Yay! The New Z.1 Is Here!
Why, oh why does Christmas come but once a year?
Actually, for economists and traders who are trying to read the economic tea leaves, once a year is almost too much. The November numbers (released in December), and the December numbers (released in January) are subject to huge error bars. In statistical terms, that means that it is extremely difficult to reject any given null hypothesis about the economy’s actual trajectory: put more simply, because of the huge uncertainty caused by seasonal adjustment of a very important season, it is difficult to look at a piece of data and say “well, my original idea clearly is wrong.” There’s just not much signal among the noise.
So, at present my operating assumption is that the economy is improving from deeply depressed Lehman-trauma-induced levels. That’s not saying a whole lot, and I don’t expect that improvement to lead to what we would normally consider a healthy recovery – growth sufficient to bring the Unemployment Rate down significantly over the next year. Moreover, a lot of that growth seems to me to be artificial. For example, it isn’t clear to me that the major auto companies need to be producing cars like mad given the state of durable demand, but I do suspect the czar isn’t going to let them slow production very much…inventory build is, after all, included in GDP, and a higher number does make his boss look good. And who knows, it might even be the right thing.
Friday’s Retail Sales figures were stronger than expected across the board, whether looking at the headline figure, ex-auto, or ex-auto-and-gasoline, and even including negative revisions to prior numbers. This is well, and good, and we should be of good cheer and all that. But I wonder how much demand moved forward to November as shoppers try and spread their purchases over a longer period this year. I know it is happening in my household – we’re done shopping. I suspect it isn’t a big effect, but my point is that it has been a very long time since we have had a Christmas shopping season in the middle of, or coming out of, a depression and we don’t know a lot about how the numbers are supposed to look.
In any event, a significant plurality of all the retail purchases for the year happen in the Thanksgiving-to-Christmas period, so Friday’s numbers are much less important than what is happening right now. And, anecdotal evidence aside, we won’t know about that until next month.
This may help explain why the stock market over the last week and a half has responded strikingly tepidly to great Employment and strong Retail Sales figures. Investors know that the real game begins now, and are ignoring the good news from last month. Maybe.
It may also be that stocks are expensive once again. On Thursday the Federal Reserve released the Z.1 report, which (geek alert) is one of my favorite. The Z.1 is the “Flow of Funds” report, and is released quarterly. This one is for Q3, so the data is always out-of-date. But it has nuggets like the count of non-Federal, non-financial debt outstanding, which fell in Q3 by $129.9bln, the most ever in a quarter, and is down $254bln over the last year. Lest you think that is quite a lot, I should observe that these precipitous declines bring the level of non-Federal debt outstanding to the still-pretty-steamy level of $27 trillion. A 1% decline over a year was not, exactly, the extent of what the doctor ordered for this economy. It needs to contract much, much more to reduce the risk in the economy. The flip side of that coin, of course, is that if it did, then the economy would be growing that much more slowly, or contracting still.
Our policymakers have taken severe steps to make sure that doesn’t happen. And this is the most disturbing sign, I think, that whether the current semi-expansion blossoms into something more or instead sputters, there could still be something ugly in our future. This is an imbalance. It needs to be, and will be corrected – either by a default debacle, or (on the more sunny side) by stagnant credit growth in the context of organic economic growth. The latter method is better, but slower, and there’s really no way to choose it. We just have to hope.