The Economic Recovery Continues

The details we learned this week about the economy add up to a simple story: the recovery is progressing. However, an economy the size of the U.S. is like a battleship; turning it around takes time.
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This week we learned more important details about the economy. They add up to a simple story: the recovery is progressing.

First we learned that despite the ending of cash for clunkers, retail sales ex-autos increased 0.5%. In fact, we saw increases in a wide variety of retail sectors such as general merchandise, food and beverage stores, gasoline stations and a furniture and home furnishing stores. The breadth of the areas which increased is encouraging.

Secondly, we saw another weekly decrease in initial unemployment claims, this time to 514,000. Here is a chart of initial claims along with the 4-week moving average:

Notice this number has been dropping since late March/early May. It has dropped from the 650,000 are to a little above 500,000. This is solid progress and indicates a trend is in place.

We also learned the manufacturing sector is doing well. First, the Empire State manufacturing survey recorded its highest level in five years.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved significantly in October. The general business conditions index climbed 16 points to 34.6, its highest level in five years. The new orders index rose 11 points, and the shipments index shot up 30 points, to 35.1. Both employment indexes were positive for the first time in more than a year. Price indexes were little changed, with the prices paid index remaining positive while the prices received index hovered just below zero. Future indexes advanced to relatively high levels, indicating that respondents expect conditions to improve further in the months ahead.

Here is a chart of the index:

Notice the sharp increase that has occurred since the early part of this year.

We also learned that the Philadelphia Fed's manufacturing survey is also expanding:

The region's manufacturing sector is continuing to show signs of recovery, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered positive readings for the third consecutive month, but they suggest only marginal growth. Indexes for employment and work hours remained negative, but trends suggest that employment losses have moderated in recent months. A growing percentage of firms have indicated higher input prices in recent months, but price increases for their own manufactured goods are not prevalent. The region's manufacturing executives expect business activity to increase over the next six months; however, expectations have moderated somewhat in the last several months.

Here is the accompanying chart:

While this index is not as strong as the Empire State Index, it has still printed a positive number for the last three months, indicating the region is experiencing growth. And -- like the Empire State survey -- the Philly Fed has been increasing at a good pace since the beginning of this year.

In addition, we also learned that overall industrial production increased at the national level:

Industrial production rose 0.7 percent in September after an upwardly revised gain of 1.2 percent in August. For the third quarter as a whole, output advanced at an annual rate of 5.2 percent, the first quarterly gain since the first quarter of 2008 and the largest gain since the first quarter of 2005. Production in manufacturing increased 0.9 percent in September, and the index excluding motor vehicles and parts rose 0.5 percent. Mining output strengthened 0.7 percent, while the output of utilities fell 0.7 percent. At 98.5 percent of its 2002 average, total industrial production was 6.1 percent below its level of a year earlier. In September, the capacity utilization rate for total industry increased to 70.5 percent, a level 10.4 percentage points below its average for 1972 through 2008.

This was the third month in a row of increases in industrial production. Also note production increased 0.5% without motor vehicle production. Like retail sales, this tells us the economy is recovering in areas outside of direct government stimulus like the cash for clunkers program.

And we're seeing positive manufacturing numbers from other countries:

The worldwide recession appears to have ended, with surveys showing manufacturing activity is on the rise nearly everywhere. ...

While details vary, the slump was sharp in nearly every country, reflecting the sudden decline that came after Lehman Brothers collapsed in September 2008. That worsened a credit squeeze, which meant some companies had no choice but to cut back on everything they could, from inventories to marketing expenditures to jobs. Others, fearing that the economic outlook could become much worse, cut back voluntarily.

It now appears that companies cut too much, and the surveys of manufacturing show that companies are expanding in most countries.

Over all, the surveys indicate that the manufacturing sectors of China, Taiwan, South Korea and India had begun to grow by April, but that the United States did not follow suit until August.

In Europe, France is reporting growth, and Britain is hovering near the midpoint, indicating the deterioration has stopped but growth has not yet begun. Although the German government estimates that its gross domestic product rose in the second quarter, the manufacturing survey indicates continued weakness in that country.

New orders and production have turned positive everywhere but in the three European laggards, Spain, Ireland and Italy. Spain and Ireland have been badly hurt by collapses in real estate markets, which had boomed, in part, because of easy credit. Mr. Williamson attributed some of Italy's problems to a lack of confidence in its government's ability to deal with problems.

We're also seeing some good signs from the tech sector:

The calendar says we are well on our way to winter, but for many technology companies, orders are starting to bloom like flowers after a spring rain. ...

So far, there are many encouraging signs. The technology giants Intel, I.B.M. and Google delivered better-than-expected quarterly financial results this week, and their executives expressed confidence that the worst was over and a rebound under way. Top executives at Dell, Cisco Systems and other tech companies have also been optimistic recently.

"The worst of the recession is clearly behind us and because of what we have seen, we now have the confidence to be optimistic about our future," Eric E. Schmidt, Google's chief executive, told analysts Thursday after the company's strong earnings report. ...

Paul S. Otellini, chief executive of Intel, the world's largest semiconductor maker, pointed to his company's solid third-quarter performance on Tuesday and said it showed that "computing is essential to people's lives, proving the importance of technology innovation in leading an economic recovery." ...

On Thursday, I.B.M., a leader in software and technology services sold to companies, reported profits and revenue that surpassed Wall Street's expectations.

The final piece of good news was the inflation number:

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in September, the Bureau of Labor Statistics reported today. The increase was less than the 0.4 percent rise in August. The index has decreased 1.3 percent over the last 12 months on a not seasonally adjusted basis.

A small rate of inflation is actually very healthy; it indicates that somewhere in the supply chain someone has either pricing power or enough demand to warrant price increases. Both of those developments indicate economic growth. However, the inflation rate is not too high, indicating the economy is nowhere near a runaway inflation level.

The one bad piece of economic news the drop in consumer sentiment:

Consumer expectations are slipping though the assessment of current conditions is little changed, in what are mixed to disappointing results for the mid-month Reuters/University of Michigan consumer sentiment report. The headline index fell back more than 4 points to 69.4, reflecting a nearly 6 point drop in expectations to 67.6 and a nearly 1-1/2 point dip in current conditions to 72.1. Rebounds underway in the housing and manufacturing sectors, as well as strength in the stock market, are likely holding up current conditions with continuing job losses likely hurting confidence in the outlook.

My guess is this is largely job market related. Regarding the job market, let me reiterate the point I made in my previous article:

The primary argument against recovery has been the jobs market. While there are numerous economic indicators that signal the economy is rebounding (here is a list of over 20) there is one that stands out like a sore thumb: jobs. However, those arguing against the idea the economy is recovering do not note that an economy the size of the US's does not simply turn on a dime. When an economy loses over 2.4 million jobs in a 4 month period (as originally thought), it does not turn around and start growing anytime soon. Now we've learned that the severity of job losses was in fact more severe. This means the period from the time of job losses to recovery is in fact longer than originally thought. Additionally -- and just as importantly -- the unemployment rate is a lagging indicator. That means it goes down after the economy starts growing. So to talk of a "jobs recovery" when the economy is still in negative territory (although it will probably print a positive GDP in the third quarter) is premature at best. Simply put, it's not time to talk about a jobs recovery yet.

Simply put, the job market is healing. The problem is that it is healing from one of the worst periods of job losses in history which indicates the rate of healing will be slow. However, as noted above, an economy the size of the US is like a battleship; turning it around takes time.

All that being said, the numbers this week were very positive and indicate the recovery is on track.

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