Latest Data Points To Anemic Expansion, Not Recession

by: Russ Koesterich, CFA

Some market watchers are interpreting the fact that US consumer confidence remained extremely low last week as a sign that the chances of a sustained recovery “have diminished.”

In my opinion, however, they’re focusing on the wrong numbers among the slew of economic data released Thursday. The right numbers to focus on: new figures from the Federal Reserve that confirm that while economic activity is stalling, we are not yet seeing credible evidence of a double dip.

According to the Fed report, US industrial production increased a better-than-expected 0.2% month over month in August. Economists had expected no change. The August rise is on top of a 0.9% gain in July and confirms that industrial production is growing at around 3.5% year-over-year — right around where it has been for the past four months and well above levels during the last recession. In September of 2008, for instance, industrial production was contracting by close to 9% year over year.

Meanwhile, capacity utilization, which measures how much of current factory capacity is being used, is also rising in the United States, indicating a more robust manufacturing environment. It’s also now well above where it was in late 2008. In the latest report, capacity utilization came in at 77.4%. That is below the 77.5% expected by economists, but up from 77.3% in July.

Why are these numbers better predictors for the direction of the economy than consumer confidence? Rather than being merely the results of a survey, these manufacturing figures measure actual economic activity.

In contrast, as I’ve mentioned before, there’s been little-to-no relationship historically between what consumers say and what consumers do. In other words, confidence does not necessarily lead to actual spending, and vice versa. As a result, consumer confidence is not a particularly useful metric for forecasting retail sales or consumption. Still, last week’s uptick in initial jobless claims does certainly represent a negative for consumption.

As for what the latest numbers mean for investors, while manufacturing figures are weak, they are not falling off a cliff like consumer confidence data. Instead, they are more evidence of a stagnant economy that is likely to muddle through. They also indicate that an anemic expansion is more likely than another recession. In such an economic environment, investors should consider remaining overweight US large and mega caps and underweight sectors tied to the consumer such as US retail.

Source: Bloomberg

Disclaimer: Narrowly focused investments typically exhibit higher volatility.

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