Written by Steven Hansen
Interesting week with the Fed saying the economy is improving, the equities markets climbing, and ECRI again stating a recession is near and there is nothing anybody can do about it.
Econintersect has been saying the economic rate of growth has been strengthening since our November 2011 forecast, and it has been getting stronger month by month until this month’s forecast when the rate of growth was unchanged. Does this have any meaning – only time will tell as one month is not a trend.
At this point, the Fed’s assessment of the economy is a “Johnny come lately” statement – a rear view look. But ECRI’s recession statement is a forward view, and deserves consideration. Cynics can say that like a broken watch, ECRI’s recession call will eventually be right. But in truth, the USA economy is like a big ocean with currents and storms and doldrums – it is difficult to generalize about the ocean’s weather. I am in the camp which says if a recession is coming – it is in the distance (barring a black swan event).
Employment data in general is a rear view look at the economy. But that does not mean that there are not portions of employment data which can provide warning of an impending recession.
My favorite in forecasting is employment in truck transportation.
Look at the year-over-year zero growth line. For the last two recessions it has offered a six month warning of an impending recession with no false warnings. Transport IS an economic warning indicator because it moves goods well before final retail sales occur. Until people stop eating or buying goods, transport will remain one of the primary economic pulse points.
Transport employment growth is far above the zero growth line – and is not in a down trend. As transport provides a six month recession warning – the implication is that any recession is further than six months away.
Others like to use temporary help as an economic litmus test. Like truck transport, temporary help is also far above the zero growth line – but has also provided one false recession warning in 2003.
Some have asked why most of my graphs begin in 2000. Economic dynamics started changing around 2000. Data comparisons to periods prior to 2000 prove little to me. The downside to limiting comparisons to period after 2000 is that there is not enough economic cycles to provide any sort of empirical proof – a real Catch 22.
Also considering the current highly manipulated monetary policy, I shun monetary data points to monitor the economy. It is hard to argue that the post 2007 economy is telegraphing comparable data to any pre-2007 historical data. My bias is towards using non-monetary pulse points which are more isolated from monetary policy.
However, I do not look for pieces of data which support my position that the economy is currently operating at “well above” recession levels – I search for outliers in predictive data which are suggesting a different conclusion.
For now, these two employment pulse points ware suggesting the economy is expanding near the highest rates seen this century.
Economic News this Week:
The Econintersect economic forecast for March 2012 continues to indicate a growing economy. This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction. Several of this index’s components draw on transport industry movements.
ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession start has been revised to hit around mid-year 2012. This week on the ECRI website, another defensive explanatory post of their recession call. What caught my eye as I have long discussed this issue:
Most data, both public and private, are seasonally adjusted. But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. This is normally a good thing, but when the economy fell off a cliff in Q4/2008 and Q1/2009, it was partly interpreted by these procedures as a lasting change in seasonal patterns. So, according to these programs, data from Q4 and Q1 would be expected thereafter to be relatively weak, and therefore automatically adjusted upwards. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.
Econintersect has long hit at the failed seasonal adjustment methodology being used by various agencies. Econintersect evaluates growth based on non-adjusted data.
This week ECRI’s WLI index value continues to be less bad at -1.4 – a negative value but the best index value since August 2011. This is the ninth week of index value improvement. This index is indicating the economy six months from today will be weaker – but increasingly marginally.
Initial unemployment claims essentially fell from 365,000 to 351,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – was unchanged at 355,750. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
The data released this week which contain economically intuitive components (forward looking) were mixed – rail movements, industrial production, and container counts. Rail traffic year-over-year contraction reported for the fourth week in a row is troubling since it contains declining components normally associated with a declining economy. Core manufacturing continues to show slightly positive growth trend lines. Container imports contracted over 12% – import declines are associated with recessions.
Weekly Economic Release Scorecard:
Bankruptcies this Week: Cano Petroleum
According to BankruptcyData.com, 2012’s current corporate bankruptcy count is just slightly elevated from 2011’s: through March 8, 2012 has seen a total of 18 public Chapter 7 and Chapter 11 bankruptcies-compared to last year’s 16. These figures represent a significant decline from 2010’s total of 22 filings (also through 3/8). The industries taking the heaviest hit this year are Electronics and Energy-each of which saw a total of three public bankruptcies. To date, Kodak’s Chapter 11 still holds the title of largest filing of the year. The asset size of companies filing for U.S. Bankruptcy Court protection has nearly tripled this year-from just $3.96 billion through 3/8 in 2011 up to $11.92 billion this year. 2012’s combined asset total nears the $12.78 billion seen through 3/8/10. Other noteworthy bankruptcy filing trends include plan confirmations, prepackaged bankruptcies and Chapter 22’s. Despite recent activity, U.S. Bankruptcy Court confirmation orders have declined in 2012. Through 3/8, we’ve seen just nine companies receive Court approval of their plans-compared to 12 and 26 through the same periods in 2011 and 2010, respectively. Prepacks, those proceedings in which the debtor files a pre-negotiated reorganization plan concurrently with a Chapter 11 petition, are up this year. Through 3/8, there have been four prepacks in 2012: Cano Petroleum, Inc.; TBS International plc; Ener1, Inc. and Buffets Restaurants Holdings, Inc. Through the same date in 2011, there were two prepacks-while eight bankruptcies utilized this expedited approach in 2010 (through 3/8). The rate of companies making repeat Chapter 11 filings (aka a Chapter 22-or even Chapter 33) is holding steady: Through 3/8/12, there have been three repeat offenders: TBS International plc; Global Aviation Holdings Inc. and Buffets Restaurants Holdings, Inc. Through the same date, there were just two Chapter 22’s in both 2011 and 2010.
Failed Banks this Week: None