Well that’s another week in the books and a rather interesting one it was. The highlight of the week goes to Mario “The Bazooka” Draghi as he cowered in front of his confetti throwing thonged assailant. You just can’t make this stuff up…
It’s tough to follow an act like that but never the less I’ll trudge on. We had a pretty busy week on the economic front. The major data points were on retail sales, industrial production and inflation. On Tuesday we got PPI which actually firmed a bit since the last report thanks to a rise in energy prices. The indices for final demand in goods and services were up from February showing gains in gasoline, jet fuel, beef and veal. On the downside were pork, natural gas and plastic resins. Right along with the PPI release was also Retail Sales. I wrote about this earlier in the week so not much more to discuss on this one other than you can’t just take the headline number and go with it. When we look at the individual series that make up the report, we see that there is indeed strength in sales coupled with inflation. The inflation in some of the categories from the report were confirmed when we got CPI data on Friday. CPI registered gains in the energy, clothing, furniture and recreation categories, all of which were first presented in retail sales data.
Unfortunately we did get some disappointing data from the NFIB Small Business (personal favorite) and Industrial Production (IP) reports. Respondents in NFIB cited poor weather, the strong dollar and government regulations as the main constraints. Of note in the data was a reference to a shortage of skilled labor which has been a recurring theme in various labor reports. We then had the Industrial Production report, which was dragged down by energy related businesses. The massive drop in energy prices has definitely skewed data in many reports which is why it has become even more critical to sift through the line items to get a true read on the information. IP only showed a gain in business equipment for the month, but all major market groups are still up on a year over year basis.
On Wednesday afternoon we got the release of the Beige Book report. The Beige Book is one of these reports that many people don’t pay attention to, but really should. When you read the summary and all the actual reports from the individual regions, you get a very good feel for what is going on in the country, not to mention a sneak peek into following data points. For example, in this month’s report, the Philadelphia section spoke about manufacturing gains which were then confirmed on Thursday when we got the Philadelphia Fed survey that beat expectations. Again in the Beige Book was the reference to a lack of skilled labor. Several regions in the report cited an inability to find workers in areas ranging from construction all the way to Information technology positions. While this inability is good to see as it speaks to an increase in labor demand, it also brings up a very troubling aspect of our country which is a decline in relevant job training. Overall the Beige Book showed an economy that is growing, but is lacking real enthusiasm.
Thursday we got another sub 300,000 weekly unemployment claims number. The stretch of low claims data we are experiencing typically coincides with a boom time economy. This begs the question, what is different this time? The answer, I believe, is that we are in a kind of reset period. We have made the transition from a severe contraction into a period of growth, but because of the extent of the damage from the downturn it has taken much longer to recover. We are just now seeing wages rise on both a nominal and real level which is the key to fostering consumption and shifting our economy into high gear. Also on Thursday we got a below expectations housing starts and building permits report. While on the soft side, when you look at the data historically, it seems as if we are at the beginning of a growth period.
*Shaded area indicates a recession as defined by the NBER.
Ah…TGIF. We got CPI, Consumer Sentiment and Leading Indicators. CPI, similar to PPI, showed some firmness because of the recent rebound in energy. So far in April, crude oil has rallied a bit and if it stays around these levels will certainly lead to a gain in next month’s inflation and retail sales data. Consumer Sentiment came in above expectations and is also at a historically high level. Ultimately it is the consumer which drives our economy and I expect that as things slowly improve we will get to that point where the economy accelerates and people will take notice. Leading Indicators were somewhat subdued in March and pointed to the reset period which I referred to earlier.
All in all it was mixed bag of data for the week. Points for both the bulls and the bears to support their arguments. Over the weekend I had lunch with a friend of mine who works in the leveraged loan business and he had some interesting observations. He is seeing demand, but what he is not seeing is the real fear of missing out that comes with a true bull market. His observations do seem to mesh with what we are seeing in the data recently which points to an economy that is moving, but just not as quickly as we would like. I have to admit that even as optimistic as I have been, I do have to agree with him. That being said, there are enough good points to the economy that I believe growth will pick up. As they say, you have to learn to walk before you can run.