Wednesday, February 29, 2012

GDP Revision Boosts Services

To me… the key part about the GDP revision is the net UPWARD revision in services spending. In the original estimate this jobs-producing sector of the economy was up at just a 0.2% annual rate. With revisions it is still weak but improved at +0.7%. Those added the tenths of a percentage point mean jobs in this low-productivity sector. In no other sector does demand growth produce job growth as reliably as in services.

On balance a couple tenths of a percentage point on an annualized GDP growth rate is background noise. But the upward revision to services is meaningful especially if that trend (for an upward revision) continues in the next set of revisions. Since consumer confidence is improving through February and since we know what job growth was in Q4 it seems that spending on services must be continuing because the job market must be improving- all indicators are that it is doing just that. And if more people are at work in significant numbers it means there must be services jobs since construction is not going to absorb too many new workers despite its recent revival and manufacturing output is largely about new machinery and enhanced productivity...and some, some, jobs but only ‘some’ jobs. Jos about the services sector hence IT is in the spotlight.

For the moment the strength in the jobs numbers and in the Conference Board’s labor-market-centric view of consumer confidence suggest that GDP and service sector growth MUST STILL BE powering ahead.

About GDP
Consumption growth at 2.1% is at its best since Q4 of 2010 when it rose at a 3.6% pace; ‘durables’ spending at a 15.3% pace is at its best since that same quarter.

Business investment was revised UP on one of two prongs: one, much less weakness in structures at -2.6% up from -7.2% and, the other, equipment, where spending cooled at 4.8% pace down very slightly from 5.2%, previously.

Housing improved strongly quarter to quarter and in the revisions compared to the ‘advance’ number with the estimate of spending up to 11.5% from 10.9% after revision.

The inventory revisions cut into growth but only slightly as growth in inventories was reduced to $54.3bln from $56.0 bln – a minor impact on GDP.

The net export (Current Account deficit) impact on GDP was slightly positive as net exports rose to -$404.4bln from -$405.8bln in the advance estimate.    The inventory and trade revisions just about wash each other out, as is often the case.   Exports slowed on revision but imports, a larger flow, slowed a bit more.

Finally government spending was slightly less weak in the fresh estimate at -4.4% up from -4.6%.

On balance the GDP revisions were rarely very large and they were in both directions by component leaving the overall GDP estimate only slightly stronger. In my view the upward revisions to services spending is the significant part of this report.

Tuesday, February 28, 2012

The Conference Board index roars!

The Conference Board index roars!

The Conference Board headline index is up over the past four months so vigorously that it is the second largest four-month climb in the 405 month history of the index (nearly 24 years).

While the durable goods index may have raised some questions today the Conference Board report has blown away any fears we might have that recovery was going to start slipping away.
Even so the details of the confidence survey show that there is still a lot of work to do

Buying plans are uniformly weak. They are- cut anyway you want to - in the bottom single digits of their respective queues and not much better in terms of their historic high-low range standings.

On balance the economy is stirring we see consumer confidence in the U of M framework is improving the Bloomberg weekly survey is near a four-year high and the Conference Board survey now has joined the good-news club. Expectations for jobs are now in true normal territory. Income expectations are, however, poor and buying plans are even worse.

While there are some clear and decisive improvements there is still a long ways to go. Still this report is encouraging.

Durable goods sound the first loud sour note

It is a much weaker-than-expected durable goods report. 

New orders fell by 4% after rising by 3.2% and 4.2%. So the impact on the growth rate for orders is not going to be severe. The lesson may be that the economy is not yet building that real head of steam more than it is...oh, no the bottom is falling out. Don't be Chicken Little looking down. 

Indeed, except for the folk at ECRI who still have their recession call in place few will want to extrapolate this one observation. The fact is that the regional PMIs in force this month are still upbeat. MFG surveys (PMI and diffusion indicators for February, not just January) are still very upbeat. 

All four of the regional Fed releases (now available) are stronger in Feb than they were in January - the durable goods data draws form January. But the outlook portion of those surveys is lower in than in Jan for three of four of those reports. Even so the outlook readings are still relatively strong and certainly solid.

At the end of the day the durable goods report is volatile and it is keeping its 'good name' in the clear on that score this month. 

Three month growth rates for shipments, orders, unfilled orders, and for inventories are still accelerating - not just growing- over three months compared to six months. For ex-transportation the picture shifts- there the growth rates are all (almost all) positive but all are decelerating and the outright three-month orders growth rate is now negative. Excluding defense all growth rates for those categories are positive and are accelerating. For nondefense capital goods all growth rates are positive and accelerating except for shipments which are declining over three months and decelerating compared to six months.

These are hardly disaster statistics.

Overall sequential growth rates mostly show acceleration over the past year. Ex transportation most growth rates show continuing deceleration over the past year - but only for orders is the three-month pace negative as we mentioned above. 

Trends are lower for machinery with several of the sequential order growth rates negative (sequential rates: 12-mo, 6mo, 3-mo). Trends for computers are lower and negative across several of the key categories. Trends for communications equipment are mixed with a number of negative readings. Trends for transportation and vehicles are mostly positive and steady.

Sales are still growing faster than inventories in 57% of the industry categories over three months. So inventories are NOT building up, Inventory to sale ratios are not climbing.  Also over three-months: Shipments growth is positive in 71% of the categories, New orders growth is positive in 57% of the categories, unfilled order growth is positive in 85% of the categories and inventory growth is positive in 71% of the categories. Categories ( Primary metals, Fabricated metals, Machinery, Computers and electronics,  Electrical equipment, Transportation equipment, all other durable goods) 

Because durable goods is so volatile we will want to see what happens next month. Is this month a re-calibration of data that had been too strong over the past two months or is there some encroaching weakness?

Finding three month net declines in Machinery orders and in electrical equipment orders, key US export categories, is something that makes me wonder if we are seeing some effect for slower growth abroad.