Up and Down Week for Economic Data

Equity markets continued their modest 2012 uptrend last week, with the S&P 500 and Dow Jones Industrial Average rising 0.9% and 0.5%, respectively.  A mixed week of economic data in the US and abroad kept investors on edge, but ultimately market volatility continued to decline.  The CBOE’s implied volatility index, or VIX, neared 20 for the first time since August’s market selloff.

 

In the US, economic news began the week positively before fading in the final few days.

 

On Monday, the Federal Reserve revealed consumer credit increased the most in 10 years.  Credit outstanding rose $20.4 billion in November, dwarfing estimates for a $7 billion gain.  The gain was sourced from both the revolving (credit cards) and non-revolving components.  Student loans and continued strength in the auto sector bolstered non-revolving credit.

 

 

Monday’s report was positive as increased consumer borrowing indicates economic confidence is improving.  However, with stagnant wage gains and consumers already dipping into their savings to fund spending, it is questionable how sustainable November’s credit binge is.  Many experts believe appetite for debt was structurally changed (read: reduced) by the financial crisis, so the recent rise in credit card debt, absent significant labor improvement, may be the exception, rather than the rule.

 

On Tuesday, the National Federation of Independent Businesses released its monthly Small Business Optimism index for December.  The index improved to 93.8 from 92.0, its highest level since February.  The index remains historically low, however, at more than six points below the pre-recession average. 

 

The Small Business index’s underlying components were mixed in the survey period, but generally net positive.  The percentage of small businesses reporting poor sales as problematic remained high at 23%, but continued to improve.  The percentage of businesses planning to hire fell by 1% from November, but was still the second highest reading since 2008. 

 

 

A notable takeaway from Tuesday’s small business report was the ratio of businesses reporting difficulty filling job openings. According to the release, “Forty-five percent of owners hired or tried to hire in the past three months, but 34% of them reported few or no qualified applicants for the position(s).”  This mismatch of labor supply and demand is something also evident in the Bureau of Labor Statistics’ (BLS) Job Openings and Labor Turnover Survey (JOLTS).  In data released on Tuesday, job openings have risen at a faster rate than hires for the past two years, suggesting another impediment to labor market recovery.

 

On Wednesday, the first of eight editions of the Federal Reserve’s Beige Book in 2012 was released.  The report compiles anecdotal accounts of economic conditions from each of the 12 Federal Reserve districts, and is valued due to its influence on the Federal Open Market Committee.

 

Wednesday’s report indicated improving conditions in all 12 districts, with overall national activity increasing at a “modest to moderate pace.”  This was a slight improvement in language from November’s Beige Book, in which activity was described as “slow to moderate.”

 

While the Beige Book highlighted improved consumer spending, Thursday’s retail sales report disappointed most observers.

 

Retail sales for December grew just 0.1%, contrary to the strength seen in most holiday sales reports.  At the headline level, motor vehicle sales and building materials sales were offset by a decline in gasoline purchases.  However, a more surprising decline at the core level was mostly to blame for the weak December reading.  Declines in non-store retailers, electronics, and wholesale merchandisers weighed on total sales levels, contradicting other national surveys. 

 

 

The final negative data point also occurred on Thursday, when initial jobless claims increased 24,000 to 399,000.  While the overall level of claims remained below the 400,000 mark, this did represent a sizeable jump after several weeks of improvement.  Initial claims are a volatile data series, however, and as we noted last week, it appears there was a higher-than-normal retention of couriers and messengers in December by employers.  Thursday’s report may signal the offloading of this seasonal accumulation.

 

 

A society Moving Toward The Brink?

With economic growth stagnating, global indebtedness remaining stubbornly high, and unemployment refusing to budge, pressure on governments and ordinary citizens is mounting.  Financial crises are notoriously difficult to recover from, but the longer-term sociological problems created by such severe declines in output pose a major headwind to the economy in 2012 and beyond.

A recent survey from the World Economic Forum’s Global Confidence Index found that 60% of public and private sector employees believe a societal disruption is likely in the next 12 months.

Source: World Economic Forum

What are the underlying causes for such concern?  Employment, for one.  By early 2011, unemployment across OECD member-nations stood at 7.4% for adults over the age of 25.  Among youth between the ages of 15 and 24, unemployment stood at a staggering 17.4%. 

Source: OECD

Here in the US, tensions are gradually bubbling to the surface.  The Pew Research Center recently revealed that 66% of individuals believe there is a strong or very strong conflict between the rich and poor.  Conflict between socioeconomic groups is now viewed as a bigger problem than racial divides. 

Source: Pew Research Center

Fixing the problem, particularly in the US, will be extremely difficult.  Individual perceptions of success are most commonly associated with job opportunities. 

Unfortunately, given the massive number of layoffs that occurred during and after the financial crisis, even if the economy added 200,000 jobs per month, it would take more than 12 years before the labor market reached its prior peak. 

Source: The Hamilton Project

Government-sponsored solutions to unemployment will also be tough to push, given the current environment.  Federal debt reached almost 100% of GDP this year. 

Source: Hoisington Investment Management

 

In the meantime, as the World Economic Forum highlighted, chronic fiscal imbalances and severe income disparity present major risks to the global economy over the coming decade.  Financially induced recessions are never easy to move beyond, and this time around is no exception.

 

The week ahead

The holiday-shortened week does include some major economic data of note, spanning inflation, housing, and manufacturing.

 

On the manufacturing front, three major releases are due this week, including the Empire Manufacturing Survey on Tuesday, industrial production on Wednesday, and the Philadelphia Fed Survey on Thursday.

 

On Wednesday and Thursday, the BLS releases PPI and CPI, respectively, both of which are expected to remain muted.  The week rounds out with housing starts on Thursday and existing home sales on Friday.

 

Earnings season kicks into full gear next week with major releases on tap from Citigroup, Wells Fargo, Goldman Sachs, BNY Mellon, State Street, US Bancorp, Northern Trust, PNC, Charles Schwab, Fastenal, F5 Networks, eBay, Freeport McMoRan, Southwest Airlines, American Express, Bank of America, Morgan Stanley, Google, Intel, IBM, Microsoft, General Electric, and Schlumberger, among others.

 

Major rate announcements are also expected from several central banks, including Canada, Brazil, South Africa, Serbia, Philippines, Colombia, and Mexico.  Brazil is expected to cut its key rate by 50 bps.

 

 

 

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