There can sometimes be a lot of “chatter” in individual monthly statistics. That is why it is often more informative to look at trend lines or moving (i.e., “smoothed”) averages. The graphs below set out the year-over-year percentage changes of three-month moving averages for key U.S. retail sales categories. The turnaround in motor vehicles and parts has clearly been dramatic. The primary reason has been the “cash for clunkers” program. It has been so popular, funding has already been exhausted. Therefore, the question is, “To what degree will the pick-up in demand be sustained?” Since the vehicle sector is nearly 20% of total retail sales, there has been an up-tick in the overall number as well. (story continued below)

Manufacturing Recovery

The recovery in the U.S. economy so far has been mainly inventory and government-stimulus related. Inventories in the manufacturing sector were run down so low that any new orders are now being met by ramping up production. On the stimulus side, it is Washington’s program to get gas guzzlers off the road and new fuel-efficient cars to take their place that has kick-started sales. It is also stimulus money going into construction projects, particularly in the civil field, that is helping to revive the economy.

Some of this effect shows up in the Purchasing Managers Index (PMI) of the Institute for Supply Management (ISM). The current (August) index value of 52.9% is the highest it has been in years. Based on precedent (e.g., a PMI above 41.2%), the latest PMI indicates that the overall U.S. economy has been growing for the past four months and that  manufacturing is enjoying expanded production for the first time since January 2008. (story continued below)

Consumers Still Hesitant

Unfortunately, it cannot be said that consumers are now much more confident. Their expectations about the longer-term future for the economy are more cheerful. But there has been only a modest improvement in their feelings about business conditions today. This is undoubtedly due to the 6.9 million workers who have experienced net job losses.

Plus, there is the fear that the jobless rate may go even higher before the year is out. Firms can be slow in hiring back workers at times such as these. Maintaining or increasing output levels with fewer workers is why productivity usually makes a leap forward in the initial phase of a recovery. Of course, this only works for a while and short-staffing in an expanding market can lead to serious problems longer term.

The fragility of the recovery is why governments around the world are staying the course on stimulus spending plans and why policy-setting interest rates continue to be held at nearly zero levels by central bankers. Until it can absolutely be taken for granted that economic growth has returned and that the only possible outlook is for improving job prospects, expect our leaders to keep their eyes on the target and their fingers crossed.