Strike 2 On Chicago

by: Alhambra Investment Partners

By Jeffrey P. Snider

The continued disappointment of economic data is starting to weigh, but only as concerns might be directed toward Q1. Despite all projections for a sharp rebound after January's dreariness, February figures continue on the downside and now March indications are not much better. The latest is the ISM Chicago Business Barometer (formerly Chicago PMI) which remained in significant contraction for a second straight month in March. That would tend to suggest warmer weather is not yet equating; expectations remain undeterred.

Consumer spending, meanwhile, has also been weaker than expected in the first quarter even though more Americans have jobs and sharply lower gasoline prices has left them with extra money to spend. Harsh winter weather also kept many Americans from shopping in parts of January and February.

The prevailing view is that the economy will pick up soon with the onset of warmer weather, especially if companies continue to create new jobs at a rapid pace. The fact that consumers felt [SIC] better about the economy's prospects in the spring and summer instead of its current performance might support that notion.

It sounds very nice and reassuring, if all-too-familiar:

Retails sales grew by a sluggish 0.1% over the previous month, according to the U.S. Commerce Department. Economists surveyed by the The Wall Street Journal had expected a healthier 0.4% growth. Excluding the volatile measure of auto and auto parts sales, the figures were pretty stagnant…

Increases in hiring and rising payrolls suggested that consumer spending would pick up in the spring, giving the economy the much needed boost, after the government reported a below-par 0.1% growth in the GDP for the first quarter.

The quoted passage immediately above was from 2014 which was far too similar to the paragraphs further above from today. They are entirely bland enough that you can simply google some variation of the keywords "weather" "economy" "spring" and "pickup" and arrive at thousands of similarly worded and written paragraphs - and you wouldn't know which year was being highlighted without specifically checking (and you will get more than a few from even 2013 with its "overly" harsh winter). The problem with this Groundhog Day recurrence in economic insufficiency is lost as the regularity of instability is a much bigger problem than is appreciated by this simple meteorological economics. The fact that the economy cannot seem to gain and hold economic traction is a signal of much deeper absences that are not expressed well by individual reports compared solely to prior months.

At least in one instance it is clear enough that repetitious instability removes all talk of that inarguable 5% GDP recovery.

Beyond any structural considerations for the persistent inability to escape beyond intermittent bad quarters, this mini-cycle downturn is already shaping up much more serious than the last or anything even past the 2012 slowdown. Winter cold and snow levels may be comparable between 2014 and 2015 but there is a heightened degree of negativity this time around. In that respect, the Chicago ISM figure is interesting in that this is the first time two readings below 50 have occurred in sequence since the Great Recession (and, in fact, there was only one other sub-50 reading in the "recovery" in April 2013).

I have serious concerns about sentiment surveys and especially index constructions based upon them, but they do provide at least a limited perspective on some economic function. Even the Chicago version shows the Great Recession on a serious lag and even the 2012 slowdown, despite exaggerations in between. With February and now March inside that downturn context, as a coincident or lagging indication, that would more than suggest, again, that this downswing in 2015 is different and perhaps much more determined than past "winters."

To that end, I highly doubt anything of the sort will be showing up in the Establishment Survey of payrolls, so we will keep hearing that robust job expansion will dig the economy out of this even-steeper rut - until past the point where "unexpected" weakness finally relents the enthusiasm for the labor market that doesn't apparently exist anywhere outside of those statistics. I find it increasingly difficult to believe that businesses would, at the same time, continue robustly hiring and cutting back on most big expenses especially as the "dollar" seriously trims profit and revenue expectations (and all the downstream implications of that).

It might just be that simple, in that a greatly expanding job market in reality would not be so unstable downstream. Actual and nominal wage growth would certainly put an end to all this instability for good, and lead to an actual recovery even if slowly in that direction at first. To that end, the ISM Chicago has not just February on notice about nothing good, it has already leaked into March thus seriously reducing the probability of aberration.