Category: ECONOMICS 5.0

The seasonally adjusted month-to-month change in August unit vehicle sales was much stronger than expected at +9.3%. That increase came entirely from light truck sales, which were up +23.1%, largely the result of more attractive incentives. Unit car sales were down -2.1%.

Not only does that August unit vehicle sales strength reduce the likelihood of a decline in Q3 consumer spending, the pricing incentives that pushed truck sales higher will also serve to hold back the Consumer Price Index.

Lower gasoline prices will also serve to contain the August CPI.

U.S. economic conditions are deteriorating, and the probability of the first (advance) estimate of GDP being negative is currently greater for Q3-2008 than it has been for any other quarter so far this cycle.

Forecasts for negative GDP have dominated the landscape for some time now, but none have been defended by “on-the-ground” data; and it took a benchmark revision to bring Q4-2007 growth to -0.2%.

Our own forecast for Q3 GDP is currently unchanged (0.0%), but several recent developments point to a meaningful downside risk:

1. Inflation-adjusted consumer spending has been down for two consecutive months, and a quarterly decline in Q3 is a real possibility. The last time consumer spending was down on the quarter was associated with the 1990 recession. Quarterly PCE never went negative in the 2001 recession.

   We currently expect Q3 PCE to be down -1.0%, but that forecast will go up for potential revision following Wednesday’s unit vehicle sales data.

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Wednesday, July 16th, the Labor Department will report the June Consumer Price Index, and we expect a large gasoline-related increase of about +0.8%. Excluding food & energy, we anticipate a much smaller increase of about +0.2%. Without an acceleration in wages and GDP, we expect core inflation to remain immune from passthrough, and the Fed to refrain from tightening despite high and rising energy, food, and non-auto consumer goods import prices.

Our CPI forecast implies a noteworthy increase in the overall year-over-year CPI growth rate (to +4.6% from +4.2%), but only a marginal increase in the core YOY rate (to +2.4% from +2.3%). The large difference between those YOY growth rates (total CPI minus core CPI) is one way of looking at the well advertised lack of inflation passthrough to date.

So far, nonfarm payrolls have avoided the -200,000 to -300,000 monthly declines typically seen in recessions, and GDP growth has avoided the outright declines typically used to define a recession. Net, it is very clear that the current economic weakness lacks the depth typically seen in noteworthy contractions (recessions).

Lacking depth, the question then turns to duration, and whether or not this slowdown causes a typical amount of pain by hurting less for a longer amount of time.

The first table in this PDF document refers to the past six recessions (column 1), and compares the length of the recession in number of months (column 3) to the length of the expansion (column 2) preceding each recession. Column 4 relates the number of recession months to the number of expansion months.

The most popular measure of employment growth is the monthly report on nonfarm payrolls. However, the most comprehensive data source on the number of people working is the quarterly census of employment and wages (QCEW). In an attempt to keep the more timely series (nonfarm payrolls) in line with the better data source (QCEW) on a continuous basis, the Labor Department includes a birth/death adjustment in its monthly report.

The birth/death adjustment is intended to account for the employment impacts of both new businesses starting up and existing businesses shutting down. The QCEW points to strong employment growth among startups that the monthly employment report methodology can not detect.

I don’t know about you but whenever someone uses the word "resilient" to explain what's behind a rebound in consumer spending -- I always cringe. What exactly does that mean? Typically, the term is heard in the following context. An analyst or economist, when pressed to justify an unexpected jump in household shopping, will often respond by saying "it looks like consumers are showing amazing resilience."

"Showing amazing resilience?" Where’s the insight in that observation? How does that explanation enlighten anyone?

By definition, someone demonstrating resilience means they are resourceful, imaginative, or creative in their actions. OK, we get that. But it seems to me it is such a vacuous term when used to explain consumer behavior.

Nonfarm payrolls were reported to be down 80,000 in March, following declines of 76,000 in both January and February. Three consecutive monthly declines in payrolls is a noteworthy development, and a strong indication of recession. Those recent monthly payroll data are depicted by the orange line to the right in the accompanying chart.

A review of the historical record (red line, green line, blue line) shows consecutive declines in nonfarm payrolls being characteristic of the past three recessions. Recession months are in bold.

The red line in the attached chart shows the monthly changes in nonfarm payrolls during the economic slowdown that included the recession which officially started in 1981.

Nonfarm payrolls were reported to be down 63,000 in February following a 22,000 decline in January. Those two consecutive monthly declines follow increases in nonfarm payrolls that averaged 80,000 in the fourth quarter of 2007 and 71,000 in the third quarter of 2007. Those recent monthly payroll data are depicted by the orange line to the right in the accompanying chart.

A review of the historical record (red line, green line, blue line) shows consecutive declines in nonfarm payrolls being characteristic of the past three recessions. Recession months are in bold.