US Expansion - Still Perversely Non-Cyclical

Here's the problem: the 0.2% mom sa fall in US retail sales ex-autos reminds us that the current US expansion is almost entirely devoid of the cyclical accelerators we always expect from business cycles.

Right now this as a source of woe, since the  expansion simply refuses to develop in the way we are used to tracking. Or one can view it as potentially a source of strength: in recent history it is virtually unheard-of for developed Western economies to generate fundamentally disinflationary supply-led expansions, but that is what seems to be happening in both the US and the UK.  On this 'optimistic' reading, the fact that the economic news repeatedly subverts attempts by central bankers on both sides of the Atlantic to reassert a 'normality' which plainly isn't there, is the good news.

However, it obviously delivers a different set of problems: serial disappointment. Let's concentrate on that.

First, notice that September's retail disappointment probably shouldn't be viewed in isolation. If one looks at the trend growth since 2009, what stands out is that retail sales have never really recouped the losses inflicted by the harsh winter.  The rebound in 2Q never managed to restore current spending levels to the post-2009 growth trendline. September's fall widened that underperformance vs trend to around winter 2014 levels.

That disappointment didn't happen in isolation: average hourly wages were static in September as they had been also in July. Looked at before seasonal adjustments, average weekly wages fell 0.3% mom in September, which was 1.5SDs below historic seasonal patterns. Auto sales have risen more slowly than historic seasonal trends consistently between June and September, with sales rising just 1.9% yoy in the 3m to September.

Constructing a domestic demand momentum indicator which reflects deviations against seasonal trends for employment, wages, retail sales, auto-sales and construction orders reveals the pattern. It's not disastrous: September is revealed as a pretty ordinarily disappointing month, bad enough to depress the 6m trendline back to winter levels, but containing no threat of recurrent recession.

But here's the problem:  this domestic demand momentum indicator has been a reasonably useful guide to US GDP growth ex-inventory movements.  And what it suggests is that we should expect 3Q GDP growth, ex-inventories, to slow to around 1.9% annualized, with 95% boundaries at 1.2% to 2.5%. Right now, the Bloomberg consensus shows an expectation of annualized growth of 3% in 3Q14 and 4Q14.  Frankly, unless there are major inventory surprises ahead (and yesterday's total business inventories growth of 0.2% mom sa in August makes that slightly less likely), those forecasts are too optimistic by far.

Of course, it's only a model, and a fairly crude one at that: it is victim to war, chance, revisions, and the thousand natural shocks that data is are heir to. But the upside surprises  and revisions would have to be fairly dramatic to justify the gap between the data and the consensus.