“Lumpy” Economic Data Are Hard to Digest

Manufacturing activity and retail sales are gaining strength but consumer confidence has dipped (again); the February employment numbers were better than expected, but home sales disappointed most analysts and the commercial real estate market is beginning to scare just about everyone.

What do these disparate reports tell us about the state of the economy today?  That it is “lumpy,” according to one analyst, equating the confusing economic picture with a not terribly palatable bowl of oatmeal.

Few analysts who are struggling to discern a coherent pattern – or any pattern at all – in the up-and-down data would disagree about an economy that is moving in fits and starts, providing simultaneously cause for confidence that the recovery is gaining traction, and concern that it might still be derailed.

Starting with the good news – and there has actually been quite a bit of it:  Economists, who had expected the severe winter storms to deliver a chill to the labor markets, got warmer employment  numbers than they were expecting.  The Commerce Department reported a loss of 30,000 jobs in February, fewer than the 50,000 the consensus forecast had predicted, leaving the unemployment rate still high but unchanged at 9.7 percent. 

Also encouraging, initial claims for unemployment benefits fell to their lowest point this year the last week in February.  Separate reports published before the much-watched Commerce Department data also reflected a brightening, though still far from bright, employment picture, measured by a continuing decline in planned layoffs – now at their lowest level in the past two years, according to one report and the past three years, according to another.   

A Hopeful Shift

“It may be a couple of more months before hiring begins to surge, but it is clear employers have shifted away from downsizing and are poised to start adding workers,” John Challenger, CEO of Challenger, Gray, and Christmas, source of one of those optimistic employment reports, told CNNMoney.  The significant change, Challenger said, is not just the decline in planned layoffs, but the change in their purpose.  A year ago, he said, companies were slashing payrolls “simply to keep the company afloat.”  Now, the goal is “to put the company in the best position to take advantage of future growth opportunities.”

Also in the good news, or sort of good news, category:  ·        

	Retail sales increased in January for the third time in the past four months.
	The service sector reflected new-gained strength as the Institute of Supply Management (ISM) Non-manufacturing Index jumped to 53 from 50.5 – the largest gain in this index since October, 2007 and an encouraging sign, analysts say, that the recovery is expanding beyond the manufacturing sector.
	The ISM Manufacturing Index declined in February, from 58.4 to 56.5 ¾ still above the 50-mark that indicates growth, although moving noticeably in the wrong direction.

·         Also wrapping good news around not so good news, durable goods orders increased by a robust 3 percent. But excluding volatile transportation orders from the total reduces that gain to an anemic 0.6 percent – the worst showing for this indicator since last August. Particularly disturbing to analysts:  Consumer demand for automobiles fell by nearly half. Still, “there is no reason to think this is the start of a double dip,” Chris Low, chief economist for FTN Financial, insisted, telling reporters that “some back and fill is standard operating procedure in recoveries.” 

Perceiving both the signs of a recovering economy and the shadows clouding it, the Federal Reserve has responded to both ¾ increasing the discount rate (from .50 percent to .75 percent) for the first time in more than three years, but emphasizing that there has been no change in the plan to keep the target Fed Funds rate near zero “for an extended time” until the recovery is on firmer footing.  The change in the discount rate “is not expected to lead to tighter financial conditions for households and businesses and [does] not signal any change in the outlook for the economy or for monetary policy,” Fed officials emphasized in a press statement.

 The Fed’s most recent Beige Book report found economic conditions improving in 9 of the 12 Fed Districts, but also found that the improvements are “modest.”  Meanwhile, analysts, who had advised caution in interpreting the 6 percent increase in GDP reported for the fourth quarter noted that the growth pace has since slowed by half, confirming their view that the strong report reflected a temporary inventory surge that would not be sustained. 

Up and Down

In other up-and-down reports, consumer spending increased more than expected in  January, posting the fourth consecutive monthly gain for this index; but personal income rose only 0.1 percent – well below expectations and the slowest rate of growth since September. 

Business confidence has increased of late, but consumer confidence fell to 46 from a revised 56.5 in January – the lowest reading for this index since April of last year.  The index of current conditions plummeted to 19.4 from 25.2, reaching its lowest level in 27 years.  “Clearly, consumer spending is going to disappoint throughout most of the year,” Steven Ricchiuto, chief economist for Mizuho Securities, told Bloomberg News.  But those negative confidence readings were based on surveys conducted before February’s relatively encouraging employment reports, so it is possible that consumer sprits will buck up next month. 

Maybe the housing numbers will improve, too.  But for now, lagging home sales remain a major concern for industry analysts and government policy-makers, alike.  Both new and existing home sales plunged in January, by 11.2 percent and 7.2 percent, respectively, despite low interest rates, soft prices and the home buyers’ tax credit – expanded and extended beyond last year’s deadline to provide ongoing support for the housing market. 

It doesn’t appear to be helping much, so far. Pending home sales – a key forward-looking indicator for existing home sales – fell by 7.6 percent in January.  The initial end date for the credit “clearly pulled demand forward, and there has been a substantial payback,” Mark Vintner, senior economist at Wells Fargo Securities, told Bloomberg News.  The housing recovery, he predicts, “is going to be very, very slow.”

Home price trends offer no reason to question that conclusion.  The closely-watched Standard & Poor’s Case-Shiller price index posted its seventh consecutive gain in December. But the average 0.3 percent gain for the 20 cities the index tracks was the smallest since the trajectory shifted from negative to positive – not a good sign, according to some analysts, who think the weak recovery may falter.  “The recovery has slowed since the summer months,” Maureen Maitland, senior vice president for index services at S&P, acknowledged in an interview with the New York Times.  Although it “hasn’t completely fallen apart,” she insisted, “we are in a bit of a flat period.” 

 “On Life Support”

Her assessment is almost bullish compared to that of analysts who see danger signs in the recent housing data.  “The housing market is clearly on life support,” Nicholas Retsinas director of the Joint Center for Housing Studies at Harvard University, told the Times.  With the tax credit ending this summer and the Fed now poised to end its purchase of mortgage-backed securities (credited with keeping interest rates low), Retsinas worries, “What’s going to happen when the government [support] isn’t there? How real is the nascent recovery,” he asked.  “And how sustainable is it?”

Even Realtors, who are genetically programmed to be upbeat about home sales prospects, admit that there is cause for concern.  February existing home sales were above the year-ago level, Lawrence Yun, chief economist for the National Association of Realtors (NAR), points out.  But the month-over month decline, he acknowledges, “is not encouraging and raises concerns about the strength of the recovery.”

Foreclosures remain a huge impediment, Yun and other analysts agree. Three million households are expected to lose their homes to foreclosure this year, according to a RealtyTrac estimate, beating the record 2.82 million foreclosures recorded last year.  A study by John Burns Real Estate Consulting, Inc. predicts a total of 5 million foreclosures over the next 5 years, while a separate analysis by Standard & Poor’s warns that the government-initiated loan modification programs, aimed at stemming the foreclosure tide, won’t be nearly as helpful as supporters hope.  According to this report, 70 percent of the struggling homeowners who receive modifications will re-default eventually, delaying those foreclosures but not ultimately preventing them.

Falling prices, which have pushed more than 20 percent of all homeowners with mortgages under water (raising fears of “strategic” defaults), haven’t yet reached bottom, according to many analysts, despite the fervent hopes of industry executives that they have.  A recent Fiserv report predicts that prices will decline by at least another 6 percent nationally over the next 18 months, on top of the 27 percent decline recorded over the past three years.