Although investors clearly liked Friday's manufacturing and consumer spending numbers, it wasn't as easy to make sense of all the other
statistics that were released last week. In particular, while GDP and existing home sales rose more than expected, consumer confidence and new home sales fell.
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Which numbers should investors focus on in trying to gauge the economy's health?
Peter R. Hartley, chairman of the economics department at Rice University in Houston, Texas, says the key figures last week were the manufacturing and income figures, which indicate that industrial and retail production are on the rise. While GDP is a good overall measurement, Hartley says, it's not based on raw data and is therefore not as reliable. And Hartley also doesn't put much faith in the consumer confidence survey.
The overall picture that Hartley sees emerging is one of an improving economy that is coming out of a recession.
TSC: U.S. manufacturing grew significantly in February, according to the Institute for Supply Management. The group announced today that its purchasing managers' index was up 4.8 points to 54.7 in February from 49.9 in January. This is the first increase in the institute's measure in 18 months. Do you think this is significant?
I think it's a significant indicator that the economy has turned around, yes. I, in fact, expected the recession to end fairly early this year. Manufacturers have been waiting for a big increase in demand since there's been such a big reduction in inventories. So, it's not surprising to see manufacturing activity pick up to replace them.
TSC: What about the Commerce Department's news on Friday that consumer spending and personal income posted solid gains in January, both rising 0.4% apiece?
Again, I think we've seen consumer spending holding up fairly well through the end of last year, and having both income and consumer spending numbers go up also points to that fairly robust
spending continuing. With spending continuing to go up on the consumer side and business inventories pretty much depleted, the only way to turn right now is to increase production. That's good news.
TSC: What about the GDP figure for the fourth quarter being revised upward to 1.4% last week?
While that's good news, I don't give as much credence to the GDP figures as I do the manufacturing, industrial production, construction, employment and consumer spending figures. GDP is one of those figures based on an aggregate, and once you get away from the raw data, they are subject to more revisions.
In the end, movements in GDP are one of the better measures we have as to what is happening in the general economy overall. The problem is those figures get revised quite a bit, so, I think you can rely a lot less on small movements in GDP figures because there's a lot of uncertainty as to what they will be down the track. And this GDP figure was revised quite a bit, as they all are.
TSC: What are some of the key indicators you follow then as harbingers of the economy's direction?
The increase in energy prices the year before last played a bigger role in the recession than a lot of commentators gave it credit for. And then the fall in energy prices at the end of last year probably has had a lot more to do with the recovery than a lot of people would admit. There's evidence that energy prices have played a role in lots of business cycles, and the latest one has tended to be underemphasized, in my view.
Of course, this is my vantage point as an economist here at Rice University in Houston, which is probably the energy capital of the United States.
TSC: While there has been some positive news of late, as we have just discussed, there have been some indicators that things are not that good, namely a decline in the Conference Board's consumer confidence number to 94.1 in February, down 3.7 points from January and significantly below the market forecast of 97. How important is this, in your view?
I don't think the consumer confidence index is a well-measured figure, in fact. Many economists who have looked at it have concluded it's not a very good measure of business cycles. On top of that, it's measuring consumer sentiment, which is backward looking, for the most part. So, I would maintain that the consumer confidence index lags the business cycle. Obviously, news of layoffs affects what consumers say in one of these sentiment readings.
What you want to know is what is going to happen in the future.
TSC: What about the conflicting data that came out last week on the real estate market? The National Association of Realtors announced that January existing home sales rose 16.4%, which the government announced that new home sales fell 14.8% in January. What are investors to make of these numbers?
Those numbers are very volatile as well, and can move a lot from month to month. And they are not always accurately measured. So, say you have a figure that's closer to the truth one month, but the previous two months were off the mark. It's going to show tremendous swings. So, I don't put too much stead in these figures, either.
But one thing we do know is that the real estate market has held up well because of the
monetary policy. There are many indications of that.
TSC: So, sifting through all of these figures, and there are a lot of them, what is your overall take on what is happening with our economy right now? Do you think we're out of the woods yet, or almost there?
Last December, I told a group of investment advisers here in Houston that I thought the economy would turn around after the New Year, so I am not at all surprised at these signs of life in the economy. In general, we have seen milder recessions in recent decades. If this turns out to be one of those milder recessions, that's not really surprising, given our recent history.