Thursday, January 28, 2010

An Economic Indicator Check Up

It’s time to check the current state of some major economic indicators:


GDP for Q4, 2009 is expected to be 4.5% (this is per the “Ake” index which averages the forecasts of my favorite seven economists. They do the math so I don’t have to!)

The forecast for Q1 is 2.8% and 2.7% for Q2.

What it means: The economy did not really grow at 4.5% in Q4. According to the experts, the number is inflated due to inventory replenishments. The 2010 first half forecasts are predicting a moderate recovery.

What I think: The GDP estimate is less accurate when economic conditions are abnormal and this is about as abnormal as it gets. The economy did grow in Q4, but not significantly (Goldman Sachs says that growth is about 2% when you eliminate the “noise” from the data). Future forecasts are becoming more consistent and accurate as the economy heals.


Housing Starts: Rate of 557,000 per year. Down 4.0% from November. Up 0.2% y/y.

Existing Home sales: Rate of 5.45 million per year (SA). Down 16.7% from November. Up 15% y/y.

Existing Home Prices: Up 1.5% y/y – first increase since August 2007

Home Builder Confidence Index (HAHB) – Fell to 15

What it means: Housing starts remain weak due to the large inventory of upscale existing homes on the market. Existing home sales (and also new home sales) fell because many sales were pulled forward due to the expiration of the tax credit. The increase in prices was unexpected, but next month’s data will be important in determining if this is a blip or a trend. Home builders remain pessimistic about 2010.

What I think: Because housing got us into this mess, people expect housing to lead us out. This has been true of many economic recoveries. There will be no big snap back in housing this time. Housing will take an extended time to recover and so should the economy.

Existing home sales will jump back up in January due to the tax credits being extended and expanded. Sales should plunge again in May due to the credits expiring in April. Therefore, June becomes a critical month. It will be in the peak of home buying season, but the tax credit is gone, mortgage rates will be higher, and there could be even more foreclosed homes on the market.

The Consumer

Retail Sales: Down -0.2% from November (SA), up 5.4% y/y (excludes auto sales)

Light Vehicle Sales: Yearly rate of 11.25 million (SA), third straight monthly increase

Consumer Confidence: The Conference Board Index is low and trending up, the ABC News index is low and trending lower.

What it means: People with jobs are spending more money than they were a year ago. People who need automobiles are buying them. Much of the fear and panic are gone and consumers are starting to behave more rationally. One of the two consumer confidence indexes is wrong. Watch for the University of Michigan Index (a third survey) released tomorrow, to break the tie.

What I Think: Retail sales are doing better, but it is not a steady increase. The low consumer confidence scores tell you the reason why. It does appear that the auto industry is recovering stronger than experts predicted.

Don’t look for consumer spending to take off just yet. As long as unemployment stays high, consumer confidence will remain weak and there will also be less disposable income available. Usually the employment rate is a lagging indicator (improves after the economy does). This time employment could be a coincident indicator (improves as the economy does). As people find jobs, they spend more money and the people that already have jobs feel more confident and spend more money also. This would be consistent with the theory that employment could improve faster than expected due to how and why the layoffs happened in 2008-2009.


Moody’s Survey of Business Confidence - Very positive increase, at highest level since late 2007

PricewaterhouseCoopers World CEO Survey- Significant increase in confidence for 2010

National Federation of Independent Business Optimism Index – Low and staying low

What it means: Large businesses are recovering but small businesses continue to struggle.

What I think: Small businesses are still having extreme difficulty obtaining credit. This should have been the government’s number one priority starting in October 2008 when credit started to dry up. The problem still remains and it is vitally important because of the number of new jobs that can be created by small businesses. There was a plan presented in the State of the Union address to provide $30 billion for small business loans. We will wait and see how fast Congress jumps into action this time.

The Predictive Indicators

The Conference Board Leading Economic Index – Up for the ninth straight month. It predicts steady growth in Q1 and increased growth in Q2.

Economic Cycle Research Institute Weekly Leading Index – Q1, 2010 growth will be slower than Q4, 2009. There will be a slight decrease in growth in Q2, 2010.

What it means: It is good news that both indexes predict the economy will continue to grow for the next six months. This is consistent with the GDP forecasts listed above. One of the two indexes, which strongly compete with each other, is wrong about Q2.

What I think: All of the indicators point to a slow, steady recovery. This is consistent with the GDP forecasts and the Model “T’s” prediction of a long, slowly ascending, curve (or the “UL” recovery).

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