Still Trudging Through and Trudging Some More
Monday, April 11th, 2011
The economic news makes Harry Truman's reason for desiring one-handed economists quite evident. On one hand, the unemployment rate is down and weekly jobless claims are shrinking. On the other hand, so many people have left the work force that the labor participation rate is at a 25-year low which may mean there's no one left to lay off. On one hand, Japan's financial markets withstood the earthquakes and tsunami better than initially expected, but on the other hand, commodity prices, especially oil, seem to keep going up because natural disasters and political instability create an anticipation of shortages. Enough with the hands already!
Earlier this month, the Institute for Supply Management issued its manufacturing and non-manufacturing indices. The manufacturing index declined only slightly from its very bullish levels, indicating that this sector will continue its growth and seems unlikely for a pullback any time soon. The inflation indicators for manufacturing materials are at a value of 85 and still rising (50 is considered as neutral in the ISM reports). This is the highest level since July 2008. The non-manufacturing sector is not growing as rapidly, but continues to be at encouraging levels. The sector's inflation problems eased a little, but are still high. In both sectors, employment trends are up but look to be slowing.
In terms of employment, the weekly jobless claims now seem to be consistently under 400,000 new claims per week. Unfortunately, there are 5.1 million people claiming benefits, and more than 700,000 claiming extended benefits (+540,000 compared to last year).
About two weeks ago, the final revision of Gross Domestic Product for Q4-2010 was raised slightly to +3.1%. Back in January, they thought Q4 was +3.2%. Then in February, they thought it was +3.8%. Just wait until they revise the final number again in June. It always seems that nothing is final when it comes to statistics.
These frequent revisions often give a false sense of precision to economic data. All data, especially the versions released soon after the conclusion of an economic period, include estimates of hard data that have yet to be received by the reporting agencies. Month by month, quarter by quarter, and year by year, the data include fewer estimates and more real life reporting. Recently the Federal Reserve made revisions back to the mid-1980s for printing industry data (we'll get to that shortly).
The best way to keep the data in perspective is to examine them on a longer-term basis. This is the reason I prefer the year-to-year comparisons of data (and also use 12-month or 4-quarter moving totals of data series rather than one period). The chart below shows the year-to-year real GDP (“real” means it has been adjusted for inflation). The economic downturn can be plainly seen, and what seems to be a movement sideways of the economy for the last few quarters can be seen at the right. Remember, the post-WWII average real GDP was between +3.3-3.4%, and we have yet to touch that on a year-to-year basis.
Since the recession began in December 2007, real GDP is up only +0.1%. From the lowest point of the recession in Q2-2009, however, GDP is up +4.4%.
Inflation is getting a bit more attention in the news because of rising oil prices as well as the prices of the goods on grocery shelves. One of the downsides of year-to-year comparisons is that you still have to look at the quarter-to-quarter trends to see if a trend is developing. The trend could disappear with data revisions, but as businesspeople we still have to look at them and judge for ourselves. The Producer Price Index is really the only broad inflation indicator showing rapidly rising prices, but the others are tamer, and the inflation adjustment used for the GDP is the most tame. (See my recent column for more details). Over the longer term, that rise in GDP from Q4-2007 that is only +0.1% looks a lot bigger when inflation is left in, at +4% for that period.
Dr. Joe's Inbox
I recently wrote that I was concerned about the size and nature of the Fed's balance sheet, and that I had not seen anything written about what would happen if the Fed just kept all of its non-traditional items like mortgages and collateralized debt obligations until they matured. There are economists worried about what would happen if the Fed were to unwind those positions, sending interest rates skyward, and removing monetary stimulus in the process. In my opinion, interest rates being too low was the cause of the problem, and the monetary stimulus has only caused more problems than it was supposed to cure. But I did find an article this week that suggested that the Fed should hold onto these bad obligations. The recommendation is to create a “bad bank” to sequester them from their good assets.
The Pew Internet Survey issued an excellent overview series of slides about the adoption of various digital media. It makes for fascinating reading. It's called “Information 2.0”. Are you communicating with customers in the media they prefer?