Positive Consumer Sentiment Suggests Consumer Spending Is Likely to Rebound.
In our March Business Conditions Monthly report (https://aier.org/bcmoverviewmar2015) we focused on areas of weakness and strength in the economy and concluded that much of the weakness reflected a “soft patch.” We noted that after a weather-related dip in the first quarter of 2014, growth jumped to a 4.6 percent annual rate and 5.0 percent in the second and third quarters before slowing to 2.2 percent in the fourth quarter. We also pointed out that the fourth-quarter deceleration was mostly a result of a sharp decline in defense spending and a dollar-induced jump in imports (a negative in GDP accounting), but that private domestic demand posted a still-robust growth rate of 4.5 percent in the final three months of 2014.
Indications from economic data for this year’s first quarter suggest that real GDP growth may fall to a 1.0 percent annual rate or possibly lower, including a softening in private domestic demand. A number of forces may be partially responsible for the slowdown including weather, labor issues at West Coast ports, the rising dollar, and the negative impact on the energy industry from falling crude prices. Despite the weakness, there are a number of positive indicators that support consumer sentiment and suggest consumer spending is likely to rebound in the second quarter.
• Payroll jobs hit a record high of 141.1 million in February, adding 11.5 million new jobs since the low of the recession and exceeding the peak prior to the last recession by 2.8 million jobs.
• Personal income reached a record $15.1 trillion annual rate in February, rising by more than $3 trillion from the recession low, growing at a 4.3 percent annual rate over the past five years.
• Real disposable personal income notched a record $12.3 trillion annual rate in February, growing 2.3 percent annually over the past five years.
• Aggregate net worth climbed to a record $82.9 trillion as of the end of 2014, rising almost $28 trillion since the low in 2009, a 7.4 percent annual rate of increase.
• Job openings totaled five million in January, the highest level since January 2001.
• The number of workers quitting jobs, presumably for better ones, reached 2.8 million in January, the highest level since April 2008.
• The portion of respondents that said jobs were plentiful reached 20.5 percent in February, a Conference Board survey of consumer attitudes showed. It was the second month in a row that the figure topped 20 percent. The measure touched a low of 3.1 percent in December 2009. The percentage of respondents who said that jobs were hard to get came in at 26.2 percent, down from a peak of 49.4 percent in September 2011.
• The consumer expectations index from the University of Michigan was 88.1 in March, using a three-month moving average, up more than 38 points from the low in 2011 (Chart 1).
Economic Outlook
The proportion of AIER’s Business Cycle Conditions leading indicators deemed to be expanding remained at 50 percent in the latest month, matching February’s reading. Each month, AIER calculates the percentage of its 12 leading indicators that are judged to be cyclically expanding, and a reading above 50 percent indicates that continued economic expansion is likely.
Click for interactive Indicators at a Glance (on mobile device turn to landscape)
As of our March evaluation, 50 percent of the leading indicators were judged to be expanding, or on an upward trend, the second month in a row at that neutral level and following 65 consecutive months above 50 percent. Consistent readings above the midpoint suggest a low probability of recession over the next six to 12 months. Conversely, when the figure drops below 50 percent, there is an increased chance that a recession is coming. However, before we can conclude that a downturn is probable, we look for confirmation from our cyclical score of leaders. For the current reading, that score came in at 79, up from 76 in the prior month, and still well above neutral. Note that there have been instances in the past where the percentage of leading indicators judged to be expanding fell to 50 or below without confirmation from the cyclical score and no recession occurred. So, while the evidence of weakness should not be ignored, the preponderance of evidence suggests the late-winter weakness may be temporary.
The percentage of coincident indicators judged to be expanding posted a reading of 100 in March, the 39th month in a row with a perfect 100 reading and the 62nd month above 50. Among our six coincident indicators, five hit new cycle highs in the latest month.
The percentage of lagging indicators judged to be expanding in March came in at 100 percent, unchanged from the prior month and registering a perfect reading for the 31st time in the past 34 months. Among the lagging indicators, three of the six were at new cycle highs while the remaining three had an indeterminate or sideways trend. Overall, our leading indicators, both the percentage expanding and the cyclical score, suggest a slightly weaker economy but not that a recession is probable (Chart 2).