Data, Data Everywhere
Bank of Canada Governor Mark Carney delivered a speech yesterday in Ontario that contained two observations that we think are certainly true:
· “Insights from financial markets are somewhat fleeting at the moment. A broad range of asset prices from the Canadian dollar to S&P 500 futures to European sovereign spreads are unusually correlated and volatile.”
· “In the current environment, the macro dominates the idiosyncratic.”
Uncertainty may abound over the future of the US economy, but that didn’t stop the equity market from having one of the best months on record in September. The SPX rose 8.9%, while the 10yr Treasury ended the month basically where it began. The past few days have featured a slew of data to help investors in their attempts to divine the direction of the economy. Right now, the expectations for third quarter GDP growth are exactly where the second quarter came in: +1.7%.
Initial jobless claims were reported yesterday, and fell to 453,000 from an upwardly-revised 469,000. Though this cheered the market, it’s essentially a non-event as claims have been flat for the last 10 months, and at levels that suggest at the least a very sluggish labor market. Historically, initial claims in the mid-400,000 range have been associated with recessions and job losses.
Personal income and spending for August were reported this morning, and both came in higher than expected. As per usual, the headlines were better than the underlying data. Nominal personal income was up $59.3 billion over last month, but about 60% of that rise was due to increasing transfer receipts (unemployment, etc). After adjusting for inflation, real personal income less transfer receipts was actually negative, and for the second month in a row. This has been a drag on real personal consumption expenditures (PCE), the largest portion of GDP. The graph below shows, the year-over-year recovery in real PCE has been fairly weak when compared to other expansions, and the pace of growth is beginning to falter.
The various regional manufacturing surveys for September and the third quarter have been mixed, all showing either slowing (but still positive) growth or actual declines in activity. The sub-index for new orders in each survey can be a leading indicator for future manufacturing activity, and the mix of slowing growth and actual declines was prevalent here as well.
The ISM national manufacturing PMI index was reported this morning, confirming the regional surveys. The headline index came in at 54.4, the lowest level since late last year, and continued its decelerating trend. The leading sub-indices of the index were not favorable: new orders has come down sharply, to 51.1 from very recent highs above 65, and the sub-index for backlog of orders is now below 50 (contracting) at 46.5.
Construction spending surprised to the upside by growing 0.4% month-over-month versus expectations of -0.4%. Investors should always be cautious when looking at month-over-month figures, and a good check is looking at the actual level of spending instead of the growth rate. As the graph below shows, today’s uptick looks fairly meaningless in this context.
Maybe the Economic Cycle Research Institute (ECRI) can help, since its popular weekly leading index is supposed to be forward looking. The index was updated today, and was basically sideways for the week, moving to 122.5 from 122.2. The index looks at money supply and industrial metals prices, along with data from the stock, bond, housing and jobs markets. Dipping into negative territory isn’t especially telling, but on quarterly year-over-year basis, it’s never hit the current level (-4.6%) without us already being in a recession. Below we chart the year-over-year change in the weekly leading index and real GDP.
So, after this data overload, are we any closer to figuring out the future path of the US economy? Probably not. The most recently completed quarter appears to be one in which we experienced slowing but still positive growth. Below trend growth, anything with a 1% handle, is not something that we normally expect one year into a recovery, and will not likely be enough to lower the unemployment rate. Based on recent speeches from Fed governors and presidents, the Fed is very focused on jobs. Which is why quantitative easing is back on the table.