In case you haven't already had enough of a dose of myth-making about the economy, it would appear that you need to get ready for some more.
The principal ongoing myth has been an economy that will accelerate next year (or perhaps the second half). It's been a steady mantra for defenders of a multiple expansion that has resulted from a growth in sentiment rather than earnings - and in 2013, earnings are declining when financials are excluded (or you can include them, in which case I will add that real earnings growth is still zero). Despite the long string of quarters in which the acceleration keeps getting deferred, I still see newsreaders on the major business news outlets looking surprised at worried analysts - don't they know the economy is supposed to get better?
The two nudges in the myth-motor appear set to come from the Federal Reserve and the Bureau of Economic Analysis (BEA). Yet I can't accuse either of them of malicious intent.
So far as the Fed is concerned, it's getting more clear with each passing day that our central bank is trying to get markets used to the idea that tapering is on the way. Regional Fed presidents Fisher (Dallas) and Lockhart (Atlanta) were both on the hustings this week making it clear what the Fed's intentions are, and one of the talking points has been how solid employment growth has been.
Has it, now? We all know that the unemployment rate has come down, and I would agree that employment data is in a steady state - remarkably similar to last year, in fact. But the recent jobs reports make it clear that most of the growth has been from a mix shift to part-time employment concentrated in occupations paying entry-level wages. That's not to say that there's no hiring elsewhere, just not very much of it. The personal income data bear that out.
So did the latest JOLTS (labor turnover) survey. Hiring rates are down year-on-year across the board. Actual hires are down, quit rates are down, quit levels are down. All of them are supposed to be rising in an expanding economy. The somewhat disappointing July jobs report aside, though, the Fed needs to get out of the Treasury bond-buying business. Whatever you may want to argue about the merits of quantitative easing - and lately there seems to be a bit of waning of faith - the Treasury doesn't need to borrow as much money in the near term. If the Fed doesn't cut back, it's going to cause problems with supply (and some of you bond guys are correcting me to more problems, I know).
The role of the BEA is different. Despite many beliefs to the contrary, I don't accuse them of cooking the data to the desired temperature. The latest trade data, though, are going to help set up a nice flow of misinformation that Wall Street should only be too happy to take advantage of.
When domestic consumption is tanking, imports dry up and the trade balance improves. For a country that is having difficulty financing itself, this is considered something of a help, though the fact that it comes about from a cratering economy responsible in the first place for the shortfall is usually glossed over.
The trade balance isn't the only thing that improves - GDP improves as well, since imports are a subtraction in the calculation of the figure. I've been in this business a long time, but my eyes still widened at the wave of effusion that greeted yesterday's trade data. That the trade deficit was better than the initial BEA estimate for June is undeniable, and will be a strong positive factor in the next revision .
I should also add that it was in the opposite direction of my expectations, primarily because the data have shown a steady drying up of trade (though we aren't tanking). You would never guess so from most of the reactions coming from the environs of Wall Street. "This is really great for the economy!" exclaimed one newsreader, and I have to say that I would love to ask him why on camera.
To begin with, it's useful to keep in mind that the trade data is heavily influenced by big-ticket ordering, in particular aircraft, much like durable goods, with the result that they are both lumpy. With that in mind, let's look at the explosion in U.S. exports this year. I know it's an explosion because the Street told me so. Sure enough, when looking at the unadjusted year-to-date totals from the BEA, exports are up 1.05% through the first six months of 2013. In real terms I make that about zero, and if you took out Boeing's (NYSE:BA) order book it wouldn't even be positive in nominal terms.
Imports are down 2.2% over the same time period, though the BEA's seasonally adjusted totals say that non-petroleum imports are up 1.7% in real terms (the "residuals" are widening though, so it's possible that later the gain will all be revised away). So yes, it's good that we're importing less oil, good for the trade balance, good to be less vulnerable. It's also good for the dollar, which perversely is not so good for the rest of American manufacturing.
To me, this looks like fairly weak consumption, part of a pattern of fading growth in U.S. consumption. The upward revision to second-quarter GDP won't mean a thing to anyone off Wall Street. Domestic oil production is a net benefit, true - it's meant an additional 6K jobs in exploration and 11K jobs in related support services over the last year. That data was already known, though, and is a small total (though much larger anecdotally, I am sure).
When a trade balance and GDP measurement is improving from strong export expansion, it's a big plus. When they're getting better because of declining imports, you should take the GDP impact with a large grain of salt. The last time I was writing skeptically about falling imports making GDP look good was 2008. However, you should fully expect Wall Street to promote any upward revision as a sign of massive strength.
It also bears repeating that the GDP price deflator was largely responsible for the second quarter improvement - it fell from 1.7% to 0.7%, a drop I find hard to believe. Had the deflator remained steady, GDP would have come in at 0.7%. Don't expect the Street to focus on that in the next revision.
You may also have heard about the wonderful news coming out of Europe. UK industrial production has turned the corner, for example, rising faster than expectations and at the fastest pace in two years. Here's a chart of UK production, widely disseminated there where they were somewhat less impressed:
source: UK Office for National Statistics
Not so impressive, is it? Does this tell you that Europe has turned the corner? What's more, June of 2012 had more working days.
There was also the matter of the "surprise" increase in German factory orders, 3.8%. That's what the headlines tell you, followed by breathless suggestions of emerging Europe. What they don't tell you is that the expansion was due to the Paris Air Show, and that orders for consumer and intermediate goods declined.
Allow me to come back to my running thesis: none of this really matters to the stock market. It's being driven by sentiment, not data, not earnings or the economy. So long as the sentiment is positive, so long as black boxes keep buying the "easy Fed," data that reflects stagnation can be refurbished, buffed up and reissued to the masses. The triggers to upsetting the wave remain the classic trio of Fed tightening, recession, credit market meltdown. I happen to think that we are flirting with all three of them, but none have yet been breached.
The current weakness in the markets is partly a reflection of more stories about tapering, and partly a reflection of a tape that is usually weak in the first half of the month (last year was an exception, getting a boost from positive central bank commentary). Note that I didn't mention earnings, though indirectly they bear some responsibility, as results that were actually constructive might have produced some buying support.
The next test will be retail sales next Tuesday. Absent positive commentary from some central bank governor somewhere, expect markets to remain on the soft side until the latter part of the month.