Wednesday, July 15, 2009

Today's Signal-To-Noise Reduction From Rosenberg

Always helpful to hear Rosie's perspective as he ferrets out the important data from the noise. The highlighted section may be a worthwhile read to all who have claimed the recession is now over.

U.S. consumer stuck in reverse

What was key in the June retail sales data for the U.S. was the 0.1% MoM dip in what is called the "core" figure, which excludes gas, autos and building materials. With the downward revisions, this was the fourth decline in a row, and while spending is nowhere near as weak as it was at the start of the year when Armageddon fears were setting in, it is troubling that the consumer is still fractionally in reverse in the face of the massive tax stimulus that the Obama team offered the household sector over the last quarter. And, while there may well be some lagged impacts, by and large, the fiscal stimulus, at least directly on the income side, has basically run its course. There is more than just a remote prospect of a consumer relapse as summer moves to autumn because organic wage-based income has declined in three of the last four months and without more financial help from Uncle Sam, we would look for more negative retail sales data in coming months.

Nominal GDP still deflating

We also received business sales data for May — this is a proxy for nominal GDP, and it declined 0.1% during the month, and is falling at an 18% YoY trend, which is without precedent. The economy is clearly still in a recession. Excluding auto, the sequential decline was 0.3% and the YoY slide was 17.3% — a record as well. So the quick answer is "no" — this is not just an automotive story, it's rather broad-based. The inventory-to-sales ratio has come off its cycle highs, but at 1.42x, it is hardly low enough to spark the re-stocking that seems to be part of the mainstream economists' macro forecast (go to Signs of Upturn in Inventories Remain Elusive on page A2 of the WSJ). It will likely have to edge down towards 1.35x before we expect a renewed positive inventory cycle to take hold. Most likely a 2011 story (in fact, the bulk of the inventory improvement has been in the motor vehicle sector — excluding autos, the I/S ratio, at 1.35x, has barely budged from its seven-year peak). What is fascinating is to hear forecasts of the recession ending when so far, three of the four major ingredients — real sales, industrial production and employment — have yet to hit bottom (and real organic income, the fourth variable, is struggling to carve one out).

Compliments of Gluskin Sheff.

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