Pre-Coronavirus Impacts: Sales And Production Show Very Weakly Expanding Economy In February

Mar. 17, 2020 10:48 AM ETSPY, QQQ, DIA, SH, IWM, TZA, SSO, TNA, VOO, SDS, IVV, SPXU, TQQQ, UPRO, PSQ, SPXL, UWM, RSP, SPXS, SQQQ, QID, DOG, QLD, DXD, UDOW, SDOW, VFINX, URTY, EPS, TWM, SCHX, VV, RWM, DDM, SRTY, VTWO, QQEW, QQQE, FEX, ILCB, SPLX, EEH, EQL, QQXT, SPUU, IWL, SYE, SMLL, SPXE, UDPIX, JHML, OTPIX, RYARX, SPXN, HUSV, RYRSX, SCAP, SPDN, SPXT, SPXV1 Comment8 Likes
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New Deal Democrat
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Summary

  • Sales and production are coincident indicators, while real retail sales is a short leading indicator, and real retail sales per capita a long leading indicator.
  • The big February decline in retail sales means that in real terms they are lower than 6 months ago.
  • Even without coronavirus, this suggests a weak consumer, and weakening employment in the months ahead.
  • Meanwhile, almost all of the February gains in production were in utilities.
  • Taken together, this shows a very weak economy, although not in recession, when the pandemic's effects began to be felt this month.

Introduction

It seems quaint to write about "short leading" and "coincident" indicators while the Great Meteor of Death is screaming down through the atmosphere. But they do give us a window into the underlying strength or weakness of the US economy just as the disaster began to strike.

Even before coronavirus, the consumer may have started to roll over

Retail sales decreased nominally by -0.5% in February. Since consumer inflation increased by +0.1%, real retail sales fell -0.6%. On a per capita basis, they declined -0.7%. This means that not only have neither real retail sales, and real retail sales per capita have made new highs since last August, but they are both at 9 month lows. Here are both measures, normed to 100 as of the August peak:

Since we have gone 6 months without a new high, this is enough to flip both the long and short leading aspects of real retail sales to neutral. Even without coronavirus, another 2 such months would make it a negative. It also means that, even before the coronavirus impact, in February there was in indication that the consumer was beginning to roll over.

Further, because real retail sales (blue in the graph below) tend to lead jobs (red), and are an even better fit for aggregate payrolls (green), this strongly suggests that, even leaving coronavirus impacts aside, employment growth would decelerate significantly in the next few months. Here are the past 10 years:

And Real retail sales YoY look relatively benign only because last February consumption was in the midst of a "min-recession" due to the government shutdown. Real retail sales are only up +0.9% compared with last March. In other words, even without coronavirus I would expect an employment slowdown this spring.

Production increased, but manufacturing treaded water

Meanwhile, industrial production, the King of Coincident Indicators, rose +0.6%, but only after January's number was reduced by -0.2%. Further, almost all of the gains were in the volatile utilities sector. Manufacturing only increased +0.1%, with a -0.1% downward revision for January, for a net unchanged number. Production is virtually unchanged YoY, and still significantly below its December 2018 peak:

Together, industrial production and real retail sales tell us that in February, before any significant negative effects from the coronavirus, the production sector remained in a shallow recession, while the consumer sector, which was already treading water for nearly a half year, looked to be rolling over slightly.

Conclusion

Including the strong employment growth in February, the net coincident picture heading into the coronavirus impacts was a very weak economy, not yet in but not far from a recession.

This article was written by

New Deal Democrat profile picture
3.44K Followers
New Deal democrat As a professional who started an individual investor for almost 30 yeas ago, I quickly focused on economic cycles and the order in which they typically proceed. I have been writing about the economy for nearly 15 of those years, developing several alternate systems that include mid-cycle, long leading, short leading, coincident, lagging and long lagging indicators. I also focus particularly on their effects on average working and middle class Americans.
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Disclosure: I/we 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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