Green Shoots? Factory Activity And Consumer Spending

Includes: DIA, IWM, QQQ, SPY
by: John M. Mason

In the endless effort to find pieces of good news that will warrant a more optimistic view of future economic growth, today's list includes information on the activity of factories and the spending of consumers.

The first piece of information is for February and the second is for January.

The Institute for Supply Management indicated that its February index rose to 53.2, which is up from 51.3 in January. If the number is above 50.0 that means that factories, in general, are expanding. In fact, 14 of the 18 industries that are included in the survey showed growth for the month.

The interpretation is that there was a rebound in activity in February from the weather-impacted number from January.

The rebound is good, but it still may be negatively impacted by the weather. The index averaged more than 56.0 for the last six months of 2013…so, the performance is rising, but it is still below what it was in the last half of last year. We will see how this plays out in March…and beyond.

The data on consumer spending was interesting, not so much because of the aggregate performance, but because of where the strength came from.

Year-over-year, personal consumption spending rose by 3.5 percent. This is up from the fourth quarter average of 3.2 percent and the third quarter result of 3.1 percent.

The more interesting fact is that the big jump in spending came in services…and the biggest increases in this area came in health care spending and spending on utilities.

The rise in the spending on health care is attributed to the Affordable Care Act, Obamacare. It is expected that in the future, more and more of consumer spending will be attributable to health care spending. The current jump is generally felt to be a result of the initiation of the program and although spending on health care will generally be higher in the future, it will not be as great as it is now. That is, future increases should be more incremental.

The spending on utilities comes from the cold weather…people needed more heat during the month. This increased spending on utilities should remain through the month of February.

The purchases of goods dropped for the second straight month.

The optimistic side of the coin looks at these results and says that once the weather related expenses go away, consumer spending will continue to rise as people substitute the purchase of goods for the purchase of heat, and coats, and salt, and shovels, and…..

This, connected with the rise in factory activity, is seen as the "green shoots" indicating an improved outlook for the economy.

On the less optimistic side, one could argue that the pickup in spending on goods will not take place because the added spending people had to make during the cold and snow siphoned off sufficient income that, along with rising health care spending, consumers have little left over to achieve higher levels of spending going into the spring.

The less optimistic argue that there will not be a "catch-up" in spending on goods from the weather-related shortfall because their incomes were still used up in taking care of the bills connected with the cold and the snow.

The economy is going to post a higher rate of growth in 2014 than was achieved in 2013. I am on record as supporting this prediction. I just believe that attaining this higher rate of growth is going to be a struggle because many problems in the economy are structural in nature and cannot be solved by just cyclical rebounds. In addition, jumping on one piece of information that gives us some upbeat feelings about the future…only sets us up to be disappointed when the next piece of information does not support these upbeat feelings.

The economy is growing…I believe, a little more rapidly than it did over the last three years. I just don't think that we can be to euphoric about what it is we are going to be able to achieve.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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