April Retail Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: April Retail Sales
KEY DATA: Sales: +0.5%; Excluding Gasoline: +0.2%; Excluding Gasoline and Food: 0.0%

IN A NUTSHELL: “Money is flowing out of consumers’ pockets but an awful lot is being pumped into gasoline tanks.”

WHAT IT MEANS: The economy continues to grow but the overriding question is: “How will the surge in gasoline prices affect the sales of other goods?” We got some insight into that with the April retail sales numbers and the initial returns are not great. While overall demand rose solidly, over sixty percent of the rise came from the increase in gasoline purchases. The other source of pain for consumers, food costs, also played a role with purchases increasing sharply as well. Indeed, when you exclude food and gasoline sales, where the rise was largely price driven, total retail sales were largely flat. People did buy more vehicles, which we knew from the unit sales numbers. Clothing and general merchandise stores did okay but the only winner was online companies. In contrast, furniture, electronics and appliances, sporting goods, restaurants and health care products were all off. The best news was an upward revision to the March numbers which could offset some of the negative from the wider trade deficit.

MARKETS AND FED POLICY IMPLICATIONS: This was a disappointing but not surprising report. Wage and salary income is not growing strongly so for most people, the higher gas prices are a constraint on their budget. But the commodity bubble (yes traders, it was a bubble and there was speculation) has at least started to deflate if not burst so going forward, we should see lower gasoline prices. The issues being created by the Mississippi flooding should only be short term. Look for the negative effects of the oil price spike to be unwound as we move through June (prices go up quickly but for some strange reason they fall more slowly). Thus, second quarter consumption should be soft but it could rebound sharply in the summer. If that sounds like a rationalization for my robust second half of the year forecast, so be it. But I am sticking to that forecast. This report has so much noise due to gasoline that I doubt the Fed will think much about it. But traders may get a bit concerned. What troubles me is that while gasoline prices may fall, food costs continue to rise as we saw in today’s wholesale price data. That could keep spending from really breaking loose. Nevertheless, retail sales should improve during the second half of the year.

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February Income and Consumption

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: February Income and Consumption
KEY DATA: Consumption: +0.7%; Disposable Personal Income: +0.3%; Prices: +0.4%

IN A NUTSHELL: “Consumers opened their wallets up but they also had to pay a lot more for their purchases.”

WHAT IT MEANS: Households seemed to be willing to brave the cold and snow and generally bad weather in February to visit their local malls. Spending rose solidly as people bought lots of soft goods and big-ticket items. They are still being cautious on buying services as those are goods they can easily do without. But while the consumption numbers look real strong, a lot of the money coming out of households’ pockets went to pay for rising prices. The Fed’s key inflation indicator jumped and even excluding food and energy it was up at a pace that if continued, would not make the FOMC members happy. Adjusting for inflation, spending was decent but not spectacular. Can consumers pay for all those goods? Well, maybe. Disposable personal income, which adjusts for taxes, rose at a somewhat disappointing pace. Wages and salaries increases were limited and while that may help corporate earnings, it doesn’t do much for spending power. What is of real concern is that incomes rose less than prices. Thus, household spending power actually declined. That does not bode well for economic growth if it keeps up. Indeed, so far this quarter, consumption is growing at a modest pace and it looks like first quarter growth could be as weak as I have feared. The savings rate was just below 6%, a rate similar to what we have seen for the last two years.

MARKETS AND FED POLICY IMPLICATIONS: There is a concept in economics called the “fallacy of composition”. Basically, it says that what is good for an individual may not be good for the whole. If a business restrains wage growth, that will help its profitability. However, if all companies do the same, then income gains are limited. As a consequence, demand grows slowly and so do profits. Much of the strong earnings we have seen coming from large companies is due to international activities so don’t assume that the increases in the equity markets imply strong domestic growth. Main Street and Wall Street are largely disconnected right now. While rising wealth does help, ultimately for this economy to grow strongly we need better income growth. Whether that comes from more hiring or higher wages or a combination of the two, it needs to happen. For the Fed members, this was an uncomfortable report. Spending power is declining as inflation is rising. With growth still disappointing, there is little the Fed can do in that scenario, i.e., it cannot raise rates so slow inflation or add more liquidity to raise growth. As for investors, inflation is not yet a major problem. But it is moving upward so it should not be viewed as being tame, no matter the Fed Chairman may publicly claim.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

February Producer Price Index

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: February Producer Price Index
KEY DATA: PPI: 1.6%; Excluding Food and Energy: +0.2%; Food: +3.9%; Energy: +3.3%

IN A NUTSHELL: “If firms start raising their prices to recoup their increasing costs, consumers are going to feel an awful lot of pain.”

WHAT IT MEANS: The days of declining costs and fears of deflation are over. Producer prices are soaring led by huge increases in food and energy costs. Yes, if you have a driver and are on a diet, those increases don’t matter. But if you are trying to make ends meet, it does. We all know about energy, which is pressuring households but it doesn’t stop there. Food price increases are at levels not seen in decades. Up to this point, the increases in wholesale costs have not been passed through to consumers as rapidly as they have been traditionally. That is likely to change. We are also seeing increases in areas outside food and energy. Other consumer goods are increasing, though the gains are nowhere near what we are seeing in the food and energy components. Still, the increases are not that tame anymore. Capital goods prices are rising in almost every category except computers, furniture and vehicles. Looking into the future, the inflation pipeline is filled with more price increases at the intermediate and crude goods levels. That implies further pressures on producer costs.

MARKETS AND FED POLICY IMPLICATIONS: The Fed may believe the rise in prices is fleeting but if firms start passing their costs through, the average person is going to be hit really hard. The economy is not strong enough for businesses to have a lot of pricing power but there comes a time that you simply cannot say you will make it up in volume. That time is here so look for more and more firms to start inching up their prices and reducing the sizes of their products. I don’t know how small they can go but the family size bag of potato chips doesn’t even feed my cat anymore (he’s a Garfield who loves greasy food). While double-digit inflation is not in the cards, look for overall household costs to be rising above 4% and excluding food and energy the Consumer Price Index to break the 2% level later this year. If we get those increases, which are above the Fed’s upper bound, a number of members will be not be very happy. With all the things going on in the world, though, the Mr. Bernanke has to present a peaceful image when it comes to inflation since the outlook for growth is so clouded. But once the Japanese and oil producing nations’ situations become clearer, the Fed will have to start facing the reality that inflation has to be addressed. As for investors, uncertainty means volatility so caution seems to be the better part of valor.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

December Durable Goods Orders

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist 

INDICATOR: December Durable Goods Orders

KEY DATA: Orders: -2.5%; Excluding Commercial Aircraft: 0.0%; Non-Defense, Non-Aircraft Capital Goods: +1.4% 

IN A NUTSHELL:  “The demand for capital goods on the part of business is still strong as it looks like investment will continue to boost growth.”  

WHAT IT MEANS:  Spending on big-ticket items, a key indicator of growth, seems to be holding up pretty well.  Yes, durable goods orders declined in December but that was due to a 99% drop in civilian aircraft orders.  It looks like there was only one order for a two seat Cessna.  Obviously, this is a very volatile component but for all of 2010, civilian aircraft orders were up a massive 66% compared to 2009 levels.  Excluding commercial aircraft, demand was flat in December.  More importantly, though, was the measure of corporate capital spending, which rose solidly.  Non-defense, non-aircraft capital goods orders posted a nearly 17% rise for all of 2010, a sign that businesses may not be hiring but they sure are getting their capital stock up to speed.  The December report, though, was decidedly mixed.  Orders for communications equipment, machinery and vehicles rose but were off for primary and fabricated metals, computers and electrical equipment and appliances.  In addition, backlogs slipped and inventories rose.  That is not the direction you want to see those categories go if you like expanding production.  

MARKETS AND FED POLICY IMPLICATIONS: This was a decent though not spectacular report.  Critically, businesses are spending money on capital goods and while that negates some of the need for workers, it still is a sign that the economy is moving forward.  Investors will like this report but there was a huge weather-driven surge in new unemployment claims that may raise some eyebrows.  The claims data have been bouncing around much more than normal with horrible weather (I am looking at about eighteen inches of snow outside my house) and government policy flip-flops messing up the normal patterns.  Thus, don’t take the rise as pointing to a weakening in the labor market.  But it is a warning that job growth remains softer than anyone would like and that is restraining consumer spending and overall economic growth.  The FOMC focused on that problem in yesterday’s meeting statement.  The January jobs report is a week away so let’s wait and see what comes out of those numbers.  If there is any warning, it is that weather could play a major role in keeping the gains down.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advise, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

December Conference Board’s Consumer Confidence Index

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

 

INDICATOR: December Conference Board’s Consumer Confidence Index

KEY DATA: Confidence:  52.5 (down 1.8 points); Present Situation: 23.5 (down 1.9 points); Expectations: 71.9 (down 1.4 points)

IN A NUTSHELL:   “People are saying they are still worried but acting differently as they have hit the malls pretty hard.”  

WHAT IT MEANS:  The sluggish recovery is the result of consumers holding tightly to their hard earned dollars.  All the reports seem to indicate they have begun to blow the dust out of their wallets and are spending more.  Strangely, though, that attitude has yet to translate into rising consumer confidence.  The Conference Board’s December reading of household perceptions was down, surprisingly.  People are less confident about the current economy and future opportunities.  They are still quite worried about where the labor market is going and that is not good news because a smaller percentage of the respondents think their incomes will rise next year. Jobs are still issue number one and as long as the labor market remains less than stellar, workers will be concerned about their job securityAn additional reason for the continued uncertainty is the housing market.  The S&P/Case-Shiller October numbers came out today and they were disappointing.  Prices fell everywhere and eighteen of the twenty large metropolitan areas had a deceleration in their price gains.  Indeed, for the first time since January, the twenty-city index was down on a year-over-year basis.  Foreclosures continue to pressure the market and that is not going to change anytime soon.  With some much of their wealth tied up in housing, home price declines can only hurt perceptions of the world.  Stability would be nice but we have to stop falling before we can start rising and I am not sure there are lots of places across the nation where housing price increases are being recorded. 

MARKETS AND FED POLICY IMPLICATIONS: The data today were disappointing.  Declining housing prices only feed the uncertain beast that is the consumer.  But we also have had news that the holiday shopping season was quite good.  So, should we listen to what consumers’ say or watch what they do?   To me, the proof is in the doing and I am not so certain we should take too much away from the decline in the confidence index.  If that is repeated in January, yes, it might be time to redo the forecast.  But I have been marking my numbers up recently and for good reason: Most of the other data have been solid!  Unfortunately for investors, there is not a whole lot of important data coming out the rest of the week so they will have to make end of the year judgments on these numbers.  I suspect traders will probably close up shop and watch and wait until next week.

November Income and Spending

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

 

INDICATOR: November Income and Spending

KEY DATA: Consumption: +0.4%; Disposable Personal Income: +0.3%;

IN A NUTSHELL:   “Households may not be shopping ‘till they drop but they are out there buying and that steady, solid pace is sustainable.” 

WHAT IT MEANS:  Bubbles are nice when they are made of glass and hung on trees.  They are not a lot of fun when they cause huge ups and downs in the economy.  That is why I have said on many occasions that I look for consumers to shop ‘till they’re tired not until they drop and that seems to be the case.  Consumption rose for the fifth consecutive month in November and while the pace was not spectacular, it was solid enough.  People bought the little things that make them happy as soft-goods and services spending rose.  They didn’t go out and buy big-ticket items, which were down slightly, but that is okay.  The concentration on the smaller ticket goods is the first step in the spending recovery.  Once job growth picks up, I expect durable goods purchases to rise more strongly.  Nevertheless, with the October spending pace revised upward and the reports of a strong December shopping period flowing in, I would not be surprised if consumer spending grows at a robust 4% or more pace in the fourth quarter.  That would lead to faster than currently projected GDP growth.  While income gains did not keep up with outflows of money, the savings rate is still at a decent 5.3% level.   The one disappointment in the report was the gain in wages and salaries.  This part of income had been increasing solidly but the November rise was less than hoped for.  Still, this component has been somewhat volatile so I wouldn’t be surprised if it bounces back in December. Indeed, the slow decline in unemployment claims tells me the labor market is continuing to firm.      

MARKETS AND FED POLICY IMPLICATIONS: The consumer is back, maybe not in full battle regalia, but households are buying goods strongly again.  The pace of spending is sustainable and as job gains and confidence improve I expect consumption to increase as well.  What we don’t see in this report are irresponsible households that are destroying their balance sheets.  The savings rate is still high enough to allow for a reduction in debt burdens.  Basically, the household sector is doing its part in driving the recovery and with businesses spending on capital goods, as we saw in the durable goods report, the upturn has clearly moved from the government to the private sector.  That is the best news we could have as we close 2010.