Don't get too excited over recent improved numbers--some of the statistics are just good luck.

By Robert Johnson, CFA  | 12-10-11  | 06:00  AM  |  E-mail Article

The economic news flow this week was almost nonexistent. Markets remained basically unchanged as investors awaited the results of yet another European summit. Despite all the troubles in Europe, U.S. exports to the region continued to grow, according to the latest trade report.

Back in the U.S., the services economy, which had shown some nice improvement this summer, paused as consumers appeared to opt for more cars and sharply discounted retail goods instead of service-related offerings. Weekly retail figures would also seem to indicate that strong retail sales over the Black Friday period were no fluke. The International Council of Shopping Centers indicated that weekly retail sales for the period ending Dec. 2, 2011, were up 3.8% from a year ago. Initial unemployment claims and a Conference Board report both showed an improving labor market too.

 

  This week, I will  take a look at a lot of special and perhaps one-time factors that may be making some of the economic data look a bit better than it actually is. Don't get me wrong--I am still bullish on the U.S. economy, but for a change we are catching a bit of tailwind that we all need to understand.

 

  More Improvement in the Balance of Trade
The reported U.S. trade deficit dropped from $44.2 billion in September to $43.5 billion in October. However, the improvement occurred because exports fell less (down $1.5 billion) than imports (down $2.2 billion). The deficit is now at its lowest point of the year, a highly unusually phenomenon for an economy that has grown throughout 2011. During the previous recovery, the deficit spiked as high as the mid-$60 billion range. Rising U.S. energy production and, more recently, falling oil prices, have certainly contributed to a better trade situation. At a minimum it now appears the trade balance is unlikely to hurt the fourth-quarter GDP calculation, and it may actually help. That said, I'd still rather have seen exports go up (though they actually were up on an inflation-adjusted basis) indicating a generally strong world economy.

 

  U.S. exports to Europe showed some weakening viewed on a year-over-year basis and a little bit of a gain sequentially from September. I suspect that sequential gain is related to seasonality. Recall that Europe represents just over 3% of U.S. GDP. On a year-over-year basis exports to Europe grew 10% in October compared with an 18% gain for all of 2011, indicating some moderation. Sequentially exports were up 1%. As brutal as the news has been from Europe, I am impressed that U.S. exports haven't really suffered.

 

  Hard to Draw Conclusions from Purchasing Manager Survey on Services
ISM's purchasing manager survey posted a surprise drop in October, with the index falling to 52.0 from 52.8, below consensus estimates. Orders and activity were both at healthy levels and improved while the employment portion was down (unlike almost every other measure of employment growth). That employment news is at odds with huge service sector gains in the Labor Department's November report. 

 

  While a disappointment, the overall ISM services metric does remain above 50, the level that generally indicates at least some growth. It appears from strong holiday sales reports that consumers are opting for physical goods at the expense of services. Booming sales of budget-priced TVs and a resurgence in auto sales are also hurting services growth at least in the short run. Note that last week's PMI for manufacturing improved over the same time frame and now exceeds the services survey results.

 

  I'd prefer the services sector be performing better, because it is a much bigger portion of the U.S. economy compared with manufacturing, and services revenue tends to stay with U.S. suppliers, providing a bigger boost to GDP. A hefty portion of retail goods are produced overseas, aiding our friends in Asia and Europe. I hope that after the holiday season the services sector will step up from its current lethargic levels.

 

  More Good News on Employment
Initial claims for unemployment dropped to 381,000 on a one-week basis versus 404,000 the previous week. The less-volatile four-week moving average dropped to 393,500. Another week or two of weekly data below 390,000 would bring the moving average to the very best level of the recovery (389,500 reached in April 2011) and to its best level since the spring of 2008. Remember this data point peaked at almost 700,000 at the worst of the recession in early 2009.

 

  On the other side, 290,000-300,000 was the very best level of the last recovery, and levels that low lasted for less than a couple of months in 2006. I do caution that large seasonal factors (substantially reducing the raw data this time of year) and odd holiday work schedules at employment offices make the data a little more volatile.

The Conference Board's predictive employment index was also highly positive when released this week, jumping 1.2% from October it's now at its best level since September 2008. Seven of the eight components of the index, including temporary help hiring, initial unemployment claims, and consumer attitudes toward the ease of finding work, registered monthly improvements. Monthly government employment reports, weekly initial claims, the Challenger Gray layoff report, and private reports like the Conference Board report are all relatively consistent in their opinion that the employment market is improving.