A Case Of Macro Mood Disorder

Today’s economic reports look strikingly bipolar. First the good news: retail sales rose a healthy 0.7% in November vs. the previous month—a bit faster than The Capital Spectator’s average econometric forecast but in line with the consensus outlook. This morning’s update on initial jobless claims is another story. Filings for unemployment benefits surged 68,000 last week to a seasonally adjusted 368,000—the highest since early October. What’s going on here? Should we cheer, cry, or take the middle road and assume that we’re in another period of mixed messages and rising uncertainty? For some perspective, let’s dive into the numbers.

First, the retail data. Spending climbed 0.7% in November, the most since February. Excluding gasoline sales, retail spending climbed even more—0.9%, which is the best monthly comparison in more than a year. It doesn’t hurt that November’s encouraging profile follows October’s upbeat news. Are these changes a quirk? No, or so the year-over-year trend suggests. Retail sales increased 4.7% last month vs. a year ago, a sizable improvement over October’s 4.1% rise, which was a strong jump on September’s 3.4% annual pace. In short, consumer spending in the retail sector is strengthening.

In stark contrast, there are dark clouds in today’s jobless claims news. As you can see in the next chart, claims shot higher in no trivial degree. The 68,000 increase last week is the most since Hurricane Sandy drove filings for unemployment skyward. But unlike a year ago, there’s no temporary weather factor to blame.

On its face, the sharp change in direction looks ominous. But there are a few reasons to reserve judgment at the moment. First, one weekly update a trend does not make. It’s widely known that this data set is volatile, far more so than many economic numbers that draw attention from the crowd. Even so, the sight of the first year-over-year increase in new claims is worrisome, even if we should take the news with a grain of salt until we see more numbers. For now, let’s simply recognize that one annual pop falls well short of a high-confidence signal for assuming that there’s trouble ahead for the business cycle. If the annual rise persists, well, it may be time to rethink the case for expecting moderate growth overall.

“I wouldn’t put too much stock in the ups and downs of initial jobless claims over the next several weeks because seasonal volatility is pretty high this time of year,” advises Moody’s economist Ryan Sweet. “Layoffs are low. Other jobs data suggest layoffs are not the problem, it’s the lack of hiring.”

The fact that retail spending has improved in the last two months supports the view that today’s claims data may be misleading us. For now, that’s a reasonable argument, although it’s going to wear thin real fast if next week’s release for this leading indicator continues to channel Ebenezer Scrooge on the macro stage.

The US economic trend, after strengthening in November, has pulled back from its recent highs in December, based on a markets-based profile of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 13.0% on Tuesday, Dec. 10. MMRI’s recent revival suggests that business cycle risk remains low. The current 13.0% value is well above the lowest reading for the year to date—7.5% in mid-September—and comfortably above the 0% danger zone. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.