by Bill Sweet
One of the early lessons that most students of finance (should) learn is that the economy is not the stock market, and the stock market is certainly not the economy.
Stock prices represent what many investors determine to be the fair value of a particular security. Thus, they represent almost real-time expectations of future value. Prices fluctuate rapidly because what you see on a ticker next to a stock is the sum of several thousand or million transactions at a particular price.
In contrast, economic data is generally gathered from a variety of sources with a lag of some time, even if only a few days, but at times reflecting data 3-4 months old. Thus, making financial decisions with economic data is literally driving while looking in the rear view mirror.
I thought to put this post together because news broke this morning that US Gross Domestic Product (GDP) shrunk at an annualized rate of about 1% in the first quarter, according to the second estimate provided by the Bureau of Labor Statistics. GDP is a rough estimate of the economic value of all of the goods and services performed in the economy during a certain time period, and serves as a broad barometer of economic activity. It is usually reported in inflation-adjusted (real) terms. Here's a chart:
I'm not convinced that this is anything to get upset about. Using annual data (comparing 1st quarter of 2014 to the 1st quarter of 2013, instead of the 4th quarter of 2013), we see a different, smoother picture:
That chart shows slow but steady annual growth in the US economy around the 1.5% - 2.5% range, after adjusting for inflation, which has been our experience for the past 16 quarters. I think that this is another critical lesson in time frame, and why many investors make the mistake of making decisions based on short-term volatility instead of focusing on long-term results.
The most common rational for the decline in production is due to the oldest excuse in the book: the weather. Indeed, for those of us in the Northeast, it was an ugly winter. 57.4 inches of snow fell on New York City's Central Park this year, with nearly 49 inches coming in January-March. The prior few winters in contrast delivered 26.1 and 7.4 inches of snow in comparison. In fact, the last time we witnessed a quarterly decline in economic production was the first quarter of 2011, in a winter in which we experienced almost 62 inches of snowfall here in New York.
That said, I'm not 100% convinced that the production drop had to do completely with the weather. The truth is that we don't know (remember: we're looking in a rear view mirror). So I find it helpful to look at other economic indicators.
The US economy has been adding about 200,000 net new jobs to the economy per month since about mid-2010. While this isn't stellar and is just above the pace at which new workers (college and high school graduates) are added to the economy, it's still a lot better than 2008-2009:
Temporary jobs are another data series I like to watch, since it's a little easier to hire and fire temporary workers. Thus, they can (at times) act as a leading indicator of the broader job market. There have been no recent declines in temporary hiring:
Durable goods are large items that businesses and corporations purchase that they expect to last at least three years. Large equipment and refrigerators are good examples of durable goods. Orders for new durable goods have been quite strong of late and have steadily increased since early 2009:
Commercial loan balances have been increasing in the economy since late 2011, perhaps indicating that US businesses have been taking advantage of relatively low interest rates in order to grow their businesses:
One of my favorite charts shows light vehicle and truck sales, which have also been steadily increasing for the past five years. I love truck sales in particular since I have a pet theory that these are landscapers and other small businesses who are out purchasing pickups to meet demand (I have no data to back this up, however). That spike in 2009 is the US government's cash-for-clunkers program:
Switching to rates, inflation has been increasing of late, but is still extremely tame at a little less than 2% per year. This is well below the historical inflation rate of about 3-4%.
Looking at inflation expectations by using the spread between 5-year Treasury Inflation-Protected Securities and 5-year Treasury bonds, we can see that expected inflation is also relatively low (although this method is imperfect as a prediction mechanism, I like it because it represents what bond traders are actually buying and selling, and not what people SAY they are doing or thinking):
The average 30-year mortgage rate is currently around 4.1%, which isn't far from historical lows.
Meanwhile, gas prices have oscillated between $3.25 and about $4.00 per gallon since early 2011:
I'm not sure what conclusions you draw from all of these data, but I am unconcerned about the state of the US economy at the moment. Things could change at any time, but everywhere I look I see a pattern of slow - but steady - growth as we continue to recover from the 2007/2009 recession.
