Ping Pong Match - February 22, 2019
Watching the economic reports drip in is almost like watching a ping pong match. One report is strong, the next is weak, which is followed by good news and another disappointment.
Let’s look at last week’s retail sales report. Per the U.S. Census, which gathers the data, the decline in retail sales in December was the biggest monthly drop since 2009. One word – ugly.
By itself, the report suggested consumers hunkered down as 2018 came to a close.
The National Retail Federation blamed the weakness on the trade war and stock market turmoil in December. But the NRF also questioned “whether the government shutdown and resulting delay in collecting data might have made the results less reliable.”
The chief economist at High Frequency Economics said the numbers were “much weaker than expected, but so much so that the data lose credibility; the trend may be slowing, but a sudden collapse is at odds with other evidence.”
He’s probably right. Anytime a report is a significant outlier (too strong or too weak), one shouldn’t completely dismiss it, but instead should look at it with a healthy level of skepticism.
Investor reaction: stocks sold off immediately after the release but pared losses, with the S&P 500 Index losing less than 0.3% for the day (MarketWatch). It suggests investors were willing to look past the report.
We are seeing some moderation in economic activity. Industrial production has slowed (Federal Reserve data), jobless claims have started to tick up (Dept of Labor data), and small business confidence has drifted lower (NFIB).
But all is not gloomy. The U.S. BLS reported last week that job openings hit an all-time high, employment growth in December and January were strong, and consumer sentiment rebounded following the end of the government shutdown (University of Michigan mid-February survey).
Forecasting the trajectory of the economy is much like forecasting the weather. Models are complex and highly mathematical, but there are too many unknowns to completely rely on projections. In addition, modeling human behavior is one more variable that can complicate economic forecasting.
As we push into the new year, most of the data suggests the economy is expanding but not at the pace we experienced in the middle of last year.