Our Boom in Hyperbole

With the year end break behind us we can return our thoughts to more mundane matters, such as the apparent boom about to sweep through the US economy. At least that’s the sentiment that seems to have sprung up while I my attention was diverted elsewhere. Everywhere I look I read headlines announcing the imminence of a surge in growth. Clearly the stock market is anticipating something grand, retail stock prices have gained about 25% in value over the last year and show no signs of slowing down. Even the Financial Times carried a headline suggesting that it, too, was now expecting the news to be unrelentingly perky throughout 2011. At least the FT told us that the data supported the breathless excitement oozing from the headlines. Other folks seem to be making it all up based upon whimsy and very little fact.

So are these boom times we are about to enter?

Maybe. Maybe not. Actually, more not than maybe.

The news is certainly more upbeat. US retail sales were strong over the selling season just ended. New claims for unemployment assistance dipped below the magic 400,00o mark for the first time in years. Manufacturing continues to plod along above the 50% mark in the Institute of Supply Management surveys. There is no sign, yet, of sustained inflation, except for the pressure on prices that might emerge from commodity cost increases – and those increases themselves reflect worldwide growth and not a monetary policy flub. So there is something real going on. Something good.

But is it a boom?

I don’t think so.

Take manufacturing. The ISM survey does indeed point to continued expansion in factory production. Today’s report has 57.0% of manufacturers saying they are adding rather than subtracting to activity. Any reading over 50% means that more factories are busier than are less so. Thus a reading of 57% is quite good. It is not a boom. Certainly we have had seventeen straight months of 50%+ readings. There was a worrying dip over the summer, but last month brought us back to last May’s level, so the dip appears to have been temporary. In historical context this is a good report, we have not seen a sustained reading for the overall ISM index of over 60% since the mid 1980’s, so this is a heartening figure.

But.

There is a downside. If we look inside the composite index at the employment sub-category we see something a little less rosy. There the reading is slightly lower, at 55.7%. More to the point it actually fell last month, and is well down from the 60.4% reached last August. So the trend in production is positive, while the trend in factory hiring is negative. Productivity is growing, at the expense of hiring.

Meanwhile the news on new claims for unemployment assistance is more positive. Last week’s report showed claims dipping sharply to 388,000. Whether there is some seasonal adjustment glitch in the data we will have to wait and see, but this is the first time since the onset of the crisis that claims have been this low. After a few weeks of hovering in the 425,000 to 440,000 range the dip seems very sudden and suggests that it could be an anomaly. Let’s hope not. The decline was sharp enough to bring the four week moving average, always the better figure to work with, down to 414,000. This is much better than the levels claims had been stuck at throughout the late summer and early fall, but nowhere near low enough to break the back of unemployment. Looking at the year over year figures the pace of improvement is slowing down, and we have yet to reach the kind of claims activity associated with a strong economy. Just to put this in context: during the long employment boom of the 1990’s weekly claims were routinely in the mid to low 300,000’s, and ended the decade in the high 200,000’s. So we are a long way from those halcyon kinds of levels, and have yet to see activity low enough and long enough to get excited by. Yes, we are moving in the right direction. No this does not portend a boom.

Besides, employment is a lagging indicator. We should see other signs of a boom before those claims numbers dip into the strong growth range. One of those signs could be retail sales which, by all accounts, showed some strength over the crucial end of year selling season. Looking back at the data we have – the last report is for November and so excludes the year end sales – the trend is very positive. The year on year rate of growth in retail sales is faster than anything we experienced in the last two decades. This is not surprising given the awful collapse we saw throughout 2009, but it is certainly suggestive that consumer demand is reviving. There was a mid-2010 slide, but that now appears to be behind us, and the annualized rates of growth are at the dizzying heights of the mid and late 1990’s.

But. Again.

This does not imply a boom. It implies a strong GDP level for 2011. Or at least stronger GDP growth than I had been predicting. In my book a boom would be several years of 4.0%+ GDP growth, and not just a single such year. And I doubt that 2011 will quite get to that level, even with the additional kick stemming from the recent tax cut deal.

So here’s why we need to keep perspective and avoid the silly hyperbole of the headline writers: even if we see 4.0%+ in 2011 unemployment will not drop very much. Maybe by a percent or so.

Why?

Because we need 2.5% GDP growth just to stay in place. Only growth above that point has the effect of reducing unemployment. That initial 2.5% simply allows us to absorb population growth and offset the impact of continued productivity improvement. This effect is why so many people still think the economy is in bad shape – it is just barely treading water in terms of job creation. Since this is a major determinant of attitudes and consumer psychology, only when we break through and get to a sustained growth of 3.5% and more will we start to see consumer sentiment improve markedly.

We are not there yet. Despite the blaring headlines we do not have a boom. Unfortunately we are much more dull: we have a steady chug. Good, or at least better than before, but not good enough to justify the excitement. And absolutely not enough to justify a relaxation of policy. All it will take is one good austerity move, and the building positive energy could dissipate quickly. Since the incoming Republican majority in the House of Representatives has signaled its intention to attack government spending, that risk is now high. We could be in the absurd position of having slogged through the hard part of restoring the economy only to have all that effort nullified by a bout of ideological insanity.

So, no, we are not there yet. Far from it. But we do have a goodly supply of hyperbole. Please ignore it.