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Farrell: Who Do We Believe on Economy's Numbers?

Wednesday, 9 Jun 2010 | 9:35 AM ET

What we should figure is never to believe government figures when they first come out. Consumer credit last month rose $1.0 billion. March's increase was originally reported to be an increase of $2.0 billion. That was revised to a decline of -$5.4 billion. It was a semi-big deal last month when we thought credit was up.

Now should we make it a bigger deal that it turned out to have been down? Lesson is, we react too much to news items that so often are subject to revision. I don't know if this past month's employment number will be revised, but a 3% downdraft in the stock market was probably a little much, on what, at best, is tenuous news.

Back to the consumer credit report for a moment. Revolving credit (which includes credit cards and unsecured revolving lines of credit) fell -$8.5 billion month over month (MoM). Revolving credit, believe it or not, has fallen for 19 consecutive months, and, since September 2008, has dropped $138 billion.

That is 14% of what had been the total outstanding. High levels of unemployment and tight credit conditions make it likely that this number will keep declining. I personally believe it is good and necessary, since the consumer is still overleveraged. It does mean that second half GDP will likely be anemic with sluggish consumer spending. But I continue to think we will see significant job growth this year, along with a commensurate rise in incomes that will allow for some measure of consumer spending growth.

Everybody's favorite Uncle Ben (Bernanke) gave an interview with a newsman more from my generation, Sam Donaldson. Donaldson was famous for confronting President Reagan with "Now hold on just a second, Mr. President." Donaldson went out to dinner for years on that, but the truth is he never said it. It was a very clever title for a book he wrote. A book, I may add, that was truly terrible.

But in his day, Donaldson was an aggressive newsman and could get a story. With Sam, Uncle Ben was sort of downbeat. He said the recovery would be fragile, slow, and gradual. Unemployment is unlikely to come down quickly (we have talked about that a lot in this letter).

The "extended period" language is data-driven, not time-driven. A change in rates will be conditioned on unemployment, inflation, and stable inflation expectations. Ben did say the Fed will raise rates before the economy returns to full employment.

That's a clearer statement than he has made, and the FOMC forecast for unemployment is 8.3% in 2011. I fear it will be higher than that, since the U-6 rate of unemployment, which includes a measure of discouraged workers who have dropped out of looking for work, is still 16.5%.

Germany's economy continues to perform admirably. Exports fell 5.9% MoM in April, but that comes after a 10.8% increase in March. The two taken together yield a solid number. Industrial production rose 0.9% MoM, and that was after an abnormal 4.3% gain in March. But with fiscal policy set to be tightened via tax increases, the German government is threatening its own recovery. Chances are a weaker euro (Germany's economy is 45% export-oriented) will allow them to continue to grow nicely.

Not much news out of the rest of the Euro zone, except Spanish civil servants went on the largest strike in recent memory. Allegedly 75% of the 2.5 million public workers backed the strike. Spain's parliament passed an austerity budget by a mere one vote a few weeks ago. We figured that Greece would never conform to the austerity needed, and now we have to question Spain's commitment. There's probably more drama ahead.

Thanks to Credit-Suisse, for the following. I picked this off the internet, and they noted that if the only number you had was the ten-year bond yield, you would calculate an Institute of Supply Management (ISM) of 47. We are in the high 50s right now. A 47 (remember, 50 is the dividing line between expansion and contraction) would imply GDP growth of less than 1%. As we have talked before, combining manufacturing and non-manufacturing ISM numbers would lead you to conclude GDP growth would be more like 3.5%.

I think we will have at least that for the second quarter, and, as said above, tail-off in the second half of this year with less than normal consumer spending. Where I want to be wrong would be with aggregate hours work picking up, incomes will grow faster, and overall economic performance will be better.

I continue to think that the 1040 level on the S&P will prove to be very strong support, as that is about the one-third correction of the total advance that I have been talking about. In last Friday's market debacle, 99% of stocks went down. Usually, after such a wipeout, you'll get a very strong up day fairly quickly. If we don't, then the 1040 level is threatened.

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