Remember that fast-food commercial of the 90’s, wondering where the extra beef being advertised in their competitors’ burgers was supposed to be?
I have the same problem with the economic recovery that Wall Street is touting as being back on track. Economic growth slowed from 5.0% in the December quarter, to 3.7% in the first quarter of this year, to only 1.6% in the second quarter. That rate of decline would have it in negative territory in this quarter if it continued.
But the slowdown has not continued, according to Wall Street’s economists. The recovery is back on track for slow growth of 2% for the third and fourth quarters, and full recovery next year.
Improving conditions are sure what I want to see, or at least be able to anticipate. So show me the beef.Where are Wall Street economists seeing evidence that the recovery that began stumbling in the spring is back on track?
Is it in the housing industry?
No way. Home sales have dropped off a cliff since the home-buyer rebate program expired in May. In addition, home foreclosures are running well ahead of last year’s pace, rising again in August, this time by 4% over July, and by 25% over August of last year. Even later data shows that mortgage applications are down sharply so far in September.
Maybe the better conditions in this quarter are in the auto industry?
Well, no. Auto sales in the U.S., which had been improving even in the 2nd quarter, unexpectedly plummeted in August, down 21% from August a year ago, the weakest August sales in 27 years.
Consumer spending accounts for 70% of the economy. So it’s a bad sign that consumers are not buying big ticket items like homes and cars, their biggest contributions to overall spending and the economy. But how about consumer spending in other areas?
Ah, here we get a little taste of beef, or at least relief. Last week it was reported that retail sales were up 0.4% in August, better than Wall Street’s forecast of 0.3%. It’s not gigantic, and the catalyst was apparently back-to-school spending on heavily discounted goods, but what the heck, up 0.4% is a positive.
Not to pour cold water on the report, but better retail sales are not expected to continue, especially given the report this week that the University of Michigan’s closely watched Consumer Sentiment Index fell to 66.6 this month from 68.9 in August, worse than Wall Street’s forecast of an improvement to 70.0, and now at its lowest level since August of last year.
So where else might Wall Street economists be seeing the upside reversals that convince it the economic recovery is no longer stumbling, that the recovery is back on track?
Well, there was excitement in the financial media a few weeks ago when it was reported that the ISM Mfg Index rose fractionally, from 55.5 in July to 56.3 in August. Maybe the manufacturing sector was picking up and could lead the recovery.
However, this week the Federal Reserve reported later data, that its ‘Empire State’ Mfg Index fell to 4.14 in September from 7.10 in August, much worse than Wall Street’s forecasts of a rise to 8.0. And that its Philly Fed’s Mfg Index remained at negative readings in September for the second straight month, at -7.0, much worse than Wall Street’s forecasts that it would rise to 0.0.
But manufacturing is not a major sector of the U.S. economy anymore. 80 per cent of jobs in the U.S. are now in the service industries; advertising, education, financial services, food services, healthcare, travel. Unfortunately, the ISM Non-Mfg Index, which measures the service sector, fell from 54.3 in July to 51.5 in August, worse than forecasts of 53.0, and at its lowest level since January.
Well, you get the picture.
Is it a recovery, or a worsening slowdown still underway, if economic reports not only continue to worsen but continue to be worse than Wall Street’s forecasts? And does the fact that they continue to be worse than forecasts not indicate that Wall Street economists remain well behind the curve and have not yet caught up with just how serious the slowdown has become?
Recovery will come. But let’s not jump the gun. First the slowdown must end.
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