U.S. Economic Highlights
03 Mar. 2014
Last week: Weak final demand was the biggest economic problem in 2013. The report on news orders last week indicated that post-holiday demand remains modest at best, and buried under snow drifts. It remains to be seen whether improved weather adds an extra kick to demand as spring approaches. For the moment, the economy continues to struggle, a message likely to be read into the labor report this week.
Monday, March 3
8:30am Personal Income and Outlays, January (Bureau of Economic Analysis)
Income growth was generally in a range of about 0.2 to 0.3 percent throughout the second half of 2013. Spending was a little stronger through the holidays as consumers bought on credit, taking advantage of holiday discounts. This report is likely to show that without those discounts, consumers shopped less, and put their credit cards away. And that underscores the fundamental problem: slow growth in spending power is holding back spending. Also, the weather kept many consumers home – in the Midwest, Northeast, even in some parts of the South. Once the weather improves, many “cabin fever” consumers are likely to go shopping. But how many, and what they buy, is ultimately a function of how much increase there is in spending power. And that means consumption in the first half of 2014 is a function of how good the labor market performs.
10:00am U.S. PMI, February (Institute for Supply Management)
U.S. purchasing managers have been upbeat for some time. By the same token, The Conference Board Leading Economic Index has been signaling a positive turn in the economy. To date, consumption has been relatively slow and business investment even slower. With little help coming from export demand and the public sector dealing with austerity (and the aftermath of a shutdown), the order flow remains slow and industrial activity quite muted. Still, these forward indicators have been pointing to improvement. Was this still the signal in January?
Vehicle Sales February
The pace of vehicle buying has remained close to a range of about 15.0 to 15.5 million units, largely the result of long pent-up demand. With the average age of the car on the road still elevated (over 11 years on average), replacement demand is likely to keep sales relatively strong. Still, the sales pace in December and January suggests that pent up demand is beginning to slowly run its course. Was that still the case in February?
Tuesday, March 4
4:00am Euro-zone Producer Price Index, January (Eurostat)
With slow demand, there is no pressure on wholesale inflation. Global energy prices are not moving higher. Food prices could be moving slightly higher, despite plentiful harvests. But “core” pricing, which excludes food and energy, remains in a range of 0.0 to 0.1 percent. There is little non-labor cost pressure on margins in Europe, or in most of the globe for that matter.
Wednesday, March 5
4:00am Euro-zone Retail Sales, January (Eurostat)
Austerity, low wage growth, low consumer confidence, high and rising unemployment, and uncertainty about economic prospects have all weighed on confidence and helped keep spending low. Data already released showed declines in both Germany and France. This data release is likely to show the declines were not limited to the core economies but spread through the entire Euro Area. Better retail buying waits for better news on jobs and wages. In an economy growing by less than 0.5 percent, this could be a long wait.
Friday, March 7
8:30am Employment Situation, February (Bureau of Labor Statistics)
Job growth was surprisingly weak in December and January. Bad weather certainly played havoc with the data and that likely continued into February. Still, the underlying problem, in both goods and service production, has been a struggle to find the revenue to pay new and/or higher wages without narrowing margins. If companies can find a way to do that in 2014, the labor market will lift consumer sentiment and drive more customers to malls, stores, and internet sites.
Manufacturing could struggle, at least until the large overhang of inventory is worked off. Construction, however, is certain to increase its head count – with more home construction and more commercial building, if the weather improves. The big question is whether the “core” service sector (which excludes health and education) can start expanding a little faster.
Regionally, hiring has been the weakest in the service-dominated big population centers in the Northeast and Midwest. Job growth has been relatively strong in the South and West. If the labor market turns up, it is likely to be the result of more hiring in small companies engaged in core service sectors in the Midwest.
8:30am U.S. International Trade in Goods and Services, January (Bureau of the Census)
Export growth was in double digits in the fourth quarter while import growth was very slow throughout the second half of 2013. Given global demand, export growth will not continue at a double digit rate in the first half of 2014. If the U.S. economy has indeed turned a corner, import growth is very likely to pick up, perhaps to a 3 to 4 percent pace. In short, this report is likely to show a widening of the trade deficit, turning into more of a drag on GDP.
THE SITUATION ABROAD
It is not just weather. Despite upbeat reports late in 2013 from surveys of purchasing managers and from The Conference Board’s Leading Economic Indexes, industrial activity and trade across the globe slowed at the end of last year and the beginning of this year. Global trade fell 0.4 percent in December, after no change in November, according to data from the CPB Netherlands Bureau for Economic Policy Analysis. Trade from advanced economies edged lower while trade from emerging Asian economies was merely tepid. Weather and financial market volatility could be blamed. But the deeper problem across the globe is the lack of confidence among consumers and business executives and the slow pace of demand. A fresh batch of purchasing manager survey data is due out this week. It is very likely to show continued belief that world-wide conditions are poised to quicken. In other words, the recent slowing is likely to turn out to have been a pause, not a more fundamental change of direction. But it begs the question – how much longer.
FACT OF THE WEEK
That is the current gap between mean and median annual income in the United States, roughly double what it was only a few decades earlier. Rote blue-collar job erosion and outsourcing of some white collar work are among the reasons for the widening of this gap. Some would add taxation policy. Whatever the root cause, widening disparity, implying a growing concentration of wealth, will threaten social cohesion. The three big questions are, how much wider will it get? Over what time period? More importantly, can the widening be slowed or even reversed?
QUESTION OF THE WEEK
Is the European economy mending?
The European Commission thinks so. The economy came out of recession by mid-2013 and posted a 0.3 percent rise in GDP in the fourth quarter of last year. The Commission is projecting that growth can pick up to about 1 percent this year and perhaps as much as 1.5 percent in 2015. The question perhaps is not what will produce this uptick but why it will be so tepid.
Reducing debt is a big part of the answer. Governments are continuing to adhere to austerity budgets to bring down high debt levels. Nonfinancial businesses are doing the same. So are households. Even consumers and businesses that want to spend are finding banks unwilling to lend unless they are sure the loans will be repaid. They are saddled with unrepaid debt as a leftover from the Great Recession and the long slow road back to growth. The struggle is to gradually move up to about a 1.5 percent pace of economic activity. It will not be easy. Still, arguing about how much growth is a welcome change after years of debate focusing on how much decline and for how much longer.