The flow of U.S. economic data and reports has definitely taken a turn for the better recently. Although, it’s perhaps more accurate to say the data has gotten ‘less bad’ than before.
The chart below displays two indicators of economic data surprises: The Citigroup U.S. Economic Surprise Index (green line) and Bloomberg’s ECO U.S. Surprise Index (red). Although different in the way they’re calculated, essentially both indicators are designed to measure the degree to which positive surprises are exceeding negative surprises in the daily and weekly blizzard of economic data reports. And both are telling a similar tale.
The upturn you see in each index at far right tells us upside data surprises are outpacing negative surprises, notwithstanding some notable exceptions … like Friday’s employment report. But on the whole, the data are exceeding forecasts.
If you are bullish on stocks, that’s a good thing, because in recent years these economic surprise indexes have had a pretty tight correlation with the S&P 500 Index. When the economic data gets less bad and then improves, the stock market generally follows suit.
But looks can sometimes be deceiving, and there is much less than meets the eye in two high-profile economic reports released just last week.
First, last Friday’s jobs report was a disappointment as mentioned above. Payrolls did expand by 162,000 last month, but it was below expectations. More disturbingly, the details of this report clearly show that the underlying employment trends in the job market leave a lot to be desired. Consider the following …
* The number of Americans forced to work part-time jumped another 19,000 to a staggering 8.25 million workers — stuck at the same high level as this time last year.
* Those unable to find work and dropped out of the labor force last month climbed by 240,000 — to nearly 90 million Americans — the second-highest reading ever recorded.
* And out of the 162,000 new jobs that were created last month … nearly 60 percent of them were low-paying positions in retail, restaurants or temp-jobs.
|When people don’t have well-paying jobs, consumer spending, the life-blood of our economy, suffers.|
In other words, the employment trend remains dysfunctional at best, and won’t do much to promote stronger economic growth, not when two-thirds of U.S. Gross Domestic Product (GDP) growth is driven by consumption.
People without well paying, full-time jobs don’t have the ability to boost their spending.
Second, last Wednesday the Bureau of Economic Analysis reported that the U.S. economy expanded 1.7 percent in the second quarter ending June 2013. That beat expectations of just 1.1 percent growth, a positive surprise, and helped the aforementioned indexes tick slightly higher.
Ah, but once again the devil was in the details. The main reason for surprisingly strong second quarter GDP was because first quarter growth was revised substantially lower.
In fact, we now find that GDP advanced just 1.1 percent during the first three months of 2013, far below the 1.8 percent growth previously reported. In other words, this particular “positive surprise” in the data wasn’t real. It’s pretty much a wash with our economy growing at an average pace of just 1.4 percent over the past 12-months.
Historically, such a slow growth rate has been associated with the start of recessions in the past. Going all the way back to 1948, any time annual GDP growth has been this anemic the “economy has entered recession within three quarters,” according to analysis from Bloomberg.
The reason: Stagnant income growth is zapping consumer spending, the life-blood of our economy.
* Average hourly earnings for U.S. workers declined in July and expanded just 1.9 percent year-over-year (chart above).
* When adjusted for taxes and inflation, American’s disposable personal incomes are up just 0.6 percent since this time last year.
* As a result, consumption is getting squeezed, with inflation-adjusted consumer spending up just 2 percent over the past year as shown below.
This is another red-flag that is close to recession-like levels. I’ll be watching the economic data surprises closely in the weeks ahead for clues about whether the stock market rally is sustainable, and you should too, given these troubling trends.
Healthy stock market gains require strong profit growth, which in turn depends upon a robust job market and healthy gains in consumer spending. Right now, this engine of economic growth is fragile at best.
There are those who claim the economy is ready and able to stand on its own without need of further monetary life-support from the Fed. And the tap may be turned off as early as the Federal Open Market Committee meeting on September 18.
But recent data tells me the U.S. economy is barely able to crawl at a snail’s pace, so it better pick up that pace before the QE-tap gets turned off.