Initial Unemployment Claims Look Awful, but Other Data Disagree
At this point in the recovery, initial unemployment claims aren't always a very meaningful indicator. However, the previous three weeks of data had been so bad that I really do need to make a comment. First off, the numbers look bad--really bad. In three weeks we have lost almost a year's worth of improvement in this metric. On the other hand, the Challenger Grey and Christmas layoff report showed month-over-month improvement.
Furthermore, the hiring metric in most of the purchasing managers' reports remains in nicely positive territory. With the exception of companies involved in mergers and a couple of special situations (Nokia (NOK1V)), the chatter out of companies seems to be about more hiring and not more layoffs. There's a lot of blather out there about why the numbers might look fishy, including Japanese auto-related issues, the late Easter holiday, processing issues in California a couple of weeks ago, and poorly calculated seasonal adjustment factors in some states. I can't independently evaluate all of these factors, but it seems to me that a few more weeks of observing the data without panicking may be in order, especially in light of last week's impressive jobs report.
Retail Sales Looking Good
As much as we all worry about rising gas and commodity prices, consumers continued to accelerate their spending during the month of April. The headline same-store sales, as reported by the International Council of Shopping Centers, was a stunning 8.5%, compared with their forecast of an already strong 5%-6%. Both the actual and forecast numbers for April were substantially inflated by a late Easter that pushed more sales into April. However, in the chart below it can be seen that even when I average March/April, it looks robust compared with last year.
Even though these numbers are not adjusted for inflation, it appears consumers are still clearly in a spending mood. That spending appears to be a little more evenly distributed than in past months, when luxury goods stores crushed discounters. I caution that after the Easter holiday sales typically soften meaningfully the following month. The ICS is forecasting growth of 3%-4% in May compared with April's 8.5%. That's still in the range of recent, non-holiday-related sales growth figures. Recent job growth and declining commodity prices could also help May's sales figures.
Auto Sales Hang In
With supply issues primarily related to Japanese manufacturers and high gas prices, there was some fear that April auto sales might disappoint. However, consumers came through again as April sales results of 13.2 million units (seasonally adjusted annual rate) were not far off February's recovery high (excluding one Cash for Clunkers month) of 13.4 million units. In fact, auto sales have been over 13 million units for three consecutive months. This month's 13.2 million units was the second highest of the recovery, just slightly below February 2011's sales.
Apparently high gasoline prices didn't scare consumers out of dealer showrooms. It appears that those car buyers in general were interested in smaller cars. GM's(GM) new compact Chevy Cruze sold 25,000 units in April, more than triple the shipments of its predecessor the Cobalt sold last April. Pickup truck sales remained robust, but even here there was some shift from large V8 engines to smaller six-cylinder engines.
The impact of the Japanese earthquake was not really seen in April as dealers had at least some Japanese cars in stock. However, Japanese manufacturers did see slower sales growth in April than their non-Japanese competitors, a trend we expect to intensify in the months ahead.
Purchasing Managers: Manufacturing Looks Great, Services Take a Plunge
The purchasing managers' survey for April remained in strong expansion territory with a reading of 60.4, down only modestly from March's level of 61.2. According to ISM's official correlation statistics, this level is consistent with GDP growth of more than 6%. Though these correlations were formulated when manufacturing was a bigger percentage of the economy, the continued strong stats out of the ISM seem to indicate that there's considerable room for the US economy to grow faster than the measly 1.8% reported in the first quarter. New orders, production, and employment all slipped a bit in April, but all remained above 60 and weren't far off the figures for the prior month. The only really disturbing news out of the manufacturing report was the price paid index, which showed another increase to 85.5 from 85.0.
News on the services side of the economy was not as benign. I found these statistics a bit disturbing as this recovery has been leaning hard on both manufacturing and consumer durable goods. The recovery in services has been anemic (though the first quarter looked a little better), which is unfortunate because it represents a much larger portion of the economy.
The ISM non-manufacturing index fell to an eight-month low of 52.7, down sharply from 57.3 the prior month. New orders took a particularly big hit, falling to 52.7 from 64.1. About the only good news here is that the prices-paid index dropped to 70.1 from 72.1, indicating a fallback in price pressures on the services side of the equation. The anecdotal comments portion of the report focused almost exclusively on the potential effects of rising gasoline prices. Other than those comments, the remarks didn't seem nearly as negative as the headline numbers suggested.
I took some solace in April's employment report, which showed better growth in the services sector than in the previous month. The employment data below seem to indicate there may be a problem with this month's rotten ISM non-manufacturing report.
Inflation, This Week's Big News
While last week's commodities rout might take a little air out of the inflationary bubble, the move comes too late to have any impact on April's consumer and producer price indexes, which will be reported at the end of this week. Expectations are for the more volatile PPI to be 0.8%, just up a touch from March's 0.7% and well off the year's high of 1.6% in February. Expectations are for the CPI to moderate some, from 0.5% in March to 0.4% in April. More important than the headline number is ripping apart the report to see how broadly inflation has spread beyond commodities and energy. Stay tuned.
Inflation Will Be Up but Won't Reach Critical Mass to Blow Up the Economy
While inflation continues to scare me, I believe the economy can sustain another few months of higher prices before the collapse of the economy becomes a forgone conclusion. Looking at past recessions, it looks as though it takes year-over-year inflation somewhere between 4% and 5% to push the economy over the edge into recession. Even with a monthly reading of 0.4% in April, the headline year-over-year inflation rate will still be around 3%, and it will take two or three months of 0.4% monthly inflation growth to push the annual rate past the critical 4% level. Although I confess that this analysis is a bit simplistic, the data support the fact that inflation needs a pretty big bump to really scare consumers, and sometimes that required bump can be large as it was in the 1970s and 1980s.
My simplistic analysis does miss the possibility that higher interest rates and not inflation is what kills recoveries. Inflation and interest generally go hand in hand, so finding the correct cause is a bit of a moot issue. However, this time with the Fed promising to hold rates low for the indefinite future, it becomes more critical to determine the root cause of a collapsing economy. If the root cause is interest rates, the next recession is probably a long way off given recent Fed statements. If it is inflation, we still have a few more months of watchful waiting, but then the economy could begin to weaken. The clock is ticking.
Will the Comprehensive Retail Sales Report Surprise on the Upside?
Based on last week's ebullient same-store sales report and respectable auto sales reports, the official retail spending report for this week should look pretty good; growth of 0.8% is well within the realm of possibilities. But again the devil is in the details of these reports.
My key question will be whether restaurant sales managed to hold up in the face of higher gas prices. Department store sales and auto sales have done far better than I would have expected in a high energy price environment. Something has to give somewhere, and I suspect restaurant sales might be one area that remains vulnerable.
It will also be interesting to see whether higher gas prices continue to drive online sales at the expense of brick-and-mortar stores. Additionally, grocery store sales took a surprising hit last month for a category that isn't supposed to move much. I would either expect a revision to last month's number or a really big number for this month--maybe both.
