May 14, 2006
Early indications of trouble
One leading indicator heads south this week.
Last fall we saw a typical pattern for the first stages of an economic recession. High gas prices created a good deal of anxiety on the part of consumers, whose abrupt slowdown in spending, particularly on motor vehicles, brought GDP growth down from its normal 3.5% annual rate to a 1.7% growth rate for the fourth quarter of 2005. As gas prices came quickly down and the disruptions from the hurricanes were resolved, consumer confidence and spending then rebounded.
It's thus of some concern that the latest value for the University of Michigan consumer sentiment index has fallen back to the low levels we saw last fall. The graph at the right shows this index, along with historical values and shaded areas denoting economic recessions.
Kash Mansori at Angry Bear shares my concerns, though Dave Altig at Macroblog notes that some analysts were cheered by the reasonable April retail sales figures released by the Commerce Department. These show nominal retail sales overall up $1.8 billion in April over March, a 0.5% increase, or whopping 6% at an annual rate. On the other hand, of this $1.8 B increase, $1.6 B came from sales at gasoline stations.
Yes, we know we're spending more on gas. That's the worry.
Even so, I agree with Dave that the April sales figures paint a picture that mitigates some of the concern raised by the consumer sentiment survey. At this point, I see these developments as something to follow with concern, but not yet cause for panic.
Posted by James Hamilton at May 14, 2006 11:17 AMdigg this | reddit
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Tracked on May 17, 2006 04:18 PM
Looking at that graph - appears there are more false positives than accurate calls... meaning the Consumer Confidence numbers drop but no recession results?
How good of a predictor is this?
Posted by: dryfly at May 14, 2006 01:58 PM
I agree, Dryfly, by itself it's a noisy indicator, so has to be read in conjunction with everything else.
Posted by: JDH at May 14, 2006 02:23 PM
I think consumer confidence is a lagging indicator, if at all.
Posted by: sam at May 14, 2006 02:37 PM
Actually, I thought there were about three pieces of bad news last week. The weak retail sales (ex fuel), the consumer confidence number and the mounting evidence of air leaving the housing bubble.
Actual and anecdotal evidence of a collapse in the Miami condo market is, I expect, the tip of the iceberg. Evidence of substantial increases in foreclosures, even in states that did not have sharp price run-ups, indicates that many of those millions who refinanced with ARMs, not to mention exotic mortgages, will soon be handing the keys over to the mortgage companies and walking away from their now non-existent home equity.
The combination of rising fuel costs and rising interest rates will have the effect of destroying demand at a much faster pace than is usual in the deceleration of the economy. I believe that the Fed has already gone too far, and will probably be much too slow to reverse.
By the way, we just had the warmest April in North America for over fifty years. Look for natural gas prices to spike sharply as the demand for electicity jumps when all the air conditioners come on.
Posted by: David Baskin at May 14, 2006 03:18 PM
I don't see how the retail sales report mitigates concern at all. Ex-gasoline stations, nominal retail sales were up 0.05%, or 0.6% annually, lagging far behind any measure of inflation. In other words, real retail sales were solidly down in April, besides paying at the pump.
(To be fair, retail-sales is often viewed ex-Auto, since auto-related sales are volatile. Ex-Auto, ex-gas stations, retail sales were up 0.2%, or 2.4% annually, arguably keeping pace with inflation. So, best case, real retail sales were flat in April, except gas.)
Of course, these are monthly blips with wide margins of error. But to the degree that we pay attention to month-to-month preliminary report astrology, it's hard to see how April retail sales can be viewed very positively.
Posted by: Steve Waldman at May 15, 2006 03:47 AM
Another bearish indicator is the growth rate of M2 which has been de-celerating for several months now.
Posted by: jim miller at May 15, 2006 05:05 AM
I viewed the retail sales report as favorable for the economy. Yes, gasoline sales accounted for most of the reported increase, but sales at building supply stores accounted for most of the sluggishness elsewhere. The decline of 1.6 percent in activity at building supply stores was most likely a small offset to remarkable gains in the early months of the year. Activity at building supply stores was still up 13 percent year-over-year. Sales at stores dealing with discretionary items -- furniture, clothing, sporting goods, restaurant meals, general merchandise -- did quite well, growing 0.5 percent collectively and buildingh on strong trends.
Posted by: Mike at May 15, 2006 09:41 AM
Mike -- Seems like a fair cop... Ex-Gas Stations-and-Building-Materials, retail sales are were up ~0.2%, about keeping pace with inflation. Ex-Gas Stations-and-Building-Materials-and-Autos, we get to your about +0.5% for, um, "normal stuff", which looks pretty good. And building materials have been really volatile.
Someone (too lazy to be me!) ought to start calculating trimmed mean or medians, it's too easy to make the numbers dance when just picking what to count and what not to...
Posted by: Steve Waldman at May 15, 2006 10:35 AM
You pointed to a pretty good trimmed series yourself, though not a mean. You can then do a 3-month average to smooth ex-gasoline, cars a building materials a bit more, and voila!, a core sales figure that you can live with. I doubt you could one could do much better than this, especially given that revisions will change the answer, anyway.
Posted by: kharris at May 15, 2006 12:11 PM
Another indicator-the number of filings of new IPO's on Friday was the highest since 1990.
Posted by: jim miller at May 16, 2006 04:54 AM
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Consumer confidence spending
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