Tuesday, August 30, 2016

A One-Legged Economy Hops Along

The industrial sectors of the economy recovered stronger and faster than the consumer sectors coming out of the Great Recession.  This was unusual, but it does make sense in retrospect.  Think of the industrial sector as being more rational, and the consumer sector as being more emotional.

The industrial sector expected the economy to recover in some fashion and set about replacing and updating stocks, equipment, and structures, albeit at a cautious, reserved rate.  Consumers, though, had to deal with foreclosures, job loses, depleted savings, a stock market crash, etc.  It was a scary time and, it took years for the fear to subside.

So economic growth was led by industrial, with the consumer limping behind.  This resulted in slow, steady, but choppy, GDP growth.  The good news is that the consumer sector regained some strength last year.  Employment improved, gas prices fell, the stock market began to climb, and confidence sprouted. The bad news is, as the consumer sector rebounded, the industrial sector began to sputter.  So the economy resembled a tag team wrestling match with a new competitor in the ring.

The manufacturing sector regressed for six months starting a year ago, followed by five months of slow growth, which added together, results in very slight improvement over the last year.  The consumer sector has been good, but not great, resulting in the continued slow growth economy.
Now there is concern that the consumer sector is starting to weaken, so let’s look at the numbers:

Consumer Confidence:

The Conference Board Consumer Confidence Survey = Flat in July.

The University of Michigan Consumer Sentiment Index = Basically Flat in August (preliminary).

Gallup U.S. Economic Confidence Index = Improving some, after hitting a low for the year in mid-July.

Therefore, confidence is not improving, but it isn’t declining either. It is steady at a modest level.

Retail Sales:

The advanced monthly report shows July sales even with June and up 2.3% over July 2015.  This is very consistent with the consumer confidence measures above.  Flat Sentiment = Flat Sales.

The Breakdown of the Retail Sales Categories (vs. June):

The Good

-         Motor Vehicles
-         Non-store Retailers
-         Furniture Stores

The Bad

-         Electronic Stores
-         Health and Personal Care Stores
-         Food and Drinking Places

The Ugly

-         Gasoline Stations
-         Sporting Goods and Hobby Stores
-         Food and Beverage Stores
-         Building Material Stores
-         Clothing Stores

The “Ugly” category is concerning.  Most of the stores listed here are highly dependent on disposable income, i.e. discretionary spending.  Of course part of the gasoline decline is due to lower prices, but the total drop was 2.7%, so maybe people are driving less – time to watch the Total Miles Driven data which has been running very positive.

Auto sales are still strong, despite the warning that demand has peaked and will soon start to drop.  Since this has been the most robust consumer category, it makes you nervous.  Recent news reports have also detailed a decline in restaurant sales.  While the July data was up 5% y/y, it declined 0.2% from June.  The Restaurant Performance Index has been choppily declining since peaking in 2015 and is now bouncing around the “100” mark, meaning little or no growth.  So, one of the other bright spots in the consumer economy is dimming.

It is confusing why consumer spending is moderating as the employment numbers grow.  Maybe consumers are nervous about the presidential elections.  Maybe healthcare costs are biting into disposable income.  Are living costs increasing as wages stagnate?

The reason for economic malaise after The Great Recession is that the
economy wasn’t running so much as it was hopping on one foot.  First the industrial foot, then the consumer foot.  Now it looks like the consumer foot is tiring, but the other foot may not be ready to take over.

The economy has been out of sync for a long time.  At some point the consumer and industrial sectors will come back together.  Let’s hope that point is not in the Flatlands. 

No comments:

Post a Comment