We have seen a number of recession calls in recent months. Yet there are reasons to question whether a recession is imminent. I want to discuss two recession flags Econintersect raised in September – one for imports and one for equities. These flags have been removed due to improving data.
The troubling question is why import container counts are contracting year-over-year, yet the inflation adjusted value of imports remains in year-over-year growth.
From the recent post on sea containers:
In September 2011 – import containers have contracted year-over-year. This is the fourth month in a row of contraction:
- June 2011 = -4.4% year-over-year
- July 2011 -= -2.1% year-over-year
- August 2011 = -9.4% year-over-year
- September 2011 = -3.9% year-over-year
Econintersect evaluates coincident economic data to validate or raise flags against our forward indicators (economic forecasts here). No single economic release can be considered a complete or sole indicator of the dynamics of the economy.
Imports are a particularly good tool to view the Main Street economy. Imports overreact to economic changes much like a double ETF making movements easy to see.
Contracting imports historically is a recession marker, as consumers and business start to hunker down. Main Street and Wall Street are not necessarily in phase and imports can reflect the direction for Main Street when Wall Street may be saying something different. During some recessions, the consumers and business hunkered down before the Wall Street recession hit – and in the 2007 recession the contraction began 10 months into the recession.
Oil prices, and also quantities of imported oil, wobble excessively year-over-year and month-over-month. In 2010, the percent of oil imports varied between 10.4% and 14.6% of the total. In 2008 the variance was between 11.5% to over 20%. No amount of adjusting – short of removing oil imports from the analysis – allows a clear picture of imports.
Also, the economy happens to be in a high cost inflation period relative to imports.
Removing oil from imports gives us a more precise view of the Main Street economy. Adjusting for cost inflation allows apples-to-apples comparisons in equal value dollars between periods. Please note that this graph varies from the previous post in that a more precise import price index was found that covers imports without petroleum.
Why are containers counts contracting year-over-year? Containers generally carry a higher percentage of the higher cost (non-bulk) Main Street items than if you view imports in general. Containers counts are saying Main Street is currently at stall speed.
Container counts are possibly a recessionary warning signal. However, these are extraordinary times with historical data confused by a massive depression and significant monetary and fiscal intervention by government. Further containers are a relatively new technology and had a 14 year continuous growth streak from 1993 to 2006. There is not enough history to make any solid determination of what the contraction of container imports is saying.
The equity recession flag was raised on 22 September 2011 when the market slipped to temporarily negative year-over-year growth. For the flag to be valid, equities must continue to fall. We stated at that time:
Although hard to believe, there have only been five groupings of penetrations below zero growth of the S&P 500 year-over-year since 1990. Score = 3 recessions, 2 false alarms, and one “wait-and-see”.
A real incursion into negative territory occurred between 30 September and 05 October closing as low at -3.1% year-over-year. Currently the S & P 500 is up 4.3% year-over-year, and is indicating this flag should be closed.
The economy is weakly growing. The removal of these flags shows the economy has just enough strength to remain positive for now. ECRI with its long lead indicators say a recession is cooked into the future. For now, we see the economy limping along in positive territory.