From Nicholas Colas at Convergex
Our basket of unorthodox economic indicators shows an American economy in a state of flux. On the plus side, used vehicle prices remain stable and pickup truck sales still show positive comps to last year. Light vehicle dealer inventories at 68 days supply are normal for this time of year, as long as car and truck demand hold up through the spring selling season. Google still autofills “I want to buy” with “a house” first and now “a timeshare” is second, showing continued strong consumer interest in both primary and discretionary housing. On the downside, food stamp program participation is still running +45 million individuals and +22 million households, down only modestly from the +48 million participants at the peak in 2013. Our proprietary “Bacon Cheeseburger Index” shows deflationary pressure on par with 2009 and 1998, pulling consumer inflationary expectations lower. And firearm background checks by the FBI both ramped to new highs in 2015 (+23 million) and show +40% year over year comps in the first two months of 2016.
There is a t-shirt popular in certain parts of the U.S. that bears the following message: “Alcohol, Tobacco, Firearms… Who’ s bringing the chips?” Yes, ladies sizes are also available. And if casual clothing isn’t your thing, the same sentiment is available on caps, mugs, patches, greeting cards and bumper stickers. Just Google the term and you’ll see a wide variety of options.
If that sentiment abhors or confounds you, I can understand. America is a large country, both in terms of geographic and ideological span. What gets taken for granted in Manhattan draws a quizzical eye in Moline or Monsey, and vice versa.
Just as it pays to travel through America to understand it completely, we also believe it pays to look beyond the customary economic data to really get under the hood of the domestic economy. We’ve been doing this piece quarterly, highlighting these “Off the Grid” economic indicators, for 5 years now and they never fail to both illuminate and entertain. We’ve included our customary chart deck in the attached document, but the rest of this report will be a highlight reel of this quarter’s findings.
Take one simple example: inflation.
- Academic discussions center on either growth in the money supply or the change in the general price levels of goods and services. Core PCE (the Fed’s preferred measure) is currently +1.7%, but we all heard Fed Chair Yellen’s skepticism on this data during her speech this week.
- The Fed Chair is right to be cautious, for it is inflationary expectations that really matter. If the population believes prices will decline in the future, or at least become relatively less dear, they will delay consumption today. Look for “Japan” in the economic dictionary to understand the consequences. To understand where consumer inflation expectations are going, you would do well to consider a basket of commonly and frequently purchased goods. That, after all, is what anchors inflation expectations for many consumers.
- Enter our very own “Bacon Cheeseburger Index”, an evenly split mini-basket of items that just happen to make up summertime’s most desirable lunch or dinner treat. Thanks to price declines in all three cholesterol-laden commodities, a bacon cheeseburger now costs 5.1% less than a year ago.
- A look back at this index to 1990 finds that it is actually a decent indicator of deflation risk. Prior periods when the BCI turned resoundingly negative (3 percent or more) since 1990 include: 2009 (Financial Crisis), 1998 (EM/Long Term Capital), and 1992 (lead up to Iraq Invasion). In each case, the Fed was cutting interest rates, not raising them.
So should the Fed actually use the Bacon Cheeseburger Index? Of course not… But does it help explain in one compact (if anecdotal) form why the Federal Reserve is happy to hold off on rate increases? I think it does.
We have a host of other indicators we track, and in the remainder of this note I will summarize them.
Auto-related indicators. Used car prices are a highly underappreciated economic bellweather. Everyone looks at new car sales, but with every new vehicle that rolls off the lot, a less shiny one stays behind. The value of that trade-in can stop a potential buyer from signing a new car loan or upgrading models. Other indicators worth a mention: full sized pickup truck sales (a proxy for small business growth) and overall new vehicle inventories.
- Used car prices according to Manheim auto auctions – one of the biggest in the business – have remained stable since mid-2010. If there is a worrisome sign, it is that they recently dropped 1.4%. That bears watching, especially with 3 year old off-lease vehicles from the 2013 sales year coming back to dealers.
- Full sized pickup truck sales are still rising, up 8% year over year.
- Dealer inventories of new cars and trucks is currently 68 days, down from 73 days last year at this time and 80 days in February. Anything over 60 is considered “High”, but a good spring selling season should clear inventory.
Supplemental Nutrition Assistance Program (also called Food Stamps) Participation data tells a story about how deep the economic “Recovery” has run through the strata of American society.
- Prior to the Financial Crisis (2006 Fiscal Year data), there were 26.5 million Americans in the SNAP program.
- That number rose to a peak of 47.6 million in 2013 and has only declined to 45.8 million as of the end of the last government Fiscal Year in September.
- The most recent data available has total participation at 45.1 million and 22.3 million households. This amounts to 14% of all Americans and 20% of all American households.
We track a range of goods and services to assess where Americans are investing and spending:
- Background checks by the FBI for firearm purchases hit a new record at 23.1 million last year. At an average transaction price of $600 (an educated guess based on many visits to gun stores over the years) that is $14 billion in firearms sales. Moreover, data from January and February 2016 shows background check volumes running +40% over last year. Now, not every check results in a sale, but we assume most do and some no doubt actually represent multiple purchases. Also worth noting: Google Trend data (the number of searches for a specific term) for ‘Buy a Gun’ are at multiyear lows. To me, that means that repeat buyers are responsible for the recent growth since they have no need to search for a Federal Firearms Dealer.
- Precious metal coin purchases from the U.S. Mint show consumers are more interested in gold over silver bullion purchases. On a rolling 6 month basis, the Mint is selling $87 million of gold coins/month now versus $62 million/month a year ago. As for silver bullion coins, the current average selling rate is $63 million/month versus $69 million last year at this time. Worth noting: both figures far exceed the amount of incremental capital invested in U.S. equity mutual funds, which is negative $23 billion YTD according to the Investment Company Institute. As with the firearms data, Google searches for ‘Gold coins” is at multiyear lows and likely indicates bullion buyers are repeat purchasers.
- Gallup Daily Tracking surveys for dollars spent out of pocket show an average daily outlay of $84, up from last year’s $82 at this time but down from the $87/day level of two years ago.
- Miles driven continue to climb, according to the U.S. Department of Transportation. For January 2016, the growth here was 2.0% over last year and on a rolling 6 month average basis the comps are still running closer to 3% - numbers we haven’t seen since the middle of the last decade. Cheap gas is, of course, the primary explanation but also forces the question: where is everyone going and why aren’t they spending more when they get there?
To measure common items searched on Google for either purchase or sale, we look at what the search engine “Autocompletes” when you type “I want to buy” and “I want to sell”. Autocomplete is a proprietary Google algorithm that attempts to predict the rest of your query based on what others have completed to the same starting words.
Yes, hilarity ensues sometimes with Autocomplete (see here: http://www.telegraph.co.uk/technology/google/6161567/The-20-funniest-suggestions-from-Google-Suggest.html), but we’ve tracked what Google has recommended to finish “Buy” and “Sell” searches since 2011. Here’s the latest:
- “A house” has been the #1 autocomplete for “I want to buy” since Q1 2015, and remains on top this quarter.
- Moving up to #2 for “Buy” is “a timeshare”. We’ll take it as a positive for both the primary and secondary residence real estate markets that these feature at the top.
- Rounding out the top 4 are “a car” and “stock”.
- For “I want to sell”, the top three answers are “Car”, “House” and “Kidney”. And yes, the last one is still illegal in the U.S.