Current Data Trumps Recent Positive Indications of Recovery

The hunger for confirmation of a continued recovery led to a positive spin on the dismal GDP revision: that it beat even worse expectations. This week brings a ton of data, some of it current and some of it lagging. The few positive reports are getting touted even when a modicum of reflection would repudiate the confirmation of recovery. With this in mind, let's survey some recent news bits.

Housing: The Case-Shiller housing report was positive - but it reflects data back in June when we still had a homebuyers credit. We already know from more recent data that housing fell off a cliff in July when the credit ended. The chart which best captures where we are in housing is this view of psychology from The Big Picture:

Spending: the headline is that incomes and spending are improving. In July, incomes rose the same as June, which is encouraging, but less than May (0.3%) or April (0.5%). Spending rose faster than incomes, and in total spending is back up to 2007 levels, but growth remains relatively low and per-captia spending is still down. The trend remains downward since 2000: 

 

Incomes: The problem is how sustainable spending is when incomes remain depressed and the government transfer payments (which helped buoy spending) are abating:

 

Retail:  The back-to-school season has been slow, which has led to deep sales to bring in parents. It is thus not clear that spending will hold up in Q3. No surprise then that retail stocks are in full retreat. 

Purchasing: The regional PMI (purchasing mangers' index) reports are coming out, with the national PMI expected tomorrow. The spin is they are still positive, indicating continued expansion. Beneath this spin, however, the trend is clearly down. The Chicago PMI missed expectations coming in at a new low for 2010 at 56.7. The NY numbers also came in "decidedly weaker" than reports earlier in the year. With the Dallas report (next item below), all the Fed manufacturing surveys are in, and they all showed slowing or contracting activity:

Manufacturing: The Dallas Fed just reported continued weakness in "business conditions" at -13.5%, up from the dismal -21% of July but worse than the -10% expectations. Texas factory and production both came in at zero. New orders came in negative, which bodes poorly for the near future. The manufacturing portion of ISM is looking like it is already into contraction. PragCap reports that manufacturing indications out of the mid-Atlantic region are "decidely negative" for August. Business conditions and new order both were negative (around -7) from the Philly Fed report, pointing to the ISM index going negative in the next report:

Tech Sector: The tech sector has been doing very well in connected devices, and July chip sales were up 37%, but the growth rate is slowing. Yet Intel missed badly in its latest report, an early indication that the weak economy has caught up with it. In July it had reported strong demand. Cisco had also reported weakness, and in general across August Tech has flashed warnings. 

 

Comments

[JT]

Today's ISM number renders all of the above analysis moot and useless.

[yelnick]

JT, on ISM, don't get prematurely exuberant. It was driven primarily by inventory & imports; whereas leading components like new orders, backlog, and deliveries all dropped. Funny how it was juxtaposed today with GM reporting a 25% drop in August sales (of course, last year August was the ill-advised cash4clunkers month). My analysis stands: you have to look under the cover of these positive lagging reports, and not look very hard, to see the negative forward trend. 

We shall know within a month: either the regional reports reverse up, or the ISM will reverse down next report. The regional reports do not stay out of alignment for long. If the regional reports stay in a decline, expect ISM on the national level to catch up by declining. 

As an aside, I am more a believer in what the China PMI report is indicating. The Chinese bottomed four months earlier than the US (Nov 08 vs Mar 09) and the Shanghai index has recently dropped but seems to have bottomed - harkening a drop in the US followed by a bottom four months hence, in the Nov time frame. 

[JT]

Yelnick,

You need to be a lot more careful with your claims . . GM did not report a sales drop of 25% for the month of August. It reported a drop of 7% from July.

[yelnick]

JT, GM did report a 25% drop, YoY. Given one day fewer this Aug, you could reduce it to 22%. A year earlier we had the distortion of Cash4Clunkers, which is why I parenthetically mentioned it. You could use THAT to lessen the bad news, but the 7% MoM drop is also troubling. It suggests the rest of auto sales may be coming in weak. If so, the likely poor unemployment report on Friday could cause a lightening up of positions over the three-day weekend and put us all into the mode of digesting more data.