The economic data reports have become more mixed. Growth is rarely even across time and industries, but the stock market often has a hard time with conflicting evidence. For Mr. Market, the economy has to be either booming or falling apart completely. Mild winter weather has clearly been a factor in the last few months, but unusual weather often merely shifts growth from one quarter to another. Last year, the economic gears were starting to catch, but gasoline rose from around $3 per gallon at the beginning of the year to $4 per gallon in early May, taking the wind out of the sails of consumers and small businesses. Are we in for a repeat this year?
Real GDP growth was revised to a 3.0% annual rate in the 2nd estimate for 4Q11. That's not statistically different from the 2.8% rate reported in the advance estimate. Components had only minor revisions. However, buried in the details of the report, personal income growth was reported higher than previously estimated. Monthly income figures, reported a day later, showed significant upward revisions to the data for July through December (largely reflecting benchmark revisions to the employment data). Adjusted for inflation, the trend in disposable income isn't especially strong (a +0.7% annual rate in 3Q11 and +1.4% in 4Q11), but it's a lot better than previously estimated (-1.9% and +0.8%, respectively). The income revision went largely unnoticed by the markets.
Personal spending rose a disappointing 0.2% in January. However, spending was restrained by mild weather. Spending on energy fell 2.7% – down 10.1% (seasonally adjusted) from September; Ex-energy, spending rose 0.4%. Still, inflation-adjusted spending, which accounts for 70% of GDP, was unchanged for the third consecutive month. Now, this data may be revised, but the figures currently suggest a relatively soft quarter for consumer spending growth (less than 1.5%).
Motor vehicle sales surged unexpectedly in February, to a 15-million-seasonally-adjusted annual rate (a four-year high). Some of that was fleet sales (sales to rental companies and other businesses), but the increase is consistent with a gradual economic recovery. In a normal recession, auto sales fall and there is pent-up demand as consumers postpone new purchases. In a normal recovery, this pent-up demand comes rushing back as the economy improves. That was not going to happen this time. Recall that during the housing boom, many individuals took out home equity lines of credit and purchased autos. With home prices still depressed and many homeowners underwater on their mortgages, a sharp snapback in vehicle sales was unlikely. However, aging vehicles eventually need to be replaced. Sales have been fueled by replacement needs, which should remain a positive factor over the near term.
Housing appears to be in a recovery as well, but a very muted one. Around 22% of those with a mortgage are underwater, according to the latest report from CoreLogic (30% in California, 44% in Florida, 48% in Arizona, and 61% in Nevada). Housing will remain a serious headwind for the overall economy for some time. However, an improving job market should help the housing sector in the near term.
The one thing that could crash the party would be higher gasoline prices. Oil prices are always a wildcard in the economic outlook. Gasoline prices have risen significantly since mid-December and may hit $4 per gallon soon. Spending more to fill their gas tanks, consumers will be left with less money to spend on other things. Last year, consumer spending slowed significantly as gasoline prices rose and new hiring by small and medium-sized business quickly began to slow.
The recent data suggest a softer and uneven growth outlook in the near term. That wasn't factored into the stock market and it will be some time before we get a clearer picture.
Scott J. Brown is senior vice president, chief economist at Raymond James & Associates
