Crosscurrents in the Economic Data

As many understand there is considerable contradictory economic data coming from various sources.  1.  When you look behind the numbers the data is not as contradictory as it seems and 2.  when the data is contradictory this is to be expected in a slow growth scenario that we now have.  The article below gives a good analysis of the current economic data and indicates where there are crosscurrents or contradiction in the data.

The italics is in italics and the bold is mine.  From Market Watch:

If someone is cooking the books of U.S. economic data, all this person has managed to do is make things pretty confusing.

“The latest round of monthly and weekly economic data presents so much of a mixed picture of the economy that even an ardent follower of the numbers like myself is left scratching my head,” said Steve Ricchiuto, chief economist at Mizuho Securities.

On the one hand, it looks like exports and manufacturing are contracting, while on the other, consumer confidence appears to be firming. 

At the same time, the unemployment rate fell in September below 8% for the first time since President Barack Obama took office and jobless claims sank to the lowest level in four years. 

Ricchiuto said he is not implying a conspiracy theory like former General Electric CEO Jack Welch, who famously charged that the labor market improvement in September was a political fix.

“Instead, I believe that the data is simply being distorted by the powerful crosscurrents in the economy that have emerged as a result of several years of a sub-par recovery process,” Ricchiuto said.

This coming week’s data may only add to the confusion. At first glance, the data will show decent retail sales, high inflation, and relatively healthy manufacturing and housing reports.

But beneath the surface is a different story.

Economists surveyed by MarketWatch forecast that the Commerce Department on Monday will report that retail sales will rise 1.1% in September after a 0.9% gain in the prior month. But a lot of the increase is due to higher gas prices. For instance, in August, sales at gasoline stations increased 5.5%, the most in three years.

Analysts like to strip out sales of autos, gasoline and building materials to get a better sense of the underlying strength of consumer spending.

On that basis, “we’re looking for an modest 0.3% gain in core sales, not quite as gang-busters as the headline number,” said Michael Hanson, economist at Bank of America Merrill Lynch. Core sales fell 0.1% in August.

Overall consumer spending likely rose only 2% in the third quarter as modest job growth continues to restrain incomes, said Sal Guatieri, economist at BMO Capital Markets. This is up only slightly from a 1.5% rate in the April-June quarter.

Inflation, as measured by the consumer price index, is expected to pop 0.5% in September mainly due to a rise in gasoline, and almost matching its 0.6% gain in August. This data, due Tuesday from the Labor Department, would be the largest back-to-back monthly gain in the index in four years. Prices at the pump rose to $3.91 per gallon in September from $3.78 in August, according to economists at Credit Suisse. Measured from a year earlier, the CPI will edge up to a 1.9% rate from 1.7% in August.

Many economists believe the energy spike will not last.

By November and December, there should be some reversal in gasoline prices, said Nigel Gault, chief U.S. economist at IHS Global Insight.

Underlying inflation is probably less strong. Core CPI inflation, which excludes food and energy prices, is expected to rise a more modest 0.2% in September following a 0.1% gain in the prior month.

Industrial production should decline a slight 0.1% in September after a steep 1.2% drop in August, the biggest decline since March 2009. Production has slowed to a crawl in the third quarter, analysts said, hurt by the slowdown in Europe and Asia and uncertainty generated by the looming fiscal cliff. The U.S. is set for an outright decline in exports of goods in the third quarter, Gault of IHS said.

Housing starts should jump 1.7% in September to 763,000 units, the highest level in four years, following a 2.3% gain in the prior month.

After a sharp 7.8% gain in August, existing home sales should retreat by 2.5% in September to 4.70 million units, according to the MarketWatch survey.

But even these two housing reports come with a caveat. The housing gains remain modest relative to the steep drop in activity since the bursting of the bubble.

“Housing fell by much more than the rest of the economy, and at some point it ought to rebound much more strongly, but that has not happened yet,” Hanson of Bank of America said.

Overall, Ricchiuto said he was going to go with the goods data rather than the labor market data.

The concept of a sharp rebound in labor market conditions in the midst of a sharp global slowdown “is hard to imagine,” he said.