Economic Reports

Economic Growth & Income

Personal income for December was better than expected at up 0.4% on the month and 4.11% year over year. Wages and salaries were up 0.5%. Unfortunately, that rate of rise is not even up to the lower end of the range we’ve seen in past expansions when 5% income growth was a precursor to recession. Still, it is, sadly, about average for this expansion. 

Two items in this category of greater concern are the savings rate and productivity. The savings rage has been falling steadily since late 2015, now down 25% year over year. At 2.5% the savings rate is now down to the level that prevailed just prior to the last recession. I suppose it could be that people are so confident in the economy they don’t feel the need to save but that has never been the case in the past. 

Productivity growth for the 4th quarter turned out to be not growth at all but rather a negative 0.1%. And productivity growth is related to investment which is a function of savings which as we just saw is not that great. And don’t even get me started on the giant dissavings that is the recent budget deal. Trumponomics, like the man responsible for it, is full of contradictions.

Production

All the sentiment based production reports of the last two weeks were positive. The ISM reports were both near 60 with new orders even higher, the manufacturing version at a 10 year high. The Chicago PMI and Dallas Fed manufacturing survey were also better than expected with the Chicago report showing a 6 year high for the employment component.

Consumption & Distribution

Consumer spending, up 0.4%, was slightly less than expected in December but November was revised higher from 0.6% to 0.8%. Still at roughly 4.5% year over year, the rate is at the low end of what we’ve seen in previous expansions. More disconcerting to me is that it took a huge surge in consumer credit to make it happen. November and December together saw a nearly $50 billion rise in consumer credit, a stunning number. Some of that is due to new car loans for hurricane replacement vehicles but credit cards saw a significant rise too. 

Inventories

Wholesale inventories rose 0.4% in December and nearly 4% year over year. Still, wholesale sales were also better than expected, up 9% year over year as the inventory/sales ratio fell again to 1.22. That is still somewhat elevated though and I’d like to see it continue to come down. With a big chunk of the inventory build in autos though I wonder if this will continue as auto sales appear to have peaked after the Houston surge. But for now, this was a good report. 

Orders

Factory orders were better than expected, up 1.7% month to month and8.4% year over year. Core capital goods orders were, however, revised lower.

Trade

In bad news for the Q4 GDP report, the trade deficit was reported to have risen in December. Imports and exports were both up, the former led by consumer goods and the latter by capital goods. Again, as I’ve pointed out before, a bigger trade deficit reduces GDP but it isn’t actually a sign of economic slowdown. The only time we’ve had a near balanced trade account in recent decades is during recession when imports fall. Somehow I don’t think that’s what President Trump has in mind when he talks about reducing the trade deficit.

Inflation

The most popular explanation for the recent stock market selloff is that the wage component of the recent employment report engendered inflation fears. I suppose that could have been a contributing factor but I don’t really subscribe to that theory. I’ll discuss the employment report below but the bottom line is that there were too many distortions in that report to take the threat of wage push inflation seriously. Besides, there is no evidence – despite decades of trying to prove a link by economists like Janet Yellen – that wage inflation is connected to general inflation. 

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