960 to 2007.
3. Note that in most previous cycles, during the recovery
employment gains would rise significantly to compensate the loss.
In the present and previous cycles that just doesn´t happen
(although the employment loss in the 2001 recession was
significantly smaller).
The panel below shows that the fall in the employment population
ratio and the labor force participation rate, even only considering
the prime working-age group (25 to 54 years), fall steeply from
early 2008. The “excuse” that that´s mostly due to demographic
(structural) factors is hard to accept. It is more likely that most
of those drops are cyclical in nature, and are associated with the
crash in aggregate demand (NGDP) growth.
Also note how extraordinarily high the number of part time
employment remains. And the percentage of the long-term unemployed
is still significantly higher than the peaks in previous cycles,
especially taking into account that we are almost seven years into
the recovery.
The last chart shows the correspondence of employment growth with
NGDP growth. Employment growth in the 2001 cycle is less than would
be normal given the growth in NGDP (which was the same as in the
1990 cycle). Much of that difference can be accounted by the fact
that the 2001 cycle was “productivity rich”.
The present cycle, on the other hand is “poor” in both NGDP growth
and productivity, being only “rich” in part time and long-term
unemployment.
PCE Inflation & Personal Consumption
Expenditures
The PCE price indexes both core and headline will have disappointed
the hawks. Core PCE did not follow Core CPI in shooting higher as
it remained firmly at 1.7%. And Headline PCE remained just as dull
as ever, like the discredited CPI Index, bumbling along at woeful
1%. This is better than the 0% seen for most of 2015 but still
below the still poor sub-2% seen during 2013-2014.
The actual clean PCE data unadjusted for estimated price movements
was really poor. Nominal expenditure growth is minimal. As we had
suspected, following the big downward revision in January’s Retail
Sales the 0.5% MoM rise for January was revised to 0.1%. The
February figure was also just a 0.1% growth on the new, lower,
January number.
The annual trend in PCE is running about 3.5%, not surprising given
it makes up the bulk of Nominal GDP also running at around 3%. A
promising uptick looks like it has stalled. The more narrow Nominal
Retail Trade figure, released a few weeks earlier, that mostly
focuses on goods rather than services is obviously running at a
lower rate.
To cap the day, the Atlanta Fed GDPNow model forecast for real GDP
growth (seasonally adjusted annual rate) in the first quarter of
2016 is 0.6 percent on March 28, following the low consumer
expenditure growth, down from 1.4 percent on March 24.
Retail Sales, Industrial Production & CPI
Inflation
1. US February Retail Sales were poor. While consensus was for
-0.2% MoM and the actual at -0.1%, January was revised from +0.2%
to -0.4%, making retail sales over the two months 0.5% lower than
expected. YoY growth is now only running at a little over 3%.
Importantly, this is a clean nominal data series, not one massaged
into “real” by splitting out the impact of unmeasurable inflation.
Retail Sales are mostly for sales through stores and on the
internet, they are not for the services sector except food
services. CPI for goods, about 25% of the basket, has been low to
negative for three years.
We have forecast a big drop off in growth in Retail Sales and Food
Services and this appears to be occurring, though one quarter
earlier than we expected.
2. Industrial Production also disappointed at -0.5% MoM vs -0.3%
expected. it was driven by weaker than expected utility output. It
was still down by 1% YoY. Hawks blamed the weather. Industrial
Production ex-utilities and energy, ie Manufacturing Production was
a little better than expected. The YoY growth decline is in line
with our expectations of nearly 1% negative growth for the next
several quarters.
Our informal “recession indicator”, based on a 6-month moving
average of yoy industrial production growth, which goes back to
1920, is still “confirming” that a recession is underway. The chart
for the recent period.
3. Real wage growth came in disappointingly, as the recent lack of
acceleration in nominal wages was actually damaged by the slighly
higher trend in CPI, used to deflate those nominal wages.
4. CPI for February was a touch higher than expected, at 1.0% YoY,
though in line MoM at -0.2%
Core CPI was also a touch higher at 2.3% YoY vs 2.2% expected and
0.3% MoM, also 0.1% more than expected.
The chart gives a good reading of how “disperse” are the different
measures of inflation!
There is a huge amount of noise in the figures as energy-related
prices collapsed leading to a MoM slump in gasoline of 15% and the
energy segment overall by 6%. There would be expected an even
bigger change in relative prices as consumers switched some or all
of the energy-related savings to other goods and services.
On today´s FOMC meeting:
If we are right and politics has split the FOMC then we are
in for a really good spell of dovish monetary policy out of
the Fed. Yellen’s comments today show either someone
confused, covering up a split or secretly supportive of the
splitters – and against the Fedborg and their
“normalisation” mania (remember that).
For more details, see the March 16, 2016 blog post “FOMC splits,
and it is a good thing!”[/vc_column_text][vc_column_text]
Activity Surveys
Two surveys of February activity in the US economy were interesting
and both somewhat overlooked. The Fed’s Labour market Conditions
index and the NFIB Small Business Optimism. Both showed slowing.
All is not well.
The Fed index showed a large drop.
The NFIB Small Business Optimism index showed a drop on an already
weak January.
[see chart from page 4]
A “strong” employment report in a “weak”
economy?
The headline numbers for February: 242 thousand jobs and 4.9%
unemployment rate.
Let´s give these numbers some “structure”. The unemployment rate is
the result of two forces that reflect economic decisions by
individuals and firms. The first is the employment population ratio
(EPOP). The second the labor force participation ratio (LFPR). The
unemployment rate is equal to 1-(EPOP/LFPR).
The charts show the behavior of unemployment together with its two
determinants over the three most recent cycles. The first two
(1990, 2001) happened during the “Great Moderation”, while the
third (2007) takes place during the “Depressed Great Moderation”.
The green bars denote recessions (as determined by the NBER). The
yellow bars denote periods of falling unemployment.
A “healthy” fall in unemployment occurs simultaneously alongside a
“strong” rise in EPOP and a “moderate” rise or stable LFPR.
In the present cycle, the fall in unemployment reflects a stable
and then “moderate” rise in EPOP and a falling LFPR. It´s another
“animal” altogether!
Many say that this reflects mostly structural/demographic changes,
like baby-boomers’ retirement. The coincidence in time of the
structural/demographic factors with the onset of the “Great
Recession” that witnessed the largest drop in nominal spending
(NGDP) since 1937 is “too much to swallow”. More likely strong
cyclical factors were responsible for bringing forward in time
decisions that otherwise would have taken place over the next
several years. In this sense the problem is mostly “cyclical”.
Although the economy is still adding jobs at a rate that could be
called “healthy”, the relatively low quit rate (which tends to rise
when employment opportunities are “bountiful”), the relatively high
duration measures of unemployment (indication that opportunities
are not “bountiful”) and the relatively weak (if you take into
consideration the depth of the employment drop) job growth,
indicate that the labor market is some distance away from having
fully recovered. In other words, like the economy, it´s still weak!
The trade numbers for December were also released. Falling trade,
both exports and imports, is another sign of a weak US economy.
The falling trend of world trade (measured by world exports) also
signals weakness in the global economy.
FOMC Minutes
In essence, the FOMC members are pretty much at a loss. The most
relevant information was what was lacking from the Statement issued
at the end of the January meeting, i.e. the “balance of risk”.
From the Minutes we learn that participants were split on the
issue.
They´ll continue to monitor inflation developments closely to
confirm that inflation will evolve along the path the Fed
“anticipates”.
Unfortunately, they´ve been saying that for several years now. What
they´ve done is put themselves in the position of “spectators” who
“wish” inflation will climb to trend, but that´s it.
Meanwhile they keep blaming the drop in oil prices and the rise of
the dollar, not figuring that those price moves in large part are a
reflection of their “tightening actions” (although they insist in
saying “policy is extremely accommodative”).
Industrial Production
Our forecast for year-on-year growth in industrial production in
January was -1.6%. The release came in at -0.6%. Month-on-month the
market´s expectation was for an increase of 0.4%. The outcome was
more than twice as large, 0.9%.
Since the last quarter of 2014, the level of industrial production
has been stagnant to falling. Year on year growth rates have been
on a clear downtrend since that time.
This is consistent with our view that nominal spending growth, or
aggregate demand growth, has been trending down since mid-2014,
when the Fed´s tightening talk increased in tone. For the next
several months we continue to expect a negative print for
industrial production on a year-on-year basis.
Retail and Food Services Sales
Nominal Retail and Food Services year-on-year growth registered
3.4%, not significantly different from our 3.3% forecast.
In other words, unlike the preferred media story, there was no
surprisingly strong consumer activity.
In February, according to our forecast, growth in retail sales
should be even stronger, nearing 4% on a year over year basis. From
that point on, however, it is expected to trend down, in conformity
with expected diminished growth in aggregate nominal spending.