(By
Robert Johnson, CFA) I will be the first to admit that some of the data this week was
confusing, and on the surface, highly contradictory. Manufacturing data,
both the durable goods orders and the national ISM Purchasing Managers'
Reports, point to some economic softening. Meanwhile, same-store retail
sales data, record auto sales, and pending home sales all suggest
consumers are opening their wallets in a big way. Furthermore,
drastically revised consumer income data suggest that the consumer was
not quite as strapped for cash as we all feared in 2011. And initial
unemployment claims set another recovery low.
So Where Do I Come Out in This Week's Data?
Remember that the consumer is absolutely the key driver in a recovery.
That's partially because of the sheer size of the consumer, who
constitutes about 70% of the economy.
More importantly, businesses and manufacturers won't produce goods
unless there is real demand from consumers. With consumer demand
accelerating, it is hard to imagine that businesses won't be too far
behind in gearing up for that demand. My guess is that expiring tax
credits and a larger than normal "use it or lose it budget flush" in
December might have made January and February tougher than usual for
manufacturers, especially for those businesses making big-ticket items.
But I suspect the manufacturing data may look a little better in March.
Inflation-Adjusted GDP Growth Revised from 2.8% to 3.0%
Some had feared that the fourth-quarter GDP growth would be reduced on
the second estimate, but it was increased instead. A return to more auto
production by the Japanese auto transplants, warm weather, and falling
gas prices all served to boost the fourth quarter a bit artificially. As
good as the 2.8% quarterly number was, the 1.7% growth registered for
the full year was probably more representative of trend-line growth than
the sharp acceleration we saw in the fourth quarter.
After all this week's revisions, durable goods production and the
rebuilding of depleted auto inventories were still the two prime
contributors to overall GDP growth. The only really notable change with
this revision was the contribution from the services sector from 0.1% to
0.4%, more than accounting for the total GDP revision. The huge
services sector has been a major laggard this recovery, so I was pleased
to see the revision.
GDP Could Have Been Even Stronger
Although there has been a lot of whining about the role of inventory in
the fourth quarter (somehow overlooking how drastically inventory cuts
hurt growth earlier in the year), there were two big detractors from GDP
that got little attention. First, defense spending, which is always
volatile, took away 0.7% from real GDP, falling an astonishing 12.1% on
an annualized basis. Though defense is unlikely to ever grow at its
previous growth rates, it's doubtful that it will be that big a
detractor anytime soon.
Also affecting GDP was warm weather, which caused a decrease in
energy usage. Declining gasoline usage took 0.1% off of GDP, while the
housing and utilities category took 0.4% off of fourth-quarter GDP
(primarily because of falling natural gas usage). Unfortunately (or
perhaps fortunately), warm weather will continue to cast a chill on the
GDP calculations in the first quarter.
Obviously, the fourth quarter will be a tough act to follow. General
expectations are for a 1%-2% increase in first-quarter GDP and 2.0% to
2.5% for the full year. The inventory building is likely to be less
pronounced in the first quarter than in the fourth quarter, and energy
usage will be down dramatically, all weighing on GDP growth.
Personal Income Growth Better Than It Looks
The personal income data this month was pretty much an indecipherable
mess because of health care, tax issues, and shifting inflation rates.
While January's numbers compared with December didn't look so hot,
complex tax issues were behind some of the problem. Overall, though,
inflation-adjusted incomes now look a little better when viewed over the
past five months. The sequential month-to-month pattern appears below: Incomes Looking Better, Spending, Not So Much
Even on a year-over-year basis, inflation-adjusted income growth was a
mere 0.6%, stuck in the same year-over-year range as it has for the
last three months. With that type of income growth, one would think it
would be tough to support the 2% or so consumption growth that I am
expecting in 2012. However, the table below shows why this level of
income growth might not be as problematic as some would have you
believe.
Wage and Compensation Growth Better Than Overall Income Growth
Interestingly, compensation grew at 4.6% while inflation grew at a
tamer 2.4%.