Another day, another reason to think that the economy’s stronger than previously thought. Or, perhaps it’s more accurate to say that the economy’s not as weak as the consensus expected.
Whatever language you prefer, there’s no getting around the fact that the economic data trickling in continues to offer reasons for rethinking that 2007 will deliver pain and suffering on a macro scale. But lest we get too excited, we don’t expect that GDP will suddenly surge to the sky. A downshift in economic momentum is still underway, but the downshift looks set to be mild, or at least milder than many recently thought.
The latest evidence for a touch more optimism comes by way of this morning’s retail sales report for December. The U.S. Census Bureau reported that retail and food service sales advanced by 0.9% last month over November.

That’s impressive on several fronts. First, 0.9% for December is more than twice as strong as December 2005’s 0.4% gain. Second, a 0.9% rise is the best monthly gain since July’s 1.4% surge. In addition, looking at 12-month changes in retail sales reveals that December’s pace of 5.4% over the previous December suggests a turnaround is in progress.

That’s impressive on several fronts. First, 0.9% for December is more than twice as strong as December 2005’s 0.4% gain. Second, a 0.9% rise is the best monthly gain since July’s 1.4% surge. In addition, looking at 12-month changes in retail sales reveals that December’s pace of 5.4% over the previous December suggests a turnaround is in progress.
Granted, it’s too early to say for sure, but it’s clear for the moment that Joe Sixpack’s penchant for spending is showing renewed signs of strength. One reason for thinking that there’s still life left in consumer spending comes by noting that the biggest gain in the retail sales subsectors for the past year was in the discretionary spending realm of electronics and appliance stores. Purchases of TVs, DVD players, washing machines, etc. posted a 15% advance on the year, or about three times as fast as retail sales generally.
Retail sales trends can fickle, of course. But when you consider the latest report with other modestly encouraging data series of late (such as yesterday’s initial jobless claims and the December jobs report), it’s getting easier to think that the economy isn’t headed for the swamps.
Adding to the reasons to be cheerful is the tumble in oil prices. A barrel of crude closed yesterday under $52, down from nearly $80 back in the summer. The sharp cut in energy prices (if it lasts) may boost consumer spending in the coming months and quarters by putting more discretionary dollars into Joe Sixpack’s wallet.
All of this is giving encouragement to stock market bulls, who have pushed the S&P 500 to within shouting distance of its old 2000 all-time highs. The bond market, meanwhile, continues to suffer the pain that flows from rethinking the economy’s strength when it comes to pricing fixed-income securities. The yield on the 10-year Treasury yesterday continued rising, topping 4.75% for a time in intraday trading–the highest since last October. If there’s any one left who thinks the Fed will cut rates at the end of this month, they’re living a solitary existence.
But make no mistake: this is still a time of transition. It’s easy to get caught up in the moment and think that all’s well. But risks abound and new economic data can bring monumental shifts in perception at this juncture. Yes, the economy may avoid a recession in the near term. But all the asset classes have run higher for an unusually lengthy stretch through the end of last year. Disappointment on some front is overdue. If it comes in commodities, that may embolden bulls in the other asset classes. If bonds take a hefty tumble this year, that may for a time encourage more equity purchases. But when investors realize that selling in bonds translates into higher interest rates, the notion of risk may return with a vengeance.