Chief economist David Rosenberg at Gluskin Sheff comments on Friday’s economic numbers. According to Rosenberg they make up an statistical illusion of a recovery. In fact, adjusted for the highest amount of artificial stimulus from the government ever, the U.S. economy is in an ongoing depression.
“If there is a bright spot, it is in the industrial sector.”
“The University of Michigan consumer sentiment index, while improving in May, to 73.3 from 72.2 in April, is actually still in recession terrain as in downturns, it averages 73.9; and during expansions it averages 90.9. So, we have the statistical illusion of a recovery, but in reality, organic growth is still hard to find,” Mr. Rosenberg writes in today’s market commentary.
While most analysts and commentators use the latest job report as an explanation for the stock markets drop, Rosenberg barely mention the slower than expected job growth.
Probably because he have already said what is to say about the situation in the American labor market in earlier commentaries.
“The ADP private payroll survey is showing marginal employment growth with none in the small business sector at all. And jobless claims, as we saw yesterday, have basically stopped falling; however, at still around the 440k level, they are not consistent at all with sustainable job creation. After plunging from 600k in June 2009, to 440k, as of January 2010, claims have basically stopped declining. That is a problem.”
Instead, Rosenberg focus on the U.S. consumers and consumer spending.
The Depression Is Ongoing
“The big deal in the April retail sales report was the “core control” segment (excludes autos, gasoline and building materials), which feeds directly into the consumer spending component of the GDP accounts,” he writes.
“The metric fell 0.2% MoM in the first meaningful decline since last July and the largest drop since the depths of despair in March 2009; a huge miss, vis-à-vis the consensus estimate of -0.3%. So this was the big downside surprise beneath the surface.”
“In addition, the University of Michigan consumer sentiment index, while improving in May, to 73.3 from 72.2 in April, is actually still in recession terrain as in downturns, it averages 73.9; and during expansions it averages 90.9.”
“So, we have the statistical illusion of a recovery, but in reality, organic growth is still hard to find.”
“The headline (inflation) did come in above expected, at +0.4% MoM, but that was due to a spurious 0.5% increase in the automotive segment (even though the U.S. Commerce Department already told us two weeks ago that unit vehicle sales showed a near 5% slide) and a 6.9% bounce in building materials, which may be part and parcel of the flurry of housing activity ahead of the expiry of the federal tax credits,” he adds.
Both industy output and retail sales are classic signs that the recession in the U.S. ended last summer.
David Rosenberg agrees with that, but says the depression is ongoing and the reason is that real personal income, excluding handouts from the government, has barely budged.
“In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trend-line for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits. The share of U.S. personal income being derived from Uncle Sam’s generosity has risen above 18% for the first time ever.”
“Real consumer spending is up $200 billion over the past 16 months and everyone believes we have a sustainable recovery even though organic income is down almost $500 billion. Think about that for a second because once the stimulus wears off, and with a 10% deficit-to-GDP ratio and concerns surfacing everywhere about sovereign credit risks, there is little out there to support future growth in consumption.”
“Some are clinging to the notion that employment growth will accelerate. From our lens, once you remove all the assumptions the Bureau of Labor Statistics uses in its monthly data, there is little growth in the nonfarm payroll data. And, the Household survey is much too volatile and too small a sample size to rely on.”
“Spain’s underlying inflation rate just turned negative in April for the first time since at least a quarter century and this is likely the thin edge of the wedge as we have yet to see the full brunt of fiscal austerity hit aggregate demand. Core consumer prices, which exclude energy and food, fell 0.1% from a year earlier from the miniscule +0.2% trend in March. All the deficit-challenged countries in the Eurozone, which technically means all of them since none come close to meeting the Maastricht budgetary targets, could be facing severe deflation pressure in the future based on the amount of slack in their economies,” the Gluskin Sheff chief economist writes.
Adding: “Ireland is already experiencing deflation, with nominal GDP falling faster than real GDP (both are down for two years straight but nominal is falling faster — nominal GDP was down by 11% in 2009, real down 7.5%). Not surprisingly, there is a lot of slack in the economy and the output gap stands at -7.1%, which suggests more deflationary pressures over the medium term. This problem is now widespread: Spain has an output gap of -5.3%, Portugal -3.6%, Italy -5.7% and Greece -4.6%.”
“Even with the recently announced austerity measures for Spain and Portugal, these countries may have trouble improving their fiscal ratios, if deflation sets in and GDP falls (as it has in Ireland). It’s otherwise known as the ‘catch 22’ — and the future of the Eurozone project, as it currently stands, is more in doubt than many are willing to believe at the current time. Either the Euro plunges or several of the EMU members will inevitably opt for their own currency of yesteryear to ease the deflationary pressure on their economies,” he concludes.
The Good News
If there is a bright spot, it is in the industrial sector, Rosenberg points out, and lists the following:
• The just-released U.S. industrial production data was strong, rising 0.8% MoM in April beating analysts’ expectations of a 0.6% increase. On a year-over-year basis, production is running at 5.2%, the strongest pace since mid-1997. Manufacturing is a bright spot with production jumping 1% MoM, matching the gain in March and is also up 6% YoY.
• Steel production is up 74% year-on-year.
• Lumber production has risen 29%.
• Automotive by 67%.
• Truck tonnage has risen 7.5% and container traffic out of Long Beach has surged 19%.
• Railway carloadings are up 14% over the past year. Some of this is related to global growth, some it to the lagged impact of U.S. dollar depreciation, and some of it related to the improved productivity position of U.S. manufacturers, which indeed seem to be enjoying somewhat of a renaissance (something we wrote about three years and should be on archive back at the old shop).
• The latest foreign trade data showed that U.S. exports of goods and services have exploded 20% YoY, as of March.
“So you see, the news is not all bad. The 20% of the economy related to exports and capital spending — the latter will benefit from the fact that capacity actually fell a record amount over the past two years and some of that surely has to be rebuilt and most pronounced in areas like transportation equipment, chemicals, plastics, industrial machinery — are certainly bright spots,” David Rosenberg writes.
Here’s a copy of today’s commentary: “Lunch With Dave”
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