Written by Steven Hansen
The Econintersect April 2012 economic index shows underlying economic fundamentals continue to improve – but the improvement will be less good than previous months. Using one word to describe April growth forecast is “weak”.
As of the end of March 2012, even using rose colored glasses rail transport is very weak year-over-year. A pessimist can have a field day in the data pointing to out-and-out contraction. All other coincident data with forward looking elements are clearly in expansion territory. Recession markers of real GDP, real income, employment, industrial production, and wholesale-retail sales growth remain well away from recession territory.
Several things are becoming apparent:
- the “New Normal” economy is pulsing or growing in unpredictable spurts;
- jobs growth has disconnected from known economic fundamentals.
These pulses cause some economists to believe the economy is heading towards a recession – as forecasts use growth rate-of-change to assess economic trends. Further, these cycles are out of phase with the calendar – and seasonal adjusting methodology seems to exaggerate these cycles.
Recession markers used are based on seasonally adjusted data which is revised for months after issuance – and normally a recession is not obvious for many months. The Econintersect forecast is based on non-adjusted data which for the most part is not revised.
Economic downturns have been signaled watching the manufacturing portion only of Industrial Production. Manufacturing year-over-year growth normally is trending “less good” going into a recession. Currently this index is above year-over-year growth levels associated with past recessions.
Econintersect uses truck transport portion of employment to search for impending recessions. 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 possible recession is further than six months away.
Econintersect does not use employment in its economic forecast.
An almost real time validator of economic growth is Federal tax revenue which is released monthly. It is a noisy index that requires averaging to be interpretative. However, this is a rear view look.
A note of clarification: “less good” is another way of saying that something shows positive growth but the rate of growth is declining (slowing down). A analogy to physics: less good = positive velocity and negative acceleration. Conversely: “less bad” means that something shows negative growth but the rate of negative change is lessening. Thus: less bad = negative velocity and positive acceleration.
A Longer View and Caveats
There are no recessionary indications evident. Our employment outlook, which does have a 6 month vision – has bottomed and is still improving. It should be noted that this index is below the level where the 2007 Great Recession began. On the other hand, it never recovered above recessionary levels either. As far as employment is concerned the recession never ended.
Econintersect notes that most elements of the economy (inflation adjusted) have NOT recovered to levels they had before the 2007-2009 recession. If this was prior to WWII, economists would consider the current USA economic state as a depression. Some actually do think we are in a depression, see Steve Keen, for example.
Econintersect believes that the New Normal economy has different dynamics than most economic models.
As Econintersect continues to back check its model, from time-to-time makes slight adjustments to the data sets and methodology to align it with the actual coincident data appropriate for Main Street. To date, when any realignment was done, no change altered trend lines or recession indications. Most changes to date were to remove data sets which had unacceptable backward revisions. Documentation for this index was in the October 2011 forecast.
Economic Forecast Data
Econintersect‘s Economic Index (EEI) is designed to spot Main Street and business economic turning points. This forecast is based on the index’s three month moving average.
The EEI is a non-monetary based economic index which counts “things” that have shown to be indicative of direction of the Main Street economy at least 30 days in the future. Note that the Econintersect Economic Index is not constructed to mimic GDP (although there are general correlations), but tries to model the economic rate of change seen by business and Main Street.
The red line on the EEI is the 3 month moving average which is at 0.35 (down from last month’s 0.50), while the monthly index fell from 0.45 to 0.25. The economic forecast is based on the 3 month moving average as the monthly index is very noisy. Readings below 0.4 indicate a weak economy, while readings below 0.0 indicate contraction.
On the above chart, the economic pulse pattern can be clearly seen – and that pulse pattern did not exist in the index prior to the 2007 recession. The question is why.
Consumer and business behavior (which is the basis of the EEI) either lead or follow old fashion industrial age measures such as GDP depending on the dynamic which is driving the economy.
Jobs Growth Forecast Improves
The Econintersect Employment Index is forecasting an improving jobs creation situation for the next six months.
The EEI is based on economic elements which create jobs. Econintersect’s Jobs index (explanation here) measures the historical dynamics which lead to the creation of jobs. It measures general factors, but it is not precise (quantitatively) as many specific factors influence the exact timing of hiring. This index should be thought of as a measurement of jobs creation pressures.
At the present time, jobs growth year-over-year is above the levels forecast by the Econintersect’s Jobs Index. The table below lists the private non-farm payroll forecasts against the current (not original headline) BLS private non-farm payrolls. Please note that the BLS data continuously is revised, and this employment forecast section of the economic forecast uses the most current BLS estimates.
Still, the EEI is predicting fewer jobs then are actually occurring. A discussion of the problem is in Ben Bernanke and the Puzzle of Employment. It seems employment has careened off on its own path.
|April 2012||130,000 (260,000)**|
* the current estimate of month-over-month growth
** fudged growth based on deviation between forecast & actual
Analysis of Economic Indicators:
Econintersect analyzes all major economic indicators. The table below contains hyperlinks to posts. The right column “Predictive” means this particular indicator has a leading component (usually other then the index itself) – in other words has a good correlation to future economic conditions.