US Economy Drifting Sideways

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Economic indicators for the week of February 11-17 suggest the US economy was searching for a direction; specifically, it neither moved forward nor backward with any punch. Last year’s debate over the fiscal cliff caused consumer pessimism to spike upward. Consumers responded to the Washington bickering in Washington by ratcheting up their savings rate (to 6.5%) and cutting back on spending.

Last week, consumer anxiety subsided, and indicators suggest they have become more confident about the future. This should lead to greater spending and less saving.

Unfortunately, Congress is about to start a new debate on sequester, i.e. whether large automatic spending cuts should occur. The debate may damage consumer confidence once again.

New numbers on residential construction are not yet available. However, it has been one of the most positive developments of the economic recovery. The increase in housing starts (from 851,000 to 954,000 in December) was excellent news because 30% of all workers displaced during the recession were in the construction industry.

The most troubling indicator last week was the continuing weakness in manufacturing output. Manufacturing and industrial production declined significantly over the last month and this was reflected by the capacity utilization index, which did not increase at all. Furthermore, the level of monthly auto sales has not increased since November.

Indicators that were Positive: Unemployment claims, Retail Sales, Consumer Sentiment

Last week’s positive indicators included a decline in initial claims for unemployment compensation, rise in retail sales and increase in consumer sentiment.

Initial unemployment insurance claims declined from 368,000 the previous week to 341,000 last week. A decline is important because it indicates businesses are no longer laying-off workers. Over the last 12 months, initial claims average 373,000 per week.

Another positive indicator was retail sales, which beat analyst expectations. Retail sales were expected to decline during the month; however, the increased by .2%. Furthermore, when auto sales (which remain rather flat) are excluded the total increase in retail sales was even more significant (.5%).

Perhaps the most positive economic indicator was the significant rise in consumer sentiment; it increased from 73.8 to 76.3. Consumer sentiment is important because it is a primary gauge of household spending. The savings rate jumped from 4.1% to 6.5% over the last month. However, the more positive sentiment suggests consumers may return to spending in the future.

Indicators that Declined: Capacity Utilization, Business Inventories, Industrial Production

The movement of three indicators during the week was troubling; they included a decline in capacity utilization (from 79.3% to 79.1%), increase in business inventories (from .2% the previous month .1%) and industrial production; which declined from .4% in December to -.1% in January.

These movements suggest the manufacturing foundation of the recovery is not on solid grounds. The primary exception to  this trend is residential construction.