Early indications of trouble

One leading indicator heads south this week.

Last fall we saw a typical pattern for the first stages of an economic recession. High gas prices created a good deal of anxiety on the part of consumers, whose abrupt slowdown in spending, particularly on motor vehicles, brought GDP growth down from its normal 3.5% annual rate to a 1.7% growth rate for the fourth quarter of 2005. As gas prices came quickly down and the disruptions from the hurricanes were resolved, consumer confidence and spending then rebounded.

With gas here in southern California now up to $3.50 a gallon, it seems prudent to be watching for indications of a replay of the economic performance of last fall.


It’s thus of some concern that the latest value for the University of Michigan consumer sentiment index has fallen back to the low levels we saw last fall. The graph at the right shows this index, along with historical values and shaded areas denoting economic recessions.

Kash Mansori at Angry Bear shares my concerns, though Dave Altig at Macroblog notes that some analysts were cheered by the reasonable April retail sales figures released by the Commerce Department. These show nominal retail sales overall up $1.8 billion in April over March, a 0.5% increase, or whopping 6% at an annual rate. On the other hand, of this $1.8 B increase, $1.6 B came from sales at gasoline stations.

Yes, we know we’re spending more on gas. That’s the worry.

Even so, I agree with Dave that the April sales figures paint a picture that mitigates some of the concern raised by the consumer sentiment survey. At this point, I see these developments as something to follow with concern, but not yet cause for panic.

14 thoughts on “Early indications of trouble

  1. dryfly

    Looking at that graph – appears there are more false positives than accurate calls… meaning the Consumer Confidence numbers drop but no recession results?
    How good of a predictor is this?

  2. JDH

    I agree, Dryfly, by itself it’s a noisy indicator, so has to be read in conjunction with everything else.

  3. David Baskin

    Actually, I thought there were about three pieces of bad news last week. The weak retail sales (ex fuel), the consumer confidence number and the mounting evidence of air leaving the housing bubble.
    Actual and anecdotal evidence of a collapse in the Miami condo market is, I expect, the tip of the iceberg. Evidence of substantial increases in foreclosures, even in states that did not have sharp price run-ups, indicates that many of those millions who refinanced with ARMs, not to mention exotic mortgages, will soon be handing the keys over to the mortgage companies and walking away from their now non-existent home equity.
    The combination of rising fuel costs and rising interest rates will have the effect of destroying demand at a much faster pace than is usual in the deceleration of the economy. I believe that the Fed has already gone too far, and will probably be much too slow to reverse.
    By the way, we just had the warmest April in North America for over fifty years. Look for natural gas prices to spike sharply as the demand for electicity jumps when all the air conditioners come on.

  4. Steve Waldman

    I don’t see how the retail sales report mitigates concern at all. Ex-gasoline stations, nominal retail sales were up 0.05%, or 0.6% annually, lagging far behind any measure of inflation. In other words, real retail sales were solidly down in April, besides paying at the pump.

    (To be fair, retail-sales is often viewed ex-Auto, since auto-related sales are volatile. Ex-Auto, ex-gas stations, retail sales were up 0.2%, or 2.4% annually, arguably keeping pace with inflation. So, best case, real retail sales were flat in April, except gas.)

    Of course, these are monthly blips with wide margins of error. But to the degree that we pay attention to month-to-month preliminary report astrology, it’s hard to see how April retail sales can be viewed very positively.

  5. jim miller

    Another bearish indicator is the growth rate of M2 which has been de-celerating for several months now.

  6. Mike

    I viewed the retail sales report as favorable for the economy. Yes, gasoline sales accounted for most of the reported increase, but sales at building supply stores accounted for most of the sluggishness elsewhere. The decline of 1.6 percent in activity at building supply stores was most likely a small offset to remarkable gains in the early months of the year. Activity at building supply stores was still up 13 percent year-over-year. Sales at stores dealing with discretionary items — furniture, clothing, sporting goods, restaurant meals, general merchandise — did quite well, growing 0.5 percent collectively and buildingh on strong trends.

  7. Steve Waldman

    Mike — Seems like a fair cop… Ex-Gas Stations-and-Building-Materials, retail sales are were up ~0.2%, about keeping pace with inflation. Ex-Gas Stations-and-Building-Materials-and-Autos, we get to your about +0.5% for, um, “normal stuff”, which looks pretty good. And building materials have been really volatile.

    Someone (too lazy to be me!) ought to start calculating trimmed mean or medians, it’s too easy to make the numbers dance when just picking what to count and what not to…

  8. kharris

    You pointed to a pretty good trimmed series yourself, though not a mean. You can then do a 3-month average to smooth ex-gasoline, cars a building materials a bit more, and voila!, a core sales figure that you can live with. I doubt you could one could do much better than this, especially given that revisions will change the answer, anyway.

  9. jim miller

    Another indicator-the number of filings of new IPO’s on Friday was the highest since 1990.

  10. adam

    In some ways we may be SHORT-CHANGING OUR NEXT GENERATION, but blaming it on others will not make it better. Acquiring knowledge and taking action is an individual responsibility.
    Consumer confidence spending
    I laugh when I see highly qualified people discusses the consumer confidence, just like we saying that there r ample amounts of bucks ready to be spent American r so rich and don’t know what to do with their money, while poor American has no $ to spare. Japan alone claims over $7000 from each Americans, each person have to pay the foreigners at lest $33, ooo as the government debt, just read these 12 points:
    12 SERIOUS QUESTIONS covered by this Report Series
    While we celebrate many things, such as longer life expectancy, a nation not at war, and more consumer choices – – IS IT FAIR TO FAMILIES and their CHILDREN TO INHERIT ANY OF THE FOLLOWING 12 ITEMS – – instead of our fixing them ?
    If u love America u will read this report and please be honest, and let us know how and where public confidence can be corrected?
    Is it by the huge profit of corporations?
    The Corporation
    I believe this is one of the best and most important documentary films to be made in many years.
    This is an extraordinary film about the creation of the American corporation, its legal organizational model, its global economic dominance and its psychopathic tendencies, and its incredible ambition to influence every aspect of culture in its unrelenting pursuit of profit
    Or do we have to bring public confidence when he see the debt clock, where the government spending more than it’s create just watch and let the readers know of this:
    USA only borrow min$ 3 to over $5 Millions per min, and we asking the poor consumers confidence, while the oil companies

  11. Seeker Blog

    Consumer sentiment looks a bit worrying

    Econbrowser just posted “Early indications of trouble“. Keep an eye on this, as it is often a leading indicator of recession. Even better, add the RSS feed for Econbrowser to your aggregator.
    Even so, I agree with Dave that the April sale…

  12. adam

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    Until we know America 1st than we can compare ourselves with others, Americans are on the brink of collapse but not all lost if u read this article, it has very valuable concrete criticism, and practical solution if we implement them
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  13. adam

    “As of today, they don’t know what to do! And if you see what they’re doing, lately, you know, they don’t know what to do. They may have watches, but they don’t know what time it is.”
    Federal Reserve, new Fed-master Bernacke has the printing presses running at warp-speed. The soaring price of oil has soaked up more than a trillion dollars of freshly-minted fiat currency, but it?s the only thing that’s kept the greenback from slipping beneath the waves. Unfortunately, that trick won?t last forever.
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