COLUMN-Real indicators point to continued US stagnation: Kemp

Tue Sep 27, 2011 10:29am EDT

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(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON, Sept 27 (Reuters) - According to the Wikileaks diplomatic cables, China's powerful Vice-Premier Li Keqiang told the American ambassador he paid little attention to official data on industrial production and GDP -- preferring to focus on railroad cargo volumes, power consumption and bank loans as more reliable metrics for growth.

Unlike China's notoriously unreliable data, the United States spends more than $100 million a year on data collection and analysis by the Bureau of the Economic Analysis and the Census Bureau, and has the most comprehensive, timely and accurate macro data among the advanced economies.

But even for the United States, headline indicators like GDP and industrial production are compiled from a host of estimates, surveys and other micro indicators. The process is slow, sensitive to assumptions, and the data is subject to large revisions as more concrete numbers become available.

So micro indicators on rail freight, power consumption and loan growth can still provide invaluable real-time intelligence about the economy's health -- supplementing and anticipating headline numbers. Micro and macro indicators are complements. In fact, for many decades, the Fed's widely quoted industrial production numbers were partly inferred from electricity consumption.

Using Li Keqiang's three indicators, it is clear the U.S. economy stalled in the first half of the year and remains moribund at present.

The rebound in rail freight volumes reported in 2010 and the first three months of 2011 has stopped. Volumes are no higher than a year ago, according to the weekly carload data released by the Association of American Railroads (Chart 1).

Power consumption has stagnated this summer after rebounding from its recession low in 2010 and early 2011, according to weekly generation data from the Edison Electric Institute (Chart 2).

Only loan growth shows signs of a continuing recovery. The volume of commercial and industrial (C&I) credit extended by banks hit $1.3 trillion by the middle of September, up 8 percent compared with the same period in 2010 ($1.205 trillion), according to the Federal Reserve.

But it was still 5 percent below the level in 2009 ($1.369 trillion) and down 15 percent on the pre-crisis level in 2008 ($1.524 trillion) (Chart 3).

Li's three indicators show an economy still trapped in the slough of despond it entered back in April, with few signs of imminent revival.

MORE TROUBLE AHEAD

The timing of the continued slump in consumer and business confidence and activity over late summer is especially unfortunate because it will likely dampen advance orders for consumer items placed ahead of the end of year shopping and holiday season.

Given the time taken to ship goods from China or produce them at domestic factories, summer is the prime period for pre-holiday orders. And autumn is normally the peak congestion period on U.S. railroads, as consumer products compete with the harvest for track space. So far this year, however, the railroad tracks show no more activity than 12 months ago.

It is almost an exact re-run of the summer slowdown in 2010. In that case, faltering confidence over the summer depressed orders. When consumer sales turned out stronger than expected at the end of the year, the overshoot was met by a run down in inventories throughout the supply chain.

But it provided only a tepid boost to growth in the first few months of 2011. Manufacturers, distributors and retailers remained cautious and engaged in only limited restocking, shrinking operating inventory margins further.

The ratio of inventories to sales shrank to just 1.25-1.27:1 between January and March 2011, compared with 1.27-1.29:1 in 2010, and 1.28-1.31:1 in 2007, the last year before the recession, according to the U.S. Census Bureau's survey of manufacturing and distribution (Chart 4).

If businesses and households had kept spending, and manufacturers and distributors restocked, the tight inventory ratio at the start of the year could have spurred a very sharp rebound in growth. But rising energy and food prices, a stalling economy, and slumping confidence, snuffed the recovery out before it began.

Officials at the Federal Reserve must be hoping for better luck this time around. But the signs are not auspicious. It is less than two months before the start of the holiday season and the consumer and business "feel good" factor remains absent.

Unless the Fed's Operation Twist can somehow produce a durable bounce in investor and more importantly business and household confidence, which seems unlikely at present, Vice-Premier Li's metrics point to a very subdued outlook in the next few months. (Editing by James Jukwey)

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