The UK's economy will come under fresh scrutiny today with the release of the January labour market report. Later, investors will digest US numbers on chain store sales and housing starts, and consider whether or not winter weather really has been temporarily hindering economic activity.
UK Labour Market Report (09.30 GMT): The UK's economic recovery is rolling on and today’s update isn’t expected to threaten this upbeat outlook. But there's always something to worry about, and the dark cloud du jour is the slowing decline rate in the number of new unemployment claims (see grey bars in the chart below). Is this a sign that the bulls should manage expectations down a bit? The case for answering “yes” will strengthen if the falling trend in the population of new claimants continues to decelerate in January.
Is this nitpicking? Maybe, but do recall that it was this data set that dropped an early clue back in mid-2013 that the UK economy’s rebound was picking up speed. Sure, it’s all obvious now but there was still quite a lot of doubt as of last summer. The improving outlook via the claimant count data, however, provided an alternative view — a view that has since become adopted by the crowd. As I wrote last September, the data at the time was “suggesting that the positive momentum is accelerating”.
Is a reversal of fortune on the cards? No, not even close. The forward momentum is intact and will remain so for the foreseeable future. But the pace of growth may be slowing, although even this point is debatable. The consensus forecast sees today’s claimant population in January dropping by 25,000, a degree faster than the previous slide. Nonetheless, the projected decline is notably lower than the decreases of a few months ago. If we see a sharper-than-expected deceleration in the claimant decline, that could be an indication that the UK economy faces more headwinds than assumed. In that case, the Bank of England governor Mark Carney’s observation that growth is still too soft to start raising interest rates will resonate a bit more deeply in the markets.
Source: UK Office for National Statistics
US Chain Store Sales (12.45 GMT): Severe winter weather continues to squeeze economic activity in the US, or so the theory goes. The sluggish macro news of late is expected to reverse course with the arrival of warmer weather. In other words, pay no attention to the data gremlins. The economy is merely suffering from a temporary bout of meteorologically-related lethargy.That’s the prevailing wisdom for analysing last week’s update on sales in shopping centres across the country. “February came in like a lion with multiple winter storms affecting various parts of the country last week,” said Michael Niemira, the chief economist at International Council of Shopping Centers (ICSC),which produces the Weekly Chain Store Sales Index in partnership with Goldman Sachs.
The recent numbers are soft, but the year-over-year trend is holding up. Sales increased 2.3 percent in the week through February 8 vs. the year-earlier period, the ICSC advised. That’s the best annual comparison since late-December. It’s also a clue for thinking that the business cycle is in hibernation rather than experiencing a death spiral. But no-one really knows for sure, which is why monitoring the incoming data is more important than ever these days. Today’s update on chain store sales won’t clarify the big-picture analysis but it will surely provide a timely hint for deciding if the weather is really a factor.
The bottom line: if the year-over-year trend in sales stays positive, score another point for the optimists.
Source: International Council of Shopping Centers/Goldman Sachs
US Housing Starts (13.30 GMT): Confidence in the home building sector took a heavy blow in yesterday’s February update of the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). “Significant weather conditions across most of the country led to a decline in buyer traffic last month,” said NAHB’s chairman Rick Judson. “Builders also have additional concerns about meeting ongoing and future demand due to a shortage of lots and labor.”
HMI’s plunge to 46 this month vs. 56 in January leaves this industry's sentiment benchmark at its lowest level since last May. The below-50 number tells us that most home builders now have a negative outlook for the residential housing market. In turn, the weak numbers suggest that it’s time to adjust expectations down for today’s January data on housing starts.
Taken at face value, the HMI report looks troubling. But until we can dismiss the weather as the problem, it’s premature to go off the deep end and assume the worst. It would be a different story if this was June and the skies were blue. But there’s no doubt that a cruel winter can take a heavy toll on the economy. How big a toll? Roughly 0.3 percentage points, according to a poll by economists. “The January freeze and crippling storms gripping the eastern United States and upper Midwest are having significant impacts on normal life and commerce," said the University of Maryland economist Peter Morici.
That’s a reasonable explanation for what is ailing the US at the moment... until it’s not. We’ll know in a month or so if this is wishful thinking or a clear-eyed review of the numbers. Meantime, it’s prudent to expect a softer batch of data in today’s housing report for January. The news may not be a reliable measure at the moment but it’s not going to boost confidence either. Indeed, the consensus forecast is calling for a moderate drop in new starts to 950,000 for last month, down from 999,000 in December. The crowd’s probably going to overlook the weakness and assume that a revival’s waiting in the wings. The buoyant US stock market so far in February suggests no less. At the moment, the S&P 500 is hovering just below all-time highs.
Source: Census Bureau, NAHB