If the new normal thesis holds then the US recovery meme is now running on empty. That’s not say we’re dipping towards a recession, we’re not, I don’t think. But growth is clearly slowing and the mix is getting less convincing.
Consider manufacturing expansion, a key plank in the new normal thesis because it is a tradable good and can grow external demand, has slowed significantly again this month in the Feds regional indexes. The New York Fed:
April’s Empire State Manufacturing Survey indicates that manufacturing activity in New York State improved modestly. Although the general business conditions index fell fourteen points, it remained positive at 6.6. The new orders and shipments indexes also remained positive, but showed only a small increase in orders and shipments. The prices paid index inched downward but remained high, and the prices received index climbed six points to 19.3. The index for number of employees rose to its highest level in nearly a year, indicating a significant increase in employment levels, while the average workweek index fell to a level that indicated only a small increase in hours worked. Future indexes remained quite positive, suggesting a strong and persistent degree of optimism about the six-month outlook.
The Philly Fed:
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down from a reading of 12.5 in March to 8.5 (see Chart 1). Indexes for new orders and shipments remained positive but were slightly weaker than their March readings. The indexes for new orders and shipments, which decreased about 1 point, remain at relatively low readings. The indexes for current unfilled orders increased 14 points and returned to positive territory this month, suggesting a backlog of unfilled orders. Inventories were also reported on the rise this month, with the inventory index increasing 7 points.
Firms’ responses suggested a notable pickup in levels of employment this month. The current employment index, which has been positive for eight consecutive months, increased 11 points, to its highest reading in 11 months (see Chart 2). Twenty-seven percent of the firms reported an increase in employment; 9 percent reported declines. The average workweek was near steady this month, with 75 percent of the firms surveyed reporting no change in average hours.
The Kansas City Fed:
The month-over-month composite index was 3 in April, down from 9 in March and 13 in February (Tables 1 & 2, Chart). The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Manufacturing growth eased in most durable and nondurable goods-producing plants, with the exception of fabricated metal, plastics, and rubber products. Other month-overmonth indexes also slowed in April. The production index dropped from 13 to 0, and the shipments, new orders, and order backlog indexes also fell. In contrast, the employment index remained unchanged, and the new orders for exports index edged up slightly. The raw materials inventory index increased from 0 to 5, while the finished goods inventory index fell after rising the past two months.
The Richmond Fed was better though it fell hardest last month:
In April, the seasonally adjusted composite index of manufacturing activity—our broadest measure of manufacturing—advanced seven points to 14 from March’s reading of 7. Among the index’s components, shipments jumped sixteen points to 18, new orders edged up two points to end at 13, and the jobs index moved up four points to 10.
Most other indicators also suggested stronger activity. The capacity utilization indicator gained nine points to finish at 15, while the backlogs index eased two points to 2. Additionally, the delivery times index lost three points to 8, while our gauges for inventories were somewhat higher in April. Indexes for both finished goods and raw materials inventories each added three points to finish at 7 and 17, respectively.
We’re still waiting for the Dallas Fed (which slowed signs of slowing last month) but there are widely consistent themes here: slowing headline numbers, slowing new orders, rising employment numbers, rising input costs and inventories. In short, margins are set to be squeezed amidst a clear end to the mini boom which took off in October last year following the September freeze and subsequent mini inventory cycle.
As I said last month, the regional indexes hold a loose relationship with the all important national manufacturing measure, the April ISM. But with two months of slowing, it’s an increasing possibility that we’ll see a decent fall in the ISM on May 1st.
The other news last night was that the weekly DOL report of unemployment claims rose on revised figures from last week:
In the week ending April 21, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 1,000 from the previous week’s revised figure of 389,000. The 4-week moving average was 381,750, an increase of 6,250 from the previous week’s revised average of 375,500.
That’s three straight weeks of rises and the highest 4 -week moving average this year. Bloomie reckons this trend is hitting confidence, the biggest fall in a year (though still well above the last few years):
The Bloomberg Consumer Comfort Index declined to minus 35.8 from minus 31.4 the previous week.
So, we may also be setting up for a consecutively weak BLS payroll number on May 4th.
Still, from a week or so ago, March retail sales were still moving at a ripping 0.8% month on month and 6.5% year on year, though that may now be old news. More to the point, the rally in the Dow last night was driven by one data point above all others, pending home sales, which beat the street handsomely:
The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 4.1 percent to 101.4 in March from an upwardly revised 97.4 in February and is 12.8 percent above March 2011 when it was 89.9. The data reflects contracts but not closings.
The index is now at the highest level since April 2010 when it reached 111.3.
So, retail sales and house prices! Perhaps it would be more accurate to declare that the US “new normal” meme is getting thin.
There’s has been a spate of new bottom calling for the US property market over the past few weeks. And no, I still don’t buy it. Like The Prince’s frame of reference for stocks, it is important to bear in mind both secular and cyclical trends in the new normal. We are seeing a cyclical bounce in US housing, from the NAR:
The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 4.1 percent to 101.4 in March from an upwardly revised 97.4 in February and is 12.8 percent above March 2011 when it was 89.9.
But is it sustainable as a secular trend? Not in my view. As I wrote in The world hangs on US housing a month ago, the current combination of housing stimulus includes perfect weather, various tax and foresclosure prevention incentives and record low interest rates engineered by the Fed’s latest QE, Operation Twist. Despite the uber stimulus last night’s result was still 3.5% below the comparable month in 2010, when a battery of measures promoted the last cyclical bounce, which does not look sustainable without ongoing extraordinary support.
We are much closer to a bottom in US house prices, but the experience of Japan suggests strongly that looking for a bottom in such markets is itself a mistake. Prices eventually flatten out sure, and stay flat. If the new normal means anything it is surely that asset prices will be determined by wider investment, real income and productivity gains, not leveraging up!
Tomorrow is the release of the advance estimate of Q1 GDP and April 30 is the Personal Income and Outlays. GDP is a lottery but I certainly expect a material slowing from Q4’s 3%. The PIO will likely repeat the very poor pace of real income growth we’ve seen for many months.
My conclusions are simple. First, US equities are pretending there is no new normal. Second, the Fed cannot allow QE (currently in the form of Operation Twist) to cease at the end of June, though they may want to hit oil before telling us so. I mean, look:
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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