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4/12/13 – More Mixed Economic News

Written by Brad McMillan, CFA®, CFP® | Apr 12, 2013 12:26:51 PM

The economic stats just keep bouncing around. Although no single statistic is worth getting too excited over, the general trend of the data is pretty indicative, and what we are seeing is a decline in growth after the strong first quarter.

Employment has been the biggest concern, with the much smaller-than-expected increase in jobs last month suggesting that the slowdown might be significant. As I have written before, the underlying labor demand has actually not been bad, despite the jobs figure, but the slowdown in jobs remains a concern, largely for the psychological effect.

Recent data suggests that, in fact, consumers are starting to be concerned, and that is affecting their behavior. Retail sales for March showed the first decline since Superstorm Sandy last October. Particularly hard hit were discretionary purchases, such as electronics, which suggests that consumers are indeed starting to pare back their spending. Reasons could be structural, such as a delayed impact from the tax and gasoline price increases, or seasonal, such as bad weather. We don’t know yet. Consumer confidence has also taken a hit, with the Michigan index released today showing a significant decline.

When you combine the weakness in job growth with the decline in consumer psychology, as well as the weakening business expectations shown in the surveys earlier this month, it is clear that the economy is slowing down. What remains to be seen is how deep and long lasting the slowdown will be.

At this point, structural factors suggest that the weakness will be mild and short lived. The most recent job loss number was well below the previous one and in line with figures from the first quarter, when the economy was stronger. This suggests that job losses may continue to run at low levels and that employment is stronger than it seems. Housing continues to perform strongly, despite some slowing signs, and pending tax refunds should provide juice for additional consumer spending. A survey I saw yesterday stated that many consumers who expect tax refunds plan to buy new cars. Recent declines in gasoline prices and record highs in the stock market may well increase consumer confidence.

There are also signs that an increase in wage growth may be starting to occur. Certainly the macro conditions for such an increase seem to be in place. If so, that would also increase consumer confidence.

Overall, some slowdown seems inevitable, but, given the pace of first-quarter growth, we can slow quite a bit and still be doing pretty well by recent standards. Moreover, there are reasons to believe that the slowdown will be limited. I will certainly continue to watch this, but at the moment signs still look pretty good.