Last week's employment report was quite a shock. The economy only created 38,000 jobs. To make matters worse, the previous two months' totals were lowered by a combined 59,000. The huge miss most likely eliminated the possibility of a June rate hike. But its severity raised an important question: is the economy sicker than we thought?
To answer that question, let's look at a number of statistics, starting with the US consumer:
The chart above shows the monthly YOY percentage change in real retail sales and the three sub-components of personal consumption expenditures (PCEs) from the BEA. The best readings come from service spending (the purple bars) which has consistently grown over the last year. At the other end of the spectrum are non-durable goods which have been weak in 8 of the last 12 months. Durable goods purchases and real retail sales are in between, with the former growing between 2%-4% and the latter expanding between 1%-2%.
There are two reasons why consumer spending is low:
The top chart is the Atlanta Fed's wage tracker. After 8 years of expansion, it is now at the lowest point from the previous expansion. Weak wage growth means consumers are spending less, as shown by the increased personal savings rate (bottom chart).
While low, consumer spending is still positive. The sustained increase in durable goods purchases shows the consumer has sufficient confidence to make major purchases. But weak wage growth and the high savings rate show a higher degree of caution.
Turning to the business sector, we have the following three charts:
The top chart shows the absolute level of corporate profits peaked in 2011. They declined in 4 of the last 6 quarters and the 2 recent increases were small. The middle chart shows industrial production. Mining (the blue line) is by far the weakest link; it represents the huge decline in oil activity. Utilities (light green) have declined since early 2015 while manufacturing (the red line) has been steady. The third chart shows that weak activity has led to weak investment: equipment expenditures (red line) started to decline in 2010, commercial real estate investment (blue) started to drop in 2012 while intellectual property spending (green line) recently moved lower.
At the same time, overall business activity remains positive:
The blue line represents service sector activity reading while the red shows manufacturing. The service sector continues to grow at a moderate pace. However, manufacturing contracted slightly at the end of 2015 and beginning of 2016. And as I noted in last week's column, the latest anecdotal comments from the ISM are positive.
The business numbers are slightly more concerning than the consumer's. Profits peaked 5 years ago, while activity and investment is weak. Although top-line activity is positive, the underlying statistics force a cautionary interpretation.
A cautious consumer and business sector lead to slowing growth momentum, which is shown in the leading (LEI) and coincident (CEI) indicators:
The top table shows the monthly change in the LEIs and CEIs. The LEIs were grinding to near 0 in late 2015 and early 2016, but increased .6% in the latest report. It's too early to determine if this is a temporary or permanent increase. The monthly change in the CEIs (second row) has been just barely positive for the last 6 months. The bottom table shows the 6-month rolling average. While the LEIs (3rd line) have been grinding lower save for the latest reading, the CEIs have been consistently reported at approximately .7%-.8%. According to the Conference Board's analysis, this is consistent with moderate near-term growth.
And the long-leading indicators aren't confidence inspiring, starting with corporate profits, which - as previously noted - have moved sideways since the end of 2011 and declined in 4 of the last 6 quarters:
Building permits are moving sideways:
M2 growth and Baa yields, however, show some expansion:
But the business activity indicators (profits and building permits) counter-balance the positive interpretation of the financial indicators (M2 and Baa yields), indicating growth will be middling at best.
To conclude, consumer spending continues to grow weakly. While the strong level of durable goods purchases indicates moderate confidence, weak wage growth and higher savings highlight a cautionary attitude. Business is on less stable footing. While the ISM numbers indicate business activity is still positive, the weak activity and investment numbers highlight significant structural weakness. And the leading and long-leading indicators project moderate growth at best.