Economic data confusion – Q1 2014. This week-end, like me, a lot of folks are scratching their heads on all this conflicting economic data we are seeing recently. This past week we had the big data point on the NFP jobs report. No matter how you spin it, it was good with 288K, with 30K in revisions, far above expectations. This is running 60K per month hotter than previously thought. MSM is spinning at as mostly weather related, others not so sure – click here.
Juxtapose the good job data with the miserable GDP growth rates of 0.1% in Q1 of 2014, the flat manufacturing PMI data, flat services PMI data, flat homes sales data, you can see why people are scratching their heads. Central bankers will have quite a job of sorting though these data points to decide future policy.
On the negative side in the jobs report, is the labor participation rate. About 806,000 people dropped out of the labor force in April, to helped to push down the unemployment rate to 6.3%, its lowest level since in September 2008. The labor participation rate of 63.2%, is the lowest in 35 years. Some spin this data point to demographics of an aging population, others say that jobs report is simply not reporting the reality of the economy. Shadow stats still have not budged with a 23% real unemployment rate – click here. It still is a very tough market for job seekers.
For the markets, equities and the Dollar were confused and largely flat. The geopolitical “risk off” trade plays into this a bit, but is still largely ignored. If Russians tanks, really start to roll across Ukraine, we could see a quick 50 to 100 SP500 shaved off the equity market. Bonds are not buying the job report, rates are flat to falling. So just what is the economy doing?
One data point I like to look at frequently is money velocity. The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. It often is a good indicator of actual business activity. So how are we doing? Look at the thumbnail chart, money velocity is at multi-decade lows. The economy for most is still dead. The only reason markets are doing relatively well, is central bank stimulus. Central banks are trying to thread the needle with stimulus and then taking away the stimulus. Markets struggle with this, but will the larger macro trends eventual take over? Something central banks can’t always control, as this has more to do with economic structure, driven by policy of our governments.
The good recent jobs data might give the economy a bit of blip upwards this spring, pushing the equity markets up to new highs, with a little help of a resolution to the Ukrainian situation. Understand that jobs data is a lagging indicator in a business cycle. If we don’t see a significant up tick in economic activity, the larger macro trends will kick in. This could set up a doozy of a “risk off” sell off this fall, signalling the end of this current economic business cycle. The next business cycle down leg could be bigger than the last, as we are starting from a much lower economic activity base.
Blue Point Trading, William Thompson