The Good Economic News . . .
12:00 AM, Nov 19, 2011 • By IRWIN M. STELZER
The average American family is not going to cancel a trip to Disneyland because of headlines about “something going on in Italy or France,” says James Bullard, president of the Federal Reserve Bank of St. Louis. So he is guessing “The holiday season will be reasonable.” Pollsters support that view. They predict that 152 million shoppers will head to the shops and malls this holiday shopping season, which begins this Friday. That’s 10 percent more than last year. Actually, the season will begin 9 p.m. on Thanksgiving Day, the time at which the stores hoping to lure early bird bargain hunters will open their doors, beating the laggards who will wait until midnight or 4 a.m. on Friday.
New data on consumer spending supports the view that retailers might be about to be treated to a long-deferred whirl around the floor with good old Rosy Scenario, who hasn’t been seen around the malls for a good long while. Retail sales, which rose by 1.1 percent in September, added a stronger than expected 0.5 percent increase in October, the fifth consecutive monthly increase. Consumers seem to be less gloomy than in the recent past: Consumer confidence, although still below its long-term average, is at a seven-month high, supporting Bullard’s view that events in far away Europe are not uppermost in consumers’ minds, although they weigh heavily on policymakers and many investors.
The aggregate sales increase might be obscuring a wide difference in its components. Walmart is reporting that customers are sensitive to the tiniest increase in the price of milk and other staples, and cut purchases in response. Meanwhile, posh Saks Fifth Avenue is reporting brisk sales of Chanel suits, Gucci handbags, and Prada shoes, even though prices on these items have risen. Neiman Marcus, another high-end retailer, is flogging Manolo Blahnik ladies’ alligator shoes for up to $4,600 per pair, reports Bloomberg Businessweek. And many retailers are reporting resurgent sales in men’s suits, as “office casual” becomes a victim of men’s desire to look smart at job interviews, or on the job if they have one.
Some observers are warning that the spurt in retail sales will prove to be a sometime thing, as George Gershwin memorably described a woman. The recent sales increase was financed from savings, since real incomes declined in the third quarter. At the low end, the rise in oil prices, if followed by a significant rise in gasoline prices, will cause these hard-pressed consumers to tighten even more. At the high end, sales often respond to share prices, and the recent turmoil in financial markets might cause a bit of restraint after the holiday splurge is behind us. Besides, October sales received a one-off boost from the introduction of Apple’s new iPhone 4S, which drove sales of electronic gear up by 3.7 percent in October. So, say analysts intent on warning us against attaching too much to the new, more upbeat data, the recent past might not be prologue.
Nevertheless, Bullard believes fears of recession are a thing of the past. Goldman Sachs’s Lloyd Blankfein took time off cutting costs, staff, and bonuses in response to a quarterly loss at the investment bank he heads, to share an even cheerier view. The slowdown in his business is not likely to prove a new secular trend, he says, and he wants to be in a position to share in the global upturn. “We really want to be in great shape for the upturn and who knows that may already have started….”
How this improvement, which has several economists raising their fourth-quarter growth forecasts from a rate of 2.5 percent to 3.0-3.2 percent, will play out in the jobs market is difficult to figure out. There were signs of some strengthening last month, when an indicator of the market’s strength—the number of workers confident enough voluntarily to quit one job, presumably to take another—rose to its highest level in three years. And the Bureau of Labor Statistics reported a significant increase in hours worked in manufacturing last month, and a drop last week in new claims for unemployment benefits, to a seven-month low. The National Retail Federation is guessing that retailers will hire 490,000 seasonal workers to handle the Christmas rush. That’s about the same number as last year. But FedEx will be hiring 20,000 workers, 18 percent more than last year, to handle delivery of online orders that will not require more in-store staff. So the total boost to seasonal hiring might exceed last year’s when staff needs of online sellers are included.
Retail sales are not the only indicator to be flashing signs that things might be improving. Industrial production rose a healthy 0.7 percent in October, and the rate at which manufacturing capacity is being utilised rose from 77.3 percent to 77.8 percent. Most significant was the 1.0 percent rise in the output of business equipment, supported by strong corporate profits, up 24 percent year-on-year for the S&P 500 in the third quarter.
There is even some good news from the housing sector. Although new home construction last month declined, permits for future home construction rose 10.9 percent last month, on the back of a 30 percent increase in permits to construct apartment units. And luxury homebuilder Toll Brothers reported that, contrary to its expectations a few months ago, revenue in its recent quarter was up 6 percent over last year, its backlog of orders is up 15 percent, and the cancellation rate of orders is down. Frank Sorrentino, CEO of North Jersey Community Bank, told a television audience that the builders he is dealing with are “more confident in the future” than they have been in the past. And the Mortgage Bankers Association reports that households delinquent on their mortgage payments (at least one month past due) has fallen to its lowest level since late 2008, and now stands at 8 percent compared with 9.1 percent at this time last year.
Before assuming that all signs point to accelerating economic growth, recall that the housing sector remains a drag on the economy. New home construction is barely above 50-year lows. Prices are still falling, and foreclosures remain high, contributing to a glut of unsold homes. The National Association of Home Builders estimates that housing accounted for 15 percent of economic growth during past recoveries; since the end of the recent recession it has contributed only 4 percent to growth.
Also, don’t forget that we really don’t know how well positioned American banks are to withstand widespread defaults on the debts of eurozone countries, how badly exports will be hurt by a Europe headed into a recession, whether president Barack Obama and Congress can cut a deficit-reduction deal that prevents still another downgrade in America’s credit without slowing growth, whether the job-stifling regulations that have small businesses cowering in their bunkers will remain in place, and whether oil prices will continue moving up from $100 per barrel.
The Economist Intelligence Unit remains among the pessimists. In a report issued late last week it cited “headwinds from fiscal tightening and reduced European demand” as well as weak labor and housing markets for its forecast that the U.S. economy will grow at a rate of only 1.3 percent next year, and that meagre rate only in the absence of a euroshock. But Blankfein insists, “the world will snap back faster than people think.” Take your pick.