KEY DATA: Claims: +135,000/ Phila. Fed (Manufacturing): -6.9 points; Orders: -4 points; Employees: -11.1 points/ LEI: +1.4%
IN A NUTSHELL: “The recovery is moving forward, but signs that the pace is moderating are spreading.”
WHAT IT MEANS: The economy this year has been like the weather in so many areas: If you don’t like it, wait a minute and it will change”. Are we starting to see another change in the direction of growth? We just may be. Consider first the labor markets. For the first time in five months, the weekly jobless claims number rose. Now let’s not get too crazy about this increase. In normal times, with normal levels of claims, the numbers bounce around all the time. And anyone who thinks you can seasonally adjust a data set on a weekly basis without getting some volatility, has not tried to seasonally adjust any number. It really cannot be done. Still, with the government’s business and household income subsidies running out, it isn’t clear whether those firms that are just hanging on can make it. It has been expected (at least by me) that by the end of the summer, many firms could throw in the towel, meaning claims rise for while going forward. It is way too early to say that, but the claims increase is at least a yellow flag.
On the manufacturing front, conditions are still good but they may be moderating. The Philadelphia Fed’s August manufacturing index declined somewhat more than forecast. Order growth eased, as did hiring, while backlogs have started to decline. That said, the sector is still expanding at a decent pace and firms continue to hire more workers. In addition, firms are able to push through more price increases, though their costs are going up as well.
Looking toward the future, the outlook is good, as long as you put things in perspective. The Conference Board’s Leading Economic Index increased at a less robust pace in July than it did in May and June. Notice I said “less robust pace”. In normal times a 1.4% rise would be viewed as pointing to stronger growth ahead. But looking out to the fall and winter, it implies that growth will come down from its elevated third quarter pace. That should surprise no one as the consensus for third quarter GDP is up about twenty percent. That rate of growth is obviously not sustainable. Thus, when the report notes that “The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020”, it is not necessarily saying we are headed into a recession – only a slower growth phase.
IMPLICATIONS: I don’t want to make too much of a deal out of the rise in unemployment claims last week. I would normally just chalk it up to the normal ebb and flow of the data and that is likely what happened. But there appear to be many in Washington who seem to think the economy can stand on its own and doesn’t need any additional stimulus or if it does, it should only get enough to get through the November election. I don’t believe I am alone when I say that is really questionable thinking. Most economists believe as I do that more help is needed. Without it, consumer spending, which is likely to set a record for growth this period, could wind up being quite modest in the fourth quarter. Firms that have used the government largesse to help pay workers will discover they actually have to make money on their own to cover payroll costs and with consumption lagging, those funds just might not be there. So, while the economy may look red hot right now, the fire could dim pretty quickly. Of course, if we get a sharp drop in claims next week, all this turns into a “never mind”, which is what I suspect most investors are thinking.