Comstock Partners, Inc.May 01, 2014
Beware Of Misleading Monthly Economic Data
Don’t be deceived by the so-called comeback in economic activity. What we are witnessing is only the expected catch-up after the extreme winter weather. Overall economic growth is merely returning to the tepid trend that was in force prior to December.
When economic activity is disrupted by short-term events such as weather the month-to-month figures can be highly misleading, and it is more meaningful to look at the year-over-year results. In last week’s comment we showed how this applied to the data on housing, production and employment. Today’s economic release on consumption and income was more of the same. Real disposable income for March rose only 2.2% from a year earlier. Real consumer spending was somewhat higher only as a result of the drop in the household savings rate to 3.8%, the 2nd lowest rate since the recovery started five years ago. With income growth still weak and the savings rate this low, the prospect for strong consumer spending in the period ahead is limited.
The jobs picture is no better. The consensus for the estimated payroll increase for April is about 215,000, which would mean year-to-year growth of 1.66%, compared last November’s annual rise of 1.82%. Just to return to this number, jobs would have to jump by 430,000. Even after an increase of 215,000, the total number of employed would remain 207,000 below the number at the start of the recession in December 2007.
Furthermore, most of the jobs increase since the lows was in in the lowest paying jobs. These jobs accounted for 22% of the job losses in the recession, but 44% of the jobs gained back in the recovery. Given these numbers, it is no wonder that consumer spending has been so restrained during the last few years.
The tepid recovery should also be seen in the light of our long-held view that economic growth following debt crises and excessive debt build-up is below average for a lengthy period of time. At the peak, household debt amounted to 129% of disposable personal income (DPI), compared to a 62-year average of 76%. As late as 1992, the percentage was still 82%. While household debt has declined to 103% of DPI, there is still a long way to go before approaching anywhere near the mean, and this creates a strong headwind for consumer spending.
When the subdued recovery is combined with high valuations, a deteriorating technical condition, an unstable situation in China, the slowdown in developing nations and the numerous geopolitical bombshells, the market outlook remains highly risky at current elevated levels.