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The MACRO news flow on the health of the consumer has been less than robust.  At best the numbers on the consumer this week point to sluggish underlying trends, but the reality is that government continues to prop up the overall consumer picture.  This has been the case for some time, and may continue, but a potent cocktail of slowing growth and accelerating inflation – we call it Jobless Stagflation – is starting to muddle the thoughts of the Central Planners in Washington, D.C.


Say what you want about the weekly gyration in Initial Jobless claims, but nearly eight million unemployed people remain on the regular unemployment insurance program and extended and emergency benefits.  Every week more and more continue to run out of the government handouts, making it all the more important that the private sector pick up the slack.  Continued improvements in wage income are needed to replace falling government transfer payment income.

This week, the headline initial claims number fell 40,000 week-over-week to 434,000 (44,000 after a 4,000 upward revision to last week’s data); rolling claims rose 4,500 to 437,000 (are now up for the past 10 weeks) and even more importantly we are now at the YTD high.  The Labor Department had attributed part of last week’s gain to a spring break holiday in New York that was not anticipated by seasonal factors.  

As Josh Steiner pointed out in a Financials post this week, there is a tight correlation between jobs and the S&P 500 but, at present, a significant divergence has opened up.  “The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.”



For the second straight month, the NFIB small business index fell to 91.2 from March's 91.9; the index is up 10 points from the low of 81 set in March 2009.  April's 91.2 print puts the index below its first quarter average of 93.5, and even below the fourth quarter average of 92.5.

Looking at some of the detail in the survey, expectations for the economy to improve over the next six months took a further step back, falling from -5% to -8%; the second straight month expectations have been negative and the lowest since August 2010.  The net percent of small businesses planning to hire was 2% in April, unchanged from a month earlier. While hiring plans have been positive for seven consecutive months, progress has stalled.

When looking at a potential growth driver there are some contradictions.  The NFIB assessments of credit conditions deteriorated in April; a net 9% of small businesses said credit was harder to obtain, down from March's 8%.  This is in stark contrast to the latest Federal Reserve loan officer survey which reported its best readings on small-business loans supply and demand since 2005.



Although consumer spending growth remains healthy, the latest retail sales data suggest that growth may be slowing on the margin (including the issues with seasonal adjustment for Easter).  The government reported that sales growth in April disappointed, with core sales growing 0.2% (the weakest result since December 2010.  Yes, rising gasoline prices are taking a toll on sales at retailers and there are some signs that discretionary purchases are beginning to slow.  Department stores and housing related retailers had a poor showing in April, while restaurants may be losing some share to the grocery store channel.  The government’s attempt to increase take home pay from reduced social security withholding is being fully absorbed by higher gasoline prices.  As noted above, the recent job picture is not good and wage income is growing only modestly and that growth is largely dependent on government.  Therefore, the outlook for retail sales has become less certain and the risk to the downside is growing every week.


This week, the Bloomberg Consumer Comfort Index dropped to -46.9 in the period to May 8, the worst reading since March, from last week’s -46.2.  Interestingly, sentiment suffered the most in the West, where gas prices are the highest in the country.

Although we are ending the week on a high note as the University of Michigan preliminary consumer sentiment index rose to 72.4 for May from a final reading of 69.8 in April.  The increase was lead by the outlook for economic conditions which rose to 67.4 from 61.6.  The barometer of current conditions declined to 80.2 from 82.5 in April.  The decline in current conditions is reflective of the stagnant jobs picture and slowing wage growth. 


Howard Penney

Managing Director