Like a rabid bulldog that refuses to let go, Goldman’s Ed McKelvey has bitten on the fact that the US economy continues to deteriorate, despite the occasional data point which the feedback loopers latch on to, only to find out the data was either manipulated or “estimated”, and provides a “roadmap” for how the ongoing depression will manifest itself over the next two quarters. As his economic team has been more correct than all others, investors will be paying far more attention to his estimates, than those of a now ridiculous David Greenlaw of Morgan Stanley, who after downgrading the economy three weeks ago, upgraded Q3 GDP from 2.1% to 2.4%. High Frequency Forecast adjustments anyone? According to McKevley the ongoing weakness in the economy will manifest itself along these five key verticals: consumer spending, housing start weakness, industrial activity, ongoing labor market deterioration, and deflation. Of course, this should be sufficient to get bizarro stocks higher by a few percent today. Then again, nobody gives a rat’s ass what stocks do anymore.
Looking ahead, we envision a road map for the fourth quarter of 2010 and the first quarter of 2011 with the following landscape:
1. Very slow growth in consumer spending. For both quarters, we expect real consumer spending to increase only 1% at an annual rate, which implies gains of slightly less than 0.1% per month. Vehicle sales will probably rise somewhat faster, though we do not expect them to crack the 12-million annualized barrier on a sustained basis. In turn, the implication for (nominal) nonauto retail sales is for increases averaging 0.2% per month. Confidence indexes, which suffered unexpected setbacks in recent months, are apt to fluctuate around their latest readings.
2. Rebounds in housing starts and home sales from severe post-tax-credit paybacks, but to levels that remain depressed. The latest observations on home sales and, to a lesser extent, housing starts reflect an unexpectedly sharp payback following the expiration of the homebuyer tax credit. The levels to which sales have fallen are thus well below their ultimate settling points in our view. We therefore expect some improvement, albeit to sales rates that remain extremely low by longer-term historical standards – about 375,000 to 400,000 for the annual rate of new home sales and about 5 million for sales of existing units. Starts of single-family units should exhibit a similar, though less pronounced pattern. Reflecting the decline in starts and the weak fundamentals in other sectors of the construction industry, outlays for construction projects should trend lower throughout the period.
3. A stall in industrial activity. Although manufacturing output and the ISM’s index for that sector have surprised us to the upside in recent months, both our analysis of the inventory cycle (if it’s not over, then it’s moving into a phase of unintended and/or unsustainable accumulation) and key indicators (differences between indexes of new orders and inventories in various surveys, including the ISM’s) point to a significant deceleration in the near term. Specifically, we look for the ISM index to drop to 50 or below by the first quarter of 2011 and for industrial output to grind to a virtual halt on a similar timetable. As durable goods orders have already signaled in coming months, we expect little net change in such orders, with risks tilted to the downside.
4. Renewed labor market deterioration. As business firms seek to protect margins in an environment of sluggish growth, net hiring is apt to come close to stalling as well, putting the unemployment rate under renewed upward pressure. Specifically, we expect payroll gains to slow to 25,000 per month (ex Census workers) and the jobless rate to drift up to 10% over the next half year. Initial claims have never fallen to a rate that was consistent with payroll growth. That plus the presumption that control over headcount will focus on limited hiring rather than renewed firing suggests that claims will remain roughly where they have been during most of 2010.
5. A slight slowing in core inflation. As already noted, core inflation has been a bit higher than we anticipated in recent months, though the pattern is still one of gradual—if uneven–deceleration. We expect that to continue in coming months (quarters, years, and possibly decades), with monthly increases slipping once again below 0.1% on average in early 2011.