Today was an economic data dump day from jobless claims, to inflation to economic activity. I just wanted to touch on a couple of the reports that were just glaring with anomalies that we expect to be correcting in the coming months ahead. While the data is showing the economy hanging in there for the moment there is not much chance the somehow the U.S. can effectively decouple itself from the rest of the globe. China’s flash PMI just came in at a contractionary level of 49, Europe is already in a recession it is just a question of how bad it will be and negative net export prices doesn’t bode well for the U.S. economy.
First, there is always a bit of disconnect between the “initial jobless claims” and the “unemployment number” as reported by the government. Initial claims are calculated from the number of people that file for state unemployment benefits whereas the “unemployment report” is calculated by a survey of 60,000 households each month. The complete explanation is here. Therefore, this is why there tends to be a disconnect between initial jobless claims averaging 363,000 a week for the last 4 weeks, or 1.3 million new jobless individuals, versus employment “growth” as reported by the government.
The most recent report showed a drop in the number of initial claims to 366,000 from the upwardly revised 385,000 in the previous week. This brings the 4 week moving average down to 363,285. The declining trend over the last 4 weeks has certainly been welcome but let’s not dismiss the fact that the decline in claims is due to temporary hires for the holiday shopping season. This will likely reverse course shortly after the new year. In fact the recent Job Opening and Labor Turnover Survey declined by more than 50% in October to 110k openings from Septembers read of 248k.
Furthermore, the recent decline in the S&P 500 may likely be predicting a reversal of trend in better employment in the coming months. The chart shows jobless claims versus the inverse of the S&P 500. In 2007-08 as the S&P 500 peaked and began to decline – jobless claims rose sharply. The same occurred post the 2000 peak although the recessionary spat was much more mild. With corporate profits set to decline, pricing pressures on the rise and consumer demand still very weak – we may be seeing pink slips emerge in the coming quarters ahead as businesses step back to preserve margins.
Speaking of rising pricing pressures for businesses – the Producer Price index swung sharply from last month’s 0.3% decline to a sharp 0.3% gain with a year-over-year rise of 7.9%. With energy costs on the rise and a big uptick in food costs this is going to impact the consumer. With aggregate demand already weak this feeds into the cautious stance by businesses and why they continue to hire for necessity, holiday shopping, versus long term employment.
The chart shows that the current peak in the ratio of crude goods to finished prices peaked earlier this year. The index has only peaked above 1.3 four times in the past with each being precedent to an oncoming recession. Since the consumer makes up 70% of the economy pay attention to the impacts of price rises and where it impacts the consumer.
Let me explain. Average Americans have just witnessed their incomes decline over the last two quarters. Now they are staring at a 9.4% advance in home heating oil prices and a 1% gain in food costs particularly for fresh and dry vegetables which rose 11.5%. Looks like “Ramen Noodles” are about to be the main course on many dinner tables while bundling up to conserve heating costs. Better pray for an abnormally warm winter.
Empire Manufacturing Index
A very robust uptick in the pace activity in the New York region’s manufacturing sector is a welcome sign rising to 9.53 versus little change in November at 0.61. What is very encouraging for the region is that this reverses the prior run of monthly contraction that goes back to June.
On the positive data front out of the region the New Orders rose to 5.10 this month versus a negative 2.07 in November with shipments especially strong at 20.87. Manufacturers in the region added to their workforces in the month with the employment index at rising to 2.33 versus minus 3.66 in the prior month. It is important to remember that this is more of a backward looking indicator even when it comes to the future outlook. Businesses tend to look at their current environment and predict improving trends six-months out which is why the outlook for general business conditions ticked up to 52.33 versus 39.02 in November and 6.74 in October – all coincident with the sharp pickup in the markets beginning in October.
The report overall was strongly positive even though there were a few negatives such as a contraction in unfilled orders and a rise for input prices (see PPI above). Overall the Composite Index of current conditions and future expectations have rebounded strongly in the last three months. The question we have to resolve now is whether these gains are ephemeral in nature or something more substantive.
Stepping back from the positive Empire region report we get a negative industrial production report to contend with in a “two steps forward – one step back” scenerio. For the month of November production weakened largely on a decline in auto assemblies, however, manufacturing was down in general across the board. Industrial production declined 0.2% after surging 0.7% in October.
By major components, manufacturing dropped 0.4% after gaining 0.5% the prior month. For November, utilities output advanced 0.2% while mining edged up 0.1%. Manufacturing was pulled down largely by a 3.4% drop in output for motor vehicles and parts, following a 3.4% jump in October. Excluding autos, manufacturing still slipped 0.2%, following a 0.3% rise the prior month.
While November’s manufacturing number is weak and contradicts the Empire manufacturing index it will be interesting to see which way manufacturing is headed in the next couple of months.
Philly Fed Survey
The last piece of our economic deluge of data today is the Philadelphia Federal Reserve Regional Survey. Like the New York Fed regional survey the Philly Fed also showed a sharp uptick in the preceding month. The Philly Fed report points to positive momentum in manufacturing for November in contradiction to the Industrial Production survey.
The Philly Fed’s general activity index rose to 10.3 versus November’s 3.6 to signal monthly expansion at an accelerating rate. Importantly, both the Empire State and Philly Fed reports are signaling gains underway for new orders, at 9.7 this month for the Philly Fed report versus 1.3 in the prior month. Furthermore, Backlog Orders also rose to 7.2 reversing a long trend of contraction.
Other readings suggested some negatives, however, such as employment which gained at less positive pace and shipments showing a slower rate of monthly increase. While the decline in the manufacturing component of the November industrial production report discussed above is confined to shipments both the Empire State and Philly Fed reports show strength in new orders.
The economy seems to be trying to muddle through at the moment even in the face of headwinds from the international communities. While the overall outlook remains weak the upticks in the data are encouraging. The real question is whether or not these are upticks within a weaker trend which will ultimately resume OR are we seeing a real recovery beginning to take shape. While we certainly hope for the latter caution is still advised from an investment standpoint. Time will tell and we will have plenty of time to get onto the economic recovery train should it arrive.