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Weather or not, economy still improving

Originally published in the Reno Gazette Journal’s website, http://www.rgj.com/story/money/business/2015/02/20/weather-economy-still-improving/23742909/

In my last column, I talked about the negative media spin on January’s data, perhaps contributing to January’s equity market decline. In February, despite the fact that the equity markets have moved to new records, negative spin continues. I continue to see hand wringing over some month over month declines in individual pieces of data without any further analysis. One of my clients sent me a piece appearing in the national financial media bemoaning the fact that the market keeps climbing despite negative trends in such things as retail sales (December: -0.9%; January: -0.8%), and consumer confidence (January 98.1; February 93.6. Then, on Thursday, we learned that the Philly Fed’s business activity index fell to 5.2 in February from 6.3 the prior month (and over 40 in November), the lowest level since last February (i.e., last winter) when it was -2.0. (The index measures firms expanding less firms contracting, so a positive score means net expansion.)

I would like you to remember that last year’s first quarter GDP surprised the markets with an unexpected decline of more than 2%. This occurred almost totally due to one of the worst winters on record, particularly in February. What likely happened is that the “seasonal adjustment” (SA) process just couldn’t deal with the weather extremes. SA is a process that uses historical averages to “adjust” data. The point is, when extremes occur, the SA process doesn’t work well. As we saw, the rest of 2014 was strong, and despite the supposed negative start, the real GDP grew +2.5% for the year. Of importance here, in last year’s first quarter, 579,000 net new jobs were created; recessions just don’t occur when that many new jobs are created.

I bring this up because we have a similar weather pattern this year, especially in the Northeast. Boston has had record snowfall so far. Should anyone be surprised that harsh winter weather temporarily impacts economic activity? To compound issues today, there are 29 ports on the west coast (through which pass 12.5% of the nation’s GDP) that are completely shut down (union strike) resulting in parts and inventory shortages and curtailing production schedules. So, don’t be surprised if first quarter GDP growth disappoints.

Yet, job creation tells us a completely different story, and it is job creation that ultimately drives economic activity. In January, jobs grew 257,000, and, over the November to January period, more than 1 million net new jobs were created. That hasn’t happened since 1997. In another report, we learned that there are now over 5 million unfilled jobs, the highest level in this century. The quits rate, too (i.e., “take this job and shove it”) is at its highest level since before the Great Recession indicating that job holders have growing confidence that they can find work elsewhere. And the latest data on initial claims for unemployment show that, except for a few weeks in May 2000, this indicator is at its lowest level since the 1970s! The point is, the labor market (jobs) is the best measure of economic health, and ours is ‘smokin.’

Still, there is angst over some of these numbers. So, let’s actually analyze retail sales, consumer confidence, and Thursday’s Philly Fed release.

If we neutralized the retail sales data for the fall in the price of gasoline, December’s retail sales were down 0.2%, and January’s were flat.

Retail sales only cover 35% of total consumer spending. The other 65% is services. To show what this means, in Q4, retail sales rose a total of 1.9% vs. Q3, but real consumer spending rose 4.3%, the best growth since before the Recession.

If we look at some of the services, we see that in December, travel rose 5.7%, hotels 4.5%, and beauty salons 0.5% over their levels of November. Restaurant spending, which along with travel and hotels is a leading indicator of consumer health, rose 0.8% in December over November, and is 13.1% higher than a year earlier. That’s significant.

The fall from 98.1 to 93.6 in the University of Michigan’s Consumer Sentiment Index may, on its face, be cause for worry. However, except for January’s number, the 93.6 level (which matched December’s reading) is the highest level of the index since January 2007. Back in September, the index was 84.6, and it stood at 88.8 in November. So, it isn’t like 93.6 means consumer negativity. It is more like January’s sentiment (98.1) represented ‘jubilation’ from rapidly falling energy prices. With a fall in equity values in January, along with slightly higher gasoline prices in February and a whole flurry of terrorist atrocities, it isn’t any wonder that the ebullience of January has been tempered.

Despite the 5.2 reading of the Philly Fed’s business activity index, the all-important employment sub-index increased, and the Philly Fed said that the future activity sub-index “reflects general optimism about manufacturing growth in the region over the next six months.”

Conclusions

1. Due to another harsh winter in the Northeast, first quarter economic data have pulled back. But, the most important indicator, jobs, still shows considerable strength.

2. In addition to the weather, this year’s first quarter U.S. GDP growth will also be impacted by the shutdown of west coast ports. As a result, it may likely disappoint. If it does, 2015 GDP results may very well be a repeat of 2014 where the succeeding quarters were very strong.

3. If the equity markets pull back as a result, it could very well be a buying opportunity (consult your financial advisor).

Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor.  Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.  Robert is available to discuss client investment needs. Call him at (775) 284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV  89521.  Ph: (775) 284-7778.

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