It is easy to become distracted by the data that comes in daily. Like the Sorcerer’s Apprentice (starring Mickey Mouse), it can overwhelm you. It can take your eyes off the “Big Picture”. This is what curses most analysts. Today’s data is so perverse that it (almost) doesn’t make sense … unless you put it in context of the real forces that drive our economy. We try to make sense of things that assaulted us today. It’s not pretty.
Consumer sentiment is a fickle thing which is why I usually regard it askance. The various indices tend to vary depending on the questions asked. Today Bloomberg came out with its consumer confidence report: “The Bloomberg Consumer Comfort Index dropped in the week ended May 13 to minus 43.6, a level associated with recessions or their aftermaths, from minus 40.4 in the previous period.” They say that if the index is lower than minus 40, it signals “severe economic discontent.”
The Reuters/U. of Michigan poll seems to have gone the other way, being quite positive, a trend that has continued since August, 2011. Today Gallup released a survey that showed people’s attitude about their financial future went up. On the other hand, their assessment of their current economic situation declined. I’m not exactly ignoring these data, but are they helpful? Since Wall Street trader live on data and rumors it means something, but … not much.
What does mean something are things like industrial production. For example, the NY Fed manufacturing index was very positive for May, up “moderately” from last month. But the data has been something of a see-saw recently. Down the seaboard however, the Philly Fed “fell into negative territory for the first time in eight months.”
Go figure. It is important to put this into perspective because regional data varies greatly. The national index for industrial production has been stagnating since March, 2011:
The Markit survey of U.S. industrial production that came out today showed a 1.1% gain in April, but they note that the trend for the quarter is actually softening, slowing down from the February peak. For a chart of this trend, click here.
I expect this trend to continue for some time. Keep in mind that there is a lot of new fiat money floating around the world right now. I believe the ECB will soon be forced to “liquify” the eurozone economies. I expect the Fed to do the same as unemployment creeps higher. But for now what we are seeing is the expiration of QE 1 and 2, proving that it can boost the financial markets, drive down bond yields, temporarily juice manufacturing, devalue the dollar to help exporters, and then run out of steam with no lasting positive results. As I’ve said many times, no central bank can print prosperity. What we are seeing now is that the steam is gone.
Which leads me to jobs and why the Fed and the politicians don’t care if it doesn’t work.
The report on new unemployment benefit claims was back to a declining trend, at 370,000 for last week. I don’t expect the declining trend to last. There are too many headwinds such as: declining savings, declining real wages, high consumer debt, lack of liquidation of malinvested assets, and a world economy that for the most part is seeing either declines or stagnation. That would indicate that employment rates would increase, perhaps not greatly, but would remain high, especially in the eyes of politicians around election time.
I expect the Fed to follow the wishes of the politicians and engage in another round of quantitative easing. Or perhaps they will come up with another clever idea like Operation Twist. They will satisfy themselves that they have at least “done something” to escape criticism. The result will be joy on Wall Street, woe to savers, and continued stagnation. For more on this see Japan.