One Step Backwards

Having been sidelined this week by minor surgery – very minor but annoying nonetheless – I have been able to take stock of our recent economic numbers. Unfortunately a more leisurely review doesn’t help too much. I have emerged more skeptical than ever.jkn

At one point earlier in the week I was contemplating writing about US consumer debt. Late in 2011 there was a fairly significant uptick in debt after many quarters of decline. The key question to ask in view of this was: does this imply that debt reduction is over? If so we can expect a slightly elevated pace of consumption as households release income for spending rather than debt reduction. When we added in the November retail sales figures, especially the rise in auto sales, and the apparent improvement in the job market, things suddenly had a much more optimistic patina. Some people even began to dream of the changes that this improvement would bring to the political landscape – Obama’s re-election chances were re-assessed upwards.

Dream on.

Today we took a step backwards.

That improvement in retail sales was reversed. They only grew by a paltry 0.1% in December, way below forecast, and way below a rate suggestive of continued improvement. Indeed if we subtract auto sales, which grew 1.5%, from the total everything else seems to have shrunk or stayed flat. Take electronics for instance. After weeks of breathless anecdotal reports of stores brimming with buyers and hectic activity, it turns out that sales in those stores actually dropped 3.9%. And that boom in online sales? It fizzled. They dropped 0.4%. One bright spot was the 0.7% increase in spending at bars and restaurants. Apparently window shopping is in vogue. Which makes sense in view of the wage outlook.

Accompanying this downbeat news was an equally dampening report on the job market. New claims for unemployment assistance jumped markedly back to 399,000 – up 24,000 over the previous week. This suggests that much of the improvement in the last few weeks of 2011 was seasonal labor and not permanent. Remember: we had sen many weeks of steady increase, which coupled with the better unemployment figures led many to think a sea change had occurred and that we were headed towards a healthy labor market at last. Not so much. Just how much of the fourth quarter pick up will stick with us, and how much will evaporate as companies shed that seasonal labor remains to be seen, but we seem to have been fooled by the extent of seasonality this time through.

This reversal of the improving trend may turn out to be temporary once we are through the oddities of year end, but clearly we are not at quite the advantageous point we had hoped for. So we must remain cautious in our outlook. As you all know I have eschewed jumping on the optimistic bandwagon and still look for GDP growth closer to 2.0% than to 3.0% this year. What concerns me somewhat is that impact that the weaker sales figures will have when the fourth quarter is compiled. We had all hoped 2011 had needed with a stronger quarter – with GDP as high as 3.5% – thus giving 2012 a good kick off. That sales report tempers things. Our momentum, which is still not adequate to break the back of our employment problem, may be weaker than we thought. If so skeptics like me will be correct. Unfortunately.

So what about that upturn in consumer debt?

I think it highly probable that it was less voluntary than forced. There comes a time when even cashed strapped households have to buy things, and it seems as if the US economy crossed that threshold late last year. People decided that there was just enough improvement that they could take advantage of discounts on big ticket items like cars. So they took the chance and borrowed. We will have to watch this statistic closely to see if that hypothesis holds up as we head into 2012. Consumer confidence has improved a little bit, but is way below its usual heady levels. The general mood remains sour and so debt reduction may re-assert itself if wages don’t pick up soon. According to the Fed’s “Beige Book” which is a compendium of reports from each of its districts there are early signs of labor shortages in some restricted sectors, but there are no signs of a general wage increase. At least not sufficient to alter debt to income ratios radically any time soon. And certainly not sufficient to represent an inflationary threat.

The word quiescent comes to mind. Stagnant is more harsh

And probably more accurate.