GDP, DURABLE GOODS, FINDING BUSINESS CYCLES

Bernanke is Cautious on Employment, Looks at Demand

Today Fed Chairman Ben Bernanke appeared before Congress to provide his semi-annual monetary policy testimony. He said that improvement in employment must be closely monitored in view indicators that show demand not strengthening in kind. Such sentiment disappointed equity markets, which closed down, despite good GDP numbers and success coming from the European Central Bank's second LTRO.

Unemployment has fallen to 8.3% from 9%, where it hovered for most of 2011. Apparently the fall in unemployment has been rather fast and deep, with the current rate at the Fed's low end of its year-long 2012 forecast. Unemployment started to decline in November of last year dropping to 8.6%. What is surprising is that quarterly GDP numbers leading up to November weren't very strong. Q1 showed GDP advancing by .4%; Q2, 1.3%; Q3, 1.8%. Today, GDP showed Q4 growth at an impressive 3.0%, with an annual gain of 1.7%.

Still, throughout 2010, a time when GDP numbers were consistently stronger than in 2011, and in fact ended with 3.0% annual growth, unemployment numbers didn't budge. What's special about Q4 2011 to  bring down unemployment in a dramatic fashion....

Fed forecasts have GDP growth in the area of trend at 2.3% to 2.6% for 2012. According to Bernanke, “with output growth in 2012 projected to remain close to its longer-run trend, FOMC members did not anticipate further substantial declines in the unemployment rate over the course of this year.” For rates of job growth to be repeated, Bernanke said that it would “likely require stronger growth in final demand and production.”

Headwinds are starting to blow against growth in final demand and production. Bernanke saw elevating gas prices pushing up inflation and depressing consumer purchasing power.

Vehicles Have Led Demand, But Demand Needs a Broader Base

Final demand can be seen in retail sales indicators. Monthly results for retail have been flat through Q4, except for the motor vehicle component. Vehicle sales have also influenced consumer credit expansion and the growth of associated manufacturing sectors.

According to today’s release of GDP numbers by the Bureau of Economic Analysis, motor vehicles lead growth across GDP components in Q4, posting growth of .81%, and annual growth at .19%. Last time growth was seen in motor vehicles of this magnitude was in Q3 of 2009, with a rate of .92%. Of course, when vehicle sales increase, associated production also increases and, with it, investment. Investment in industrial equipment showed basic strength through 2011, growing .22% in Q4. Transportation equipment was also strong in 2011, with Q4 results growing .18%.

Contrast vehicle and associated numbers with broader demand numbers. Clothing and shoes, as a component of GDP, looked weak through 2011 with Q1 growth at .07%; Q2 at .05%; Q3, -.19%; and Q4 ending the year with .07% growth resulting in an annual rate of .07%.. Food and beverage purchases looked like clothing---weak, and the particular numbers almost identical. Whereas in 2010, both components were about twice as strong, posting annual growth of .13% each.

Economic numbers show two concerns. Firstly, employment improvement might be more a reflection of vehicles, as opposed to a broader base. Secondly, given the quarterly GDP numbers for most of 2011, with a jump in Q4, is this growth sustainable.

Durable Goods Orders, With GDP Can Tell of Bottom Cycles

Durable Goods Orders reported by the Census Bureau today show a decline in January of -4.0%, following three consecutive months of increase. This data shows anticipated future production. The motor vehicle component looks healthy with January numbers at a .9% increase and a year over year increase of 12.2%. These results comport well with other trends in other economic indicators showing strength in vehicles.

In fact, looking at the stock performance of the Dow Jones Automobiles and Parts Index ($DJUSAP) versus the S&P 500 ($SPX), we see that the auto index outperformed the S&P by growing 27% from a December 20, 2011 low through to a February 17, 2012 high. For the S&P, the growth rate has been 15.4%. However, currently everything is moving sideways, not really advancing and not really declining.

More important, nonetheless, are the areas of weakness in durable goods orders. The most significant class is “computers and related products”, which is different from “computers and electronic products” which includes the semiconductor industry.

For “computers and related products”, surprising decline is seen month over month with a fall in January of -10.1% versus December’s fall of -5.9%. Of considerable note in this industry is a year over year decrease of -13%, that is from January 2010 compared with January 2011. This component is experiencing the largest decreases of all durable goods.

Looking at a similarly related component on the GDP report, its growth has been weak over 2011. This implicates a business cycle ready for an uptick in demand.

Ultimately, vehicles really showed up in Q4, while other things weren’t as strong as one would like to see. Ideally, one would like to see employment steady at its rate or obviously improve, while retail aside from vehicles improves. From there, perhaps the cycle for some of these underperforming components will tick up.