According to the Chinese Zodiac, 2014 will be the “Year of the Horse.” And judging from some of the early comments in the quarterly earnings season, it looks like this year’s economic horse will pull up lame. The Bloomberg Orange Book Sentiment Index – a proxy for the overall state of economic affairs in the U.S. – has been running below 50 for 49 consecutive weeks, which implies a stagnant growth rate in GDP in the 2-to-2.5 percent range.
Expectations for real GDP this year are slightly higher than the 2.3 percent pace posted in 2013. Economists polled by Bloomberg anticipate a 2.8 percent increase while the Federal Reserve has a similar 2.8-to-3.2 percent forecast range. The Fed traditionally has lofty, and often incorrect, expectations for GDP.
The driving theme behind this subpar, sluggish recovery is the lack of desirable growth in real disposable personal incomes, which grew at just 0.6 percent during the 12 months ending in November.
This is also the reason behind weak activity in the retail sector this past holiday season. Howard Levine, CEO of Family Dollar Stores noted the company’s core lower income customers have faced high unemployment levels, higher payroll taxes, and recent reductions in government assistance programs. “All of these factors have resulted in incremental financial pressure and a reduction in overall spend in the market,” Levine said in a recent conference call. Consumers can’t spend what they don’t have.
In this year of the horse, household-related industries – retail, restaurants, entertainment, products – appear to have stumbled out of the starting gate. This is mainly due to a highly competitive and promotional environment.
Virtually every consumer-related company has made mention of the need to discount in this economy. Announcements from the retail sector imply profound weakness for retailers. JC Penney disclosed its intention to close 33 stores and eliminate 2,000 workers. Macy’s said it would shutter five department stores and furlough about 2,500 employees. Meanwhile, other retailers have reduced expectations. Best Buy’s domestic same store sales fell 0.9 percent compared to year-ago levels for the nine weeks ended Jan. 4.
The data support Orange Book anecdotal observations. Goldman Sachs-ICSC weekly retail sales index fell 1 percent during the week ending Jan. 11. This followed a 5.4 percent plunge during the previous week. Looking at the 13-week moving average of the year-over-year change, this high frequency barometer of retail activity appears to have returned to its downward trend and is rapidly approaching the 2 percent threshold associated with the onset of recession.
Housing data have also exhibited weakness. Housing starts fell 9.8 percent in December, while the level of forward-looking building permits slumped 3 percent. The MBA Purchase Index has also shown no sign of recovery and has trended lower in recent weeks.
As a result of all this domestic weakness in key interest rate sensitive sectors, the Federal Reserve may have to rethink its tapering initiative, particularly its mortgage purchases. My one “surprise” for this year is that the Yellen Fed may consider eliminating the interest paid on borrowed reserves to help open up the lending spigots and fuel economic growth.