MacroScope

Conflicting signals for U.S. economy

December 27, 2011

As 2011 draws to an unspectacular close, U.S. economic data are sending thoroughly mixed messages about the near-term path of the recovery. That’s not particularly reassuring given the still enormous risks emanating from Europe – but it’s better than the unequivocal weakness that prevailed during the first half of the year.

Consumer confidence offered some reassurance, jumping to an eight-month high in December and showing other encouraging signs as well as Eric Green of TD Securities explains:

The better than expected consumer confidence numbers (64.5) put confidence, like most measures of economic activity, back to the levels of early spring. Views on the labor market, however, look to be rising at a much better clip. The labor differential (between jobs plentiful and hard to get) continued to improve. That measure tracks the unemployment rate very well. It rose in December from -37.4  to -35.1. That remains exceptionally weak, but it is the trend that matters. That trend has improved decisively over the past several months and is now well above the spring levels that averaged closer to -39, and is the highest since the end of 2008.

Still, a much sharper-than-expected fall in U.S. home prices for October, while relatively stale as a data point, was enough to remind the Wall Street crowd that this fundamental source of growth remains in a rut with no end in sight. U.S. home prices peaked in mid-2006 and have since dropped by about a third nationwide, with much steeper plunges in the hardest hit parts of the country.

Nomura’s Aichi Amemiya reminds clients of the foreclosure glut still to hit housing:

The recent positive momentum of home sales data has not carried over into housing prices. The Case-Shiller house price index showed a continued decline on a month-over-month basis in October. The monthly rate of change was -0.62% in October, following -0.66%% in September (Consensus:-0.34%). The pace of the decline was faster than the market expectations. […] An expected surge in foreclosure activity will likely become a burden on prices. Realtytrac, a private online marketplace for distressed properties, said in the recent foreclosure report, ‘November’s [foreclosure] numbers suggest a new set of incoming foreclosure waves, many of which may roll into the market as REOs or short sales sometime early next year.’

Against that backdrop, it is hard to envision the sort of burst in spending that usually powers America’s consumption-driven economy. Tom Porcelli at RBC Capital Markets:

In an environment where real earnings continue to slip further into negative terrain on a y/y basis, hiring remains anemic (still well below the lows of the last cycle), credit availability is extremely tight, and confidence is prone to shocks (Europe, failure to extend the payroll tax cuts) the consumer will be hard-pressed to expand at much faster than a 2% clip. With this sizeable component of GDP already so weak, the impact from decelerating growth in capex and exports (the pillars of the US economic recovery thus far) on the back of a European-driven global slowdown could make 2012 even more painful.

Er, happy new year?

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