Economic Data Are Cooling Off

 | Dec 23, 2011 | 3:00 PM EST
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Economic news, which had been coming in better than expected, now seems mixed at best. This morning, the Bureau of Economic Analysis released data indicating that consumers' incomes and spending for November barely grew and that aggregate wages actually fell. We also learned from the Census Bureau that for the second month in a row, companies are investing less in their businesses. And earlier this week, the Chicago Fed's composite of 85 economic indicators showed that growth is slowing and below trend.

Let's start with consumers, in the form of the Personal Income and Outlays report. Black Friday hype aside, real personal spending grew by just 0.2% in November. And that was possible only because consumers saved less, as real disposable incomes were basically unchanged. And aggregate wages and salaries fell by 0.1% in nominal terms. The savings rate fell from 3.6% to 3.5%, a trend that is unsustainable, as a healthy savings rate is in the range of 8% to 10%. This is especially true when you consider that Americans need to save for a looming retirement and that household net worth fell by 4.1% in the third quarter, according to the Federal Reserve's Flow of Funds report.

Not only are companies reducing their aggregate payroll expenses, as evidenced by the falling wage component, they also decreased their investment in capital goods (outside aircraft) for the second month in a row. The key component of the durable-goods report, new orders for non-defense capital goods excluding aircraft, fell by 1.2% in November, after a drop of 0.9% the month before. (These data are not adjusted for inflation.) While headline orders for durable goods showed an increase of 3.8%, most of that came from orders for new planes (up 73.3%) and defense spending (up 3.7%).

If you strip out transportation, new orders rose by just 0.3%, but computers and electronic products were down 4.4%, and electrical equipment was off by 1.2%, following a drop of 1.0% in October. Companies do not appear to be investing in technology, for this month's data at least. That probably ties in with Oracle's (ORCL) disappointing results.

And then there is the very comprehensive Chicago Fed National Activity Index (CFNAI), which is a composite of 85 different indicators. A reading of zero indicates that the economy is growing at its trend rate, or long-term potential (usually regarded as about 3%). Readings below zero indicate that the economy is growing below its potential, and sustained readings below -0.70 for the three-month moving average are usually associated with recessions. The indicators are drawn from four broad categories of data: 1) production and income 2) employment, unemployment and hours 3) personal consumption and housing, and 4) sales, orders and inventories.

Earlier this week, we learned that the CFNAI moved lower, to -0.37 in November, from -0.11 in October. Production-related indicators made a contribution of -0.23 to the index in November -- a sharp decrease from +0.16 in October and its lowest value since April 2011. Two of the four broad categories of indicators that make up the index decreased from October, and only the employment, unemployment and hours category was positive in November. The three-month moving average held at -0.24, indicating that the economy is not growing fast enough to add enough jobs to keep up with population growth, let alone re-employ the 13.3 million unemployed Americans.

What do these data mean, and what can we expect going forward? Well, let's ask the companies. (In tomorrow's column, Economic First Look, I will discuss consumer sentiment.) The National Federation of Independent Businesses' small business survey shows that these companies' primary concern is weak demand. However, small-business sentiment, while low, is improving, and members of the organization indicate an increased willingness to hire, should demand justify it.

Meanwhile, for large companies, consider the Business Roundtable's fourth-quarter CEO Economic Outlook survey. "The findings of this survey reflect the continuation of a slow, uneven recovery characterized by ongoing economic uncertainty for American businesses," said Jim McNerney, chairman of Business Roundtable and chairman, president and CEO of Boeing (BA). The organization said that about one-third of its member CEOs expect to add employees and spend more on large equipment in the next six months. More than 40% plan to keep their workforces steady, and about a quarter expects to cut jobs. Unlike smaller companies, whose sales are primarily domestic, Roundtable members find Europe's financial crisis to be a major concern, McNerney said. Standard & Poor's estimates that about 14% of revenue for the 500 biggest U.S. companies comes from Europe.

Thus, we're still left with that circular logic that has prevailed during this recovery. Businesses are waiting for demand to improve before they invest and hire more, at which point they can afford to give pay raises to their workers. But as we see, consumers can't spend more until more of them are working, and those who are employed earn more money. I'd like to think that consumers might blink first and spend more, but that low savings rate presents a big challenge.



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