Rosy headlines obscure some troubling trends
The data flow picked up this past week, but much like what we saw with the Bureau of Labor Statistics take on February employment, the headline was far rosier than what was found upon sifting through the data in greater detail.
For example, although the economy created 227,000 jobs in February, the number of jobs created slowed compared with January and the quality of jobs created fell as 40 percent were either temporary or hospitality-industry jobs. I am sure that good people are working hard at those jobs, but the reality is that the wages associated with those positions are on the low end and few come with benefits.
Viewed another way, of the 12.8 million unemployed in February, roughly 57 percent had some college as their highest level of education. It comes as little wonder then that there is high mismatch between the skill sets that employers need and what is to be had in the unemployed talent pool.
The misleading messages continued this week in the form of February retail sales, which were up 0.9 percent, excluding autos. Of the components that constitute retail sales, the sector that rose the most was gas stations — a reflection of higher pump prices. At the end of February, the average price for a gallon of gas was $3.72, up from $3.39 at the end of January — an increase of 10 percent. To me, that falls into the camp of good news/bad news: Yes, retail sales are up, but only because consumers are paying more to fill their tanks.
As we learned Thursday, producer prices rose 0.4 percent in February compared with January and were led by energy prices, up 1.3 percent for the month. I often find that the year-on-year comparison tells a more revealing story. To that end, the February producer price increase rose 3.3 percent over the past 12 months. Although that is slower than in recent months, it still points to inflation.
Thus I think the far more important indicator to watch is Friday’s consumer price index. As Federal Reserve Chairman Ben S. Bernanke said last month, the willingness of households to spend will be key to the pace at which the economy expands in coming quarters.
Despite the positive spin being put on some of the headline numbers, economists have started adjusting their outlooks to reflect the underlying data. Goldman Sachs recently cut its gross domestic product growth forecast for the current quarter to 1.8 percent from 2 percent, while Bank of America lowered its forecast from 2.2 percent to 1.8 percent. Although Jpmorgan Chase has maintained its 2 percent growth forecast for the first quarter, the firm noted that downside risks exist given soft reports on consumer and capital spending.
The U.S. is not the only economy where growth forecasts have been ratcheted back. China recently cut its 2012 GDP forecast to 7.5 percent. Although that is head and shoulders above the 2 percent forecast for the U.S. economy this year, it is the slowest rate of growth in China in roughly a decade. Also making forecast cuts were South Africa, Taiwan and Lithuania, among others. European Central Bank officials have confirmed a January International Monetary Fund forecast of a “very mild recession” this year, and only modest growth next year. Economists polled by the Economist magazine are predicting that only Germany and Switzerland will deliver economic growth this year, while Belgium, the Netherlands, France, Italy and Spain all contract.
With the stock market touching new highs this week, one has to wonder how long it will be before reality catches up for investors. While waiting for that, I’m going to try to understand the difference in Fed-speak between what it previously forecast — “moderate” economic growth — and the updated forecast released this week calling for “modest” growth.