The near-euphoria in the market over the perceived surge in the economy is highly misleading. The year-over-year percentage increases we are seeing in various economic indicators are only an indication of how far down we were. It reminds us of the title of a book published a number of years ago entitled Been Down So Far Anything Looks Like Up. All that’s happened is that the economy is less bad, but it is certainly not strong. Let’s look at two key examples-retail sales and industrial production.
Yesterday’s report on March retail sales was greeted with banner headlines proclaiming the comeback of the consumer. Typical was the Wall Street Journal’s assertion that “Shoppers turned up in surprising force”. Yes, it’s true that retail sales in March were up 8.6% from the low a year earlier. But this was still 3.6% below the peak sales in May 2008, almost two years ago. Moreover, at current levels sales are actually still slightly below the level reached back in December 2006 over three years earlier. The really significant fact is that over the last 43 years retail sales have hardly ever gone down at all, even in recessions. So the fact that sales have “soared” to a level reached over three years ago is hardly a harbinger of consumer strength.
The same kind of reasoning applies to industrial production (IP). March IP was up 6.1% from the June trough. That may sound good in the headlines, but it was still down a significant 9.1% from the top in December 2007. Moreover, IP in March was at about the same level as it was over 10 years ago, back in December 1999. Never since the depression in the 1930s has IP failed to exceed a level established 10 years earlier.
The same is true of a lot of other key economic indicators. They are up, but from highly depressed numbers, and are still significantly below earlier peaks. Indeed, housing has hardly bounced at all and seems set for another dip. New home sales made a new cyclical low in February and are at the lowest level in least 47 years dating back to 1963, while the Mortgage Bankers Association purchase index is still hovering near its low.
Small businesses are another major weak spot. They account for an estimated 50% of GDP, 50% of employees and almost all of the job growth. The National Federation of Independent Business (NFIB) index for March was at its lowest level since July and remains well under the lows reached in the last two recessions. The subsections of the index shows a decrease in plans to increase jobs, lower expectations of sales, fewer job openings, deteriorating credit conditions, lower earnings expectations, and plans to decrease capital expenditures. Not only do small businesses constitute about half of the economy, but their statistics often do not get picked up in the surveys that determine the major economic series that we rely upon to give us an accurate picture of the economy. Therefore, even the fragile economic growth that’s reported may be exaggerated by the omission or under-reporting of small businesses.
All in all, it seems to us that the media reports of a newly-soaring economy are highly exaggerated and likely to lead to investor disappointment in the period ahead. We pointed out the Fed’s own rather restrained view of the economy in last week’s comment (see archives). This would certainly account for the Fed’s determination to keep rates near zero for an “extended period”. Only a highly fragile economy would require that low a rate.