Alhambra Investment Partners’ Dr. John Chapman discusses the current malaise:
Recent data on the U.S. economy are not encouraging, and calls for a recession have risen in recent months. But there is after all a big difference between an economy growing at 1-2%, and one not growing, or shrinking, as in Europe at the moment. There will be a recession in the U.S. when rates rise, and/or things turn catastrophic in Europe while there is no policy shift in the U.S. We expect neither in the near term, though concede the considerable burdens across the globe.
Still No Recession in the U.S. in 2012, but Slow Growth? Obviously, Alas
By John L. Chapman, Ph.D. Washington, D.C.
The U.S. economy produced 250,000 jobs for the three months between December and February, but job growth slowed dramatically in the ensuing three months between March and May. More recently, weekly new jobless claims are on the rise again, back above 380,000 the last few weeks; not disastrous, but the march back to normalcy below 350,000 has been halted. With additional news that household net worth has fallen 40% in the last three years, retail sales are falling, manufacturing activity slowing, and the Eurozone torpor painfully rolling out to the point that interbank credit is threatened, are we headed back toward recession?
We do not think so, though we concede the list of problems is long. Recent data about the U.S. economy have not been encouraging, but it is important to understand near-term prospects, because only in the event of an officially-declared recession is the likelihood of a sustained drop in equity valuations made manifest in the United States.
First, industrial production declined in May (by -0.1%), when a gain was expected. Manufacturing in general declined -0.4% in May, while the economically-indicative automotive sector was down -1.4%. (everything else, ex-autos, fell -0.3%). High technology-based capital goods production, however, rose +0.5% last month, and is up nearly 1% from year-ago levels. Meanwhile the Empire State Index witnessed a dramatic drop in the arc of growth, from +17.1 to +2.3 in May (though still shows expansion). And lastly, overall capacity utilization moved down to 79.0% last month, from 79.2% in April, while capacity for manufacturing specifically fell -0.4% to 77.6%.
These data were not welcome news, but were not bad in what, as the government data show, are extremely volatile time series. Both automotive and ex-auto manufacturing are up dramatically from prior year totals, too, and thus must be given context. And in our view, industrial production is always indicative of business sentiment in a very pronounced and “front-line” way: clearly, the rising noise about recessions in both Europe and the United States, and a downturn across much of Asia, is bound to affect production levels at the margin here, month to month.
In sum, these data concern us, but not overly so, yet. They bear watching if negative prints occur across the summer months, when production schedules are often near peak capacity. We do concede that if things were to deteriorate in Europe, which is sure to get press in the next 60 days, that industrial production and factory utilization data would likely show absolute declines, or at least signal the implausibility of a return to robust growth until better policies are in place around the world.
Secondly, the May retail sales data and prior revisions were not good. Retail sales declined -0.2% last month, but were worsened by downward revisions to the prior two months, which had been initially reported as positive in expansion. Ex-auto sales were down -0.4%, and two very big retail indicators, gasoline and building materials, also experienced big drops (the former due to 17% price declines, the latter thanks perhaps to an evening out from strong sales during a very mild winter). However, total retail sales were up more than +5% in the last year, while ex-autos saw a +4.3% gain.
Again, while expansion is always preferred to the economically-sensitive indicators, panic need not set in due to these numbers, fully considered. Interestingly, for example, excluding gas station sales, retail sales were up +0.1% in May. And as the Census data show, retail sales pacing is higher this quarter than last; again, sentiment may be a temporary drag on what would have been better numbers.
Finally, both producer and consumer prices declined last month. The Producer Price Index (PPI) declined -1.0% in May, though they are still up +0.7% year-on-year; meanwhile, the Consumer Price Index (CPI) fell -0.3% last month, though is still up +1.7% versus May 2011. Clearly the rate of inflation across the board in the U.S. economy has been coming down for some months, the biggest reason being an inordinate global demand for dollars that is severe enough to pressure the U.S. price level. Yet there are still price pressures easily scene in the micro-analytic data.
In terms of wholesale prices, energy fell dramatically (-4.3%), while the other big noon-core item, food, declined -0.6% (all other wholesale prices rose +0.2%). Consumer goods wholesale prices were down -1.5%, while capital equipment prices rose +0.1% in May – and are up +2.1% year on year. The product stages further back in the production process, intermediate and crude, were also down last month, but up slightly in the last 12 months. Overall, core producer prices, excluding volatile food and energy, are still up +2.7% in the last twelve months, and still, therefore, to us anyway, represent a latent distortive-inflationary threat. As such, producer prices do not justify the current hue and cry calling for more Fed easing.
We come to the same conclusion when analyzing consumer prices – other than gasoline, most other prices are rising, including housing. CPI cash-only inflation, which does not include any imputations for home-owners’ rent, declined -0.4% in May, yet this metric is still up +1.6% year-on-year. Energy prices led the drop, but core consumer prices (those which exclude food and energy) were up +0.2% last month, and are still up +2.3% year-on-year. Cash earnings are now basically flat in the last 12 months (-0.1%), as continued pressure on real wage gains is evident across the data (hours worked, however, is up +1.8% year-on-year, increasing total disposable income levels).
All-in, the data out recently certainly show a slow-growth, plod-along economy, not yet tipped negative, but with numbers in many categories that are not robust. This week’s high-sensitive data, which included retail sales as well as production and inflation figures, could in the aggregate be interpreted as heading toward decline territory, which would in turn presage a drop in profits and equity prices.
Yet our sense of things is that the slowing was due to some re-balancing from the mild winter, in tandem with an elevated level of fear that is pervasive. The chatter about Europe is now positively deafening, and “China’s economy slowing” draws fifty million google hits. Further, the “fiscal cliff” in the U.S. is not a product of academic theory that can be assumed away in the end: it is very real in the minds of economic agents faced with making decisions in the here and now, with the threat of tax hikes and further regulatory burdens very real.
Since 1990, Denmark’s economy has averaged a 1.6% growth rate in GDP. With marginal tax rates of 52% on personal incomes and a VAT of 25% to complement a corporate tax rate of 25%, the Danish welfare system is very complete. But the growth rate is what it is: there are no technological breakthroughs that come to mind, no new innovations emanating from Copenhagen, no high-growth industries, no venture capital sector and little in the way of corporate buyout energies, or even recognizable companies known to a global public (the way, say, an IBM or Coca Cola or Microsoft are). Indeed, life just “is what it is.” We mention this only because there is one big thing missing in Denmark that has long been a hallmark of the U.S. economy, and which is a key catalyst to growth and prosperity: entrepreneurial dynamism. But now, this Denmark-like context for the economy is the new normal for the U.S. as well: the former vibrancy of the American economy, last seen across much of the ‘80s and ‘90s, is gone, replaced instead by fear and nervous chatter about global policies which everywhere seem to be wrong-headed if not downright foolish, if a return to prosperity is indeed the goal.
As such, the tortured concerns of late evinced by Washington policymakers fretting over why past stimulus measures have not worked, and why more stimulus is needed, are so much whistling in the wind to the business class – the producers – in the U.S. economy. For high-octane growth to return to the United States, policy direction must change. And this, in turn, would be the very best thing that could happen for the poor and embittered souls trudging through life in the Eurozone at the moment, beginning with our Greek brethren. We wish them well this week in the aftermath of their latest vote.
John Chapman, PhD, is Chief Economist for Alhambra Investment Partners in Palmetto Bay, Florida. John can be reached at email@example.com. The views expressed here are solely those of the author, and do not necessarily reflect that of colleagues at Alhambra Partners or any of its affiliates, or the Daily Capitalist.