There can be little doubt that data releases rather than experience or intuition are driving the economic conversation. This is perhaps a function of the disconnection that many people feel about an economy that they no longer understand. Rather than trusting their own eyes or their own gut to form an opinion, it’s much easier to grab a set of convenient numbers. The big question then becomes what numbers you choose to look at and which you choose to ignore.
While there are a great many types of economic data releases, issued by a myriad of public and private sources, two reports have risen above the rest in importance: the Quarterly GDP estimates issued by the Bureau of Economic Analysis, and the monthly jobs report issued by the Bureau of Labor Statistics. And those two reports have been recently coming up roses. The 3rd quarter GDP growth report, released on November 25th, revised growth upwards to an annualized rate of 3.9%, and the November Jobs report, released on December 5th, showed the creation of 321,000 new jobs in November, the highest monthly total in nearly three years. These reports have solidified the views of the mass of analysts that the U.S. economy is currently firing on all cylinders.
But to make this conclusion, almost all the other data sets, which used to be considered significant, have been either ignored or, when that proves impossible, rationalized away to make the figures unimportant. This never happens with strong data, which is typically accepted at face value.
In the weeks leading up to, and the days after, the recent GDP and jobs reports, a torrent of data releases came in that were almost universally awful. However, in our current era of journalistic lethargy, these reports have received almost no attention at all.
While it would be too long and boring to list all of these moribund statistics, here is a brief overview, in chronological order, of what you are likely not hearing:
November 24 - The Chicago Fed National Activity Index, which weighs 85 different economic indicators to gauge the national economy, fell to 0.14 in October from 0.29 in September. The three-month average declined to negative 0.01 from positive 0.12. The index is designed so that readings above zero indicate above-trend growth.
November 24 - Markit’s Flash PMI, which measures service sector health, came in at 56.3 for November, missing expectations of 57.3. This is the lowest reading for the index since April, and the fifth consecutive month of declines.
November 25 - The Richmond Fed Manufacturing Index came in at a very weak 4 for November, which is down sharply from the 20 posted in October, and far below economist expectations. Consensus expectations were for 16, with survey respondents ranging from 12 to 24.
November 25 -The Commerce Department reported that growth in corporate profits (adjusted for depreciation and the value of inventories) slowed sharply in the third quarter to a 2.1% annual rate, down from an 8.4% annualized rate in the second quarter.
November 25 - The Case Shiller 20-City Index showed year over year price gains of only 4.9%, the lowest reading since October 2012. This continues a trend of a decreasing rate of home price appreciation.
November 25 - The Conference Board reported that U.S. Consumer Confidence dropped to 88.7 in November from a revised 94.1 in October. The November drop was unexpected and puts the index at its lowest reading since June. Economists surveyed by The Wall Street Journal had forecast November to come in at 96.5.
November 26 - U.S. durable-goods orders rebounded 0.4 percent in October after September’s decline of 0.9 percent. However, the rise largely reflected a 45.3% surge in demand for defense aircraft and parts, which masked weak demand elsewhere. Excluding transportation, orders fell 0.9%, the biggest drop since December 2013. Excluding defense-related products, orders fell 0.6%.
November 26 - Personal income rose by only .2% in October, half of the .4% expected by economists.Personal spending also increased by .2%, but this was 33% less than the .3% consensus expectations.
November 26 - Manufacturing activity in the Chicago-area expanded 60.8 in November, which represents a significant drop from 66.2 in October. The decline was larger than the consensus expectations for a decline to 63.
December 3 - Mortgage applications decreased 7.3% from the week earlier, the second straight week of declines.
December 3 - The National Retail Federation reported that Thanksgiving weekend retail sales came in at a disappointing $51 billion, down 11% from 2013. This data includes the entire four day weekend, in which many retailers operated under longer hours than they have in years past.
December 5 - Although the Trade Deficit narrowed slightly to $43.4 billion in October, the figure was actually higher than the consensus estimates and only came down because the September numbers were revised higher. In addition, the trade deficit in manufactured products hit $71.2 billion, the highest on record.
December 5 - Factory orders fell for the third consecutive month, shrinking 0.7% (more than double the .0.3% rate that had been expected) in October after declining 0.5% in September.
December 5 - Consumer credit rose $13.2 billion in October but the increase was far less than the $16.8 billion expected by a Bloomberg survey of economists (September’s rate that had also come in well below the consensus estimate was revised even lower). The gain was largely centered on a $12.3 billion increase in non-revolving credit that includes auto financing and the government’s acquisition of student loans from private lenders. Revolving credit rose only $0.9 billion, down from an already disappointing $1.4 billion in September.
Although the national elections are generally not counted as an economic indicator, the November mid-term elections reflected overwhelming economic dissatisfaction among voters, which resulted in a drubbing at the polls for Democrats associated with the President’s agenda.
So if the majority of the granular reports of weak economic activity persist and the public remains unaware or unconvinced that the economy is improving, how could it be that the two most followed reports could be so strong?
There is much in both the GDP and the Jobs Report that is dependent on forward-looking expectations. I believe that both reports are showing improvement because businesses are building inventory and hiring staff in anticipation of an economy that they believe will continue to improve. It’s like the Field of Dreams recovery, prepare for it and it will come. But I think businesses are following the false narrative, and ignoring, or rationalizing, the bad data as thoroughly as does the media. When they realize they were fooled by the hype, jobs will be lost, and GDP will fall.
Furthermore, the GDP and jobs data would certainly be far weaker if the Federal Reserve were not providing so much monetary support. Sure, they have discontinued the vast majority of the QE, but interest rates are still at zero percent. What would GDP or job growth look like if consumers, businesses, and the federal government were forced to pay anything that approaches the historically normal interest rates on our much greater than normal level of debt? My guess is that it will be awhile before we find out, as I believe that as the bloom comes off the recovery rose, the Fed will launch another round of QE before it gets around to raising interest rates.