Uptick In Economic Growth In January
Because of the crash in stocks, people probably aren’t that interested in economic data from before the coronavirus fears were gripping the world. However, it’s important to note how the economy was doing before the negative impact because it tells you how ready it was to deal with a negative shock like this. If the shock would have come a few months ago, the U.S. economy could have fallen into a mini recession. But luckily growth was firming before this negative catalyst.
It’s good for global growth that the Chinese trade war with America died down right before the coronavirus outbreak. Chinese growth is in a secular decline as its weak population growth weighs on its potential.
In support of my point that the economy was in fine shape before this outbreak, we have the January Chicago Fed National activity index which improved from -0.51 to -0.25. That beat estimates for -0.6. The bad news is the December reading was revised down 16 basis points.
Good news is the chart below shows the 3 month moving average improved to -0.09 from -0.23. 3 month moving average spiked because the terrible October reading, which was -0.68, was newly excluded from the 3 month average. It’s likely that the 3 month average falls next month because the November reading won’t be included; it was revised up 8 basis points to 0.49.
Details Of The Chicago Fed Index
Within January’s index, 36 of 85 categories had positive impacts and 49 had negative impacts. 56 improved sequentially and 27 got worse. Production category hurt the index by 23 basis points because of weakness in industrial production. We're expecting an uptick in industrial production in 2020 barring a big negative impact from the coronavirus. A spike in the new orders index helped the sales, orders, and inventories segment as it only hurt the report by 2 basis points.
Once again, this index was expected to spike along with the regional Fed indexes if it wasn’t for the coronavirus potentially ruining sentiment.
Employment indicators only hurt this report by 3 basis points as there were 225,000 jobs created in January. Because the labor market is nearly full, I don’t think it’s fair to expect average monthly job creation in 2020 to be as high. Another negative is temp job creation has been falling. This segment likely won't be a huge negative in 2020. But I don’t think it will improve much from this level.
Finally, the personal consumption and housing category helped this index by 3 basis points. Consumer wasn’t very strong in January especially if you look at core retail sales. However, its confidence is sky high. Housing market probably will only get hotter in March as interest rates are plummeting. Record low average 30 year fixed mortgage rates are a boon for the spring buying season. Rates couldn’t be falling at a better time for home buyers.
Redbook Sales Growth
In the week of February 22nd, the same store sales growth rate in the Redbook report fell from 5.7% to 5.4% which is still a solid reading. Based on Google search trends, there is evidence that Americans aren’t that focused on the coronavirus. It’s unlikely that the consumer pulls back in February.
Biggest negative factor might be the stock market’s losses. However, we’d probably need to see a bigger decline than 5% to cause shoppers to stay home (and not shop online obviously).
Consumer Confidence Improves
When markets fall, investors are quick to ignore any positives. This irrational behavior allows you to profit as long as you don’t get caught up in the emotions. Conference Board consumer confidence index rose from 130.4 to 130.7 which missed estimates for 132.5. This positive reading is being discounted because the survey period ended on February 13th. It wasn’t impacted by the coronavirus.
U.S. consumers are less focused on the coronavirus than they are in South Korea. Which makes sense because there are much fewer cases in America. And it's doubtful we will see a similar sized decline in confidence. Remember, South Korean consumer confidence fell the most in 5 years.
This report was good because buying conditions improved. The decline in buying conditions made me concerned with the University of Michigan report. Specifically, the Present Situation index fell from 173.9 to 165.1, but the Expectations index rose from 101.4 to 107.8. Those saying current business conditions were good fell from 40% to 38.6%. Those saying conditions were bad rose from 10.4% to 11.9%.
That means the net percentage with a positive opinion fell 2.9%. Consumer’s opinion on the job market worsened by a greater amount. Those saying jobs are plentiful fell from 47.2% to 44.6% and those saying jobs are hard to get rose from 11.9% to 14.8%. That’s a net percentage decline of 5.5%. That’s not in line with the very low number of jobless claims.
Outlook got better. Those saying business conditions will improve rose from 18.4% to 20.4% and those saying conditions will get worse fell from 8.6% to 7.4%. That’s a net improvement of 3.2%. Outlook on the labor market barely changed since the percentage expecting more jobs fell 0.3% to 16.2% and those anticipating fewer jobs fell from 12.9% to 11.1%. Income prospects improved modestly. 22% expect an increase in income (up 0.4%), while 6.7% expect a decrease in income (down 1.3%).
Conclusion
U.S. economy is in solid shape to deal with a shock to the system. I don’t see the coronavirus causing a recession. The only way it would is if fear grips investors enough to catalyze a big drop in the stock market. We're talking about a 30% dip here. Consumer confidence would reverse from its current cheery nature as consumers are highly influenced by the stock market.
A big decline in stocks causing a recession would be reflexivity in play. To be clear, I would be very bullish if stocks fell 10% let alone 30%.
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