One week ago, the non-farm payroll report sent the unemployment rate higher by 0.5% to 5.5%, sending the markets into a steep dive and reviving cries of recession from the demand-side pundits and economists who were having a hard time supporting such talk recently.
Since then, two important positive pieces of information deserve note: one is the Fed's public recognition on Monday of the inflation they have created, and a signaled willingness to increase rates to relieve that inflation, and the second is a strong retail sales report showing growth in retail sales at twice the rate expected by the consensus of economists.
We have already explained in previous posts on the Taylor Frigon Advisor that the Fed's attempts to steer the economy often have serious economic consequences, and that the most recent example is the inflationary pressures left over from too-easy money since the end of 2003 (likely the primary factor in the painful increase in oil and gasoline costs).
The good news is that, since the era of the Volcker Fed, we have known how to prevent runaway inflation, and Bernanke's comments earlier this week indicate a willingness to use proven tools to contain it, saying the Fed "will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation" (text of the speech is available here).
The other noteworthy data point was the retail sales data for May, shown in the Census Bureau graph above. Total sales for the period of March 2008 through May 2008 were up 2.6% over the same period one year ago. Retail sales in May 2008 were up 2.5% over retail sales in May 2007. Retail sales in May 2008 also increased 1.0% from April 2007, while the consensus had been forecasting an increase of only 0.5%.
The main talking point for the recession crowd has been that the consumer was going to fall off a cliff, sending the US into a recession. The strong retail sales figures totally crush the theory that the consumer is causing a recession. We have explained in many previous posts that the fears of a consumer-driven recession which have played endlessly in the media since last fall are overblown -- see here and here for example.
The main rebuttal we have been hearing is that these retail sales numbers from May are primarily the result of the government rebate checks. The very first of these checks hit accounts around May 2nd. However, on the same day that the May retail sales numbers were released by the Census Bureau, the retail sales figures for the March 2008 to April 2008 period were also revised upward, from -0.2% to +0.4%. This upward revision for March and April derails the argument that the May growth was simply about rebate checks. Further, only about a third of all the checks have even gone out to date, which also diminishes the argument that the retail number was primarily due to the government "stimulus" checks.
Not surprisingly, the media continues to warn of a consumer-led recession, in spite of the developments of this week. However, we would tell investors to focus in on the two important positive data points discussed above as confirmation of some of the arguments we have made on this blog over the past several months, which will help amidst the barrage of noise and opinion that floods in from all sides in the modern information age.
The markets themselves will no doubt be bumpy for several months, due to fears about Fed rate hikes and uncertainty over when they will begin, uncertainty over the upcoming Presidential elections, lower summer trading volumes that can exacerbate mood swings, and other unforeseen factors. However, the picture for growth in the underlying economy became clearer this week, for those who are able to read the signs.
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