Thursday, January 19, 2012

Economic reports point to better times ahead

Claims plummet
It was another day of positive data in which people have tried to find bad news. How many of you do this when you open your Christmas presents? Do you look at the thing and try to figure why it isn’t as good a present as is seems?

The day’s jobless claims data are unequivocally goods news even we cannot evaluate them fully. Claims shot up by 27K the week before and now they have plunged by 50K. This is huge volatility even by the standards of jobless claims. Last week we pondered if all the progress was slipping though our fingers; this week it looks like progress has re-accelerated. Well, maybe not, but at least we know that last week’s signal was false and now, once again, we wait for next week’s report to give us a clue where claims are going to settle in.

The 350K mark is quite good and is as close to normal as we have seen for some time. Claims rarely get down below the 300K level.

Since 1974 the median value for claims has been 367K. Also since 1974 claims have been below the 300K level only 109 times in 1,985 weeks or only 5.5% of the time. Claims fall below the 350K level and stay above the 300K level 38% of the time. But claims are above the 370K mark 47% of the time. Thus claims are elevated in recession and stay that way in recovery periods. Even though recessionary periods are relatively short, they ratchet claims up and it takes them a good part of the recovery to get back below the 350K mark. They take some time before they work down into the ‘normal zone’ leaving the level of claims high (above 370K) much more than they are moderate (350-300K).. Indeed, the high claims Zone is all too normal occurring as it does 47% of the time.

But apart from claims falling to 352K in the week of Jan 13 for the previous week when claims spiked, the insured rate of unemployment rate fell to 2.7% its lowest level in this cycle. It was last at 2.7% in Sept of 2008.

Thus there is quite a lot of evidence that the labor market is improving.

Housing Starts
Housing starts is one of those reports you know is not going to be too good. It’s like unwrapping a Christmas present from your stingiest aunt. Don’t get your expectations up. Still there can be unexpected positive surprises. While the housing headline was not one of those surprises the continuing rise of single family starts was as single family starts continue their string of increases.  But housing still has issues. We do not like to put too much emphasis on the winter housing reports because they are so much about the weather rand the weather has been mild this year and it could example the improved tend over the last few months. Also the lift for single family starts is still quite shallow and only the largest of the multi-unit categories has any real lift to it. The housing report had some good news but it was not completely believable.

The Philly Fed MFG Survey -January
 The Philadelphia Fed’s January MFG survey ‘disappointed’ because its lift was low and it so was its level. The level for December was revised down giving January a lower base to spring from. That accounted for some of the disappointment. And then the January gain itself was not large. Many of the January categories were weaker notably orders and shipments but the separately surveyed barometer did rise month to month. The Philadelphia outlook index also advanced strongly. Despite having some irregularities Philadelphia posted a strong outlook and showed continued employment and a strong work week gain.  

The CPI and CPI trends remain in good shape.  Headline inflation is on the strong side year over year at 3% but over six month that is a 0.4% annual rate decline. So the energy induced bulge is dissipating. Core inflation is decelerating from 2.2% to 2% to 1.8% from 12-months to 6-Mos to 3-mos.  Inflation seems to be on the run and yet is not running too fast to worry the Fed.  

Yet, interestingly, the trend for service inflation is up. The services sector, a lower productivity and more inflation-prone sector and the center of job creation is showing a persisting rise in inflation. That should be enough to keep the Fed from worrying that deflation is setting in. It might also be the harbinger of less tight times for services and evidence that the sector is warming and will take the lid off job growth.  And that may be the most tantalizing element of the CPI report.