The US recovery is thinning

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:

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

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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Comments

  1. A bit unrelated to the post but non the less relevant to the US, what’s your stand on the theories about how the Fed is a separate entity run by Rockeffelers/Morgans etc and how every dollar printed is actually a loan and so the US government will never be out of debt.

    Anyways just wondering if the bloggers and readers have a view on this having an effect on the US recovery and what it might mean for the future.

    • That is true. The Fed consist of 12 regional banks, who’s shares are owned by private banks – primary those owned by the Rothschild, Morgan and Rockefeller families.

  2. Ranier Wolfcastle

    Do Barclays — source of your chart — offer an explanation of why the market would go up with operation twist. For that “QE” there wasn’t even a change to the Fed balance sheet …right? They buy at one end of the curve and sell at the other.

    There doesn’t seem to be a physical mechanism there to drive the market. Is this the perceptions fairy working her magic?

    • I don’t have the full note, sadly.

      It appears to me, however, that Twist has worked insofar as mortgage rates have hit multi-decade lows. That, combined with some other passing factors, has boosted housing transactions and raised hopes of sustainable recovery for everyone, boosting spending There’s also been the mini inventory cycle in manufacturing and clear bottom in new homse construction.

      That’s plenty to explain the rally.

      It’s just not sustainable unless these extraordinary stimulus remain in place, in my view.

      • That’s plenty to explain the rally

        very strong corporate earnings migh also have something to do with it?

        • Obviously, but the same have been apparent for many months. It’s macro developments that are driving the shifts in the market. It’s a discounting mechanism, right?

      • Ranier Wolfcastle

        In the things you mentioned the low mortgage rates were an intended operation twist effect, so home owners refinancing would have a few extra bucks in their pockets. “Raised hopes” is the perceptions fairy waving her wand. I don’t see how the inventory cycle etc could be attributed in any way to operation twist. Those things are independent of Fed action IMO.

  3. Terry McFadgen

    Maybe H&H you are just not getting the new normal-which is the Fed is determined to drive up risk assets and has “infinite” fire power to do it?. Don’t fightit- just buy anything but Treasuries!
    What’s more its working in terms of corporate confidence and household confidence.

  4. H&H, thanks for the great summary. Your last paragraph says it all in a nutshell. I fully agree with that view.
    IMHO there’s another economy in a trap, needing confidence levels to stay afloat while not being able to provide more stimulus until oil has come down. Maybe the priced in expectation of QE is so built in by now that it will actually carry the markets as long as needed?! Or maybe not… We shall find out I guess.

  5. Terry McFadgen

    H&H-“Isnt that my main conclusion”.

    Good if it is.I thought that by using the word “pretending” that you saw the market as vulnerable to a reality check.
    Looks like we agree that reality is risk on- come what may.

      • Ranier Wolfcastle

        ….but this comes back to my point: what is the causality by which twist is driving the markets. Things like inventories and current earnings have nothing to do with twist.

        The only mechanism I can figure by which twist might help the economy is by putting a few bucks in the pockets of mortgagees. The rest of it is the perceptions fairy at work (if you want to attribute S&P growth to twist).

  6. You guys really should start reading Bill Bonner in “The Daily Reckoning”. If you did, you’d know that this idea of a ‘recovery’ is simply an illusion created by the Fed’s printing of trillions of dollars of counterfeit currency. This is the age of ‘The Great Correction’, and as long as the Fed and the pollies try to stop it, the longer it will last. Just look at Japan if you want proof.

  7. Obviously you still believe in the power of meddling Central Bankers and politicians to fix the mess they got the economy in in the first place. They can’t, they don’t and they never will. A great pity Americans can’t grasp that simple fact either, because if they did Ron Paul would be the Republican nominee not that moron, oops, Mormon, Romney

    • +1000

      “They can’t, they don’t and they never will. A great pity Americans can’t grasp that simple fact”

      A central bank/debt fuelled recovery has traction around here as well.

      PS BTW I quite like Mr Bonner’s stuff.