The recent release of 4Q2010 GDP shows that the USA economy, from a traditional bookkeeping point of view, has left the recovery stage – and the economy is now technically back into an expansion phase. Expansion begins when GDP exceeds its pre-recession peak.
While this is true technically, realistically the economy remains under the influence of the recession, especially when measurements are made on Main Streets in much of the country. And when real GDP is normalized to population, the economy is only half way to recovery.
At the end of every month, the editorial team of Global Economic Intersection go through the quantitative exercise of reviewing our set of non-monetary economic pulse points – and extrapolate a prediction for the next month’s Econintersect Economic Index (EEI).
This is not a mindless exercise. Thorough review of the data and checks of quantitative forecast against anecdotal observation not only determines what is observable in aggregate, but also exposes the process to challenges from thing others might call externalities and preclude from consideration. To date, we believe that our forecasts have fairly forecasted the real underlying economy.
For February, we are seeing a potential black swan event unfolding which may impact this quantitative forecast – the Middle East/ North Africa unrest.
Our first concern is that this crisis may pop the equities bubble championed by Fed Chairman Ben Bernanke as the main beneficiary of quantitative easing.
The ownership of equities is concentrated in the upper 20% of the USA citizens. It is the spending of these citizens which is driving the current “weak” recovery (or expansion, if you accept the traditional view). Loss of wealth of this group would contract spending of this group. This spending contraction would be over a period of time, and likely would have a small effect in our forecast period.
But Econintersect’s primary concern with this potential black swan event is the effect of an oil price spike. Oil price spikes could effect the economy in February.
All forecasts rely on measurement of underlying trends which historically have a correlation to future economic movements. A black swan is an unforeseeable event – such as the oil crisis which began in October 1973 and literally within days triggered the 1973 USA recession. Both in 1973 and February 2011 – the underlying economy was weak.
For this reason, Econintersect believes there is an unusually high uncertainty for any forecast (ours included) for the month of February. For this reason, the team at Econintersect are qualifying this February 2011 economic forecast.
Econintersect’s February 2011 USA Economic Indicator
The Econintersect forecast for February 2011 is for slightly positive growth. All underlying indicators are showing expansion.
One major component of the EEI is transport related. Econintersect considers transport (truck, rail and sea container) counts a primary economic pulse point – and its trend represents underlying economic pressure.
This month, the transport portion of the EEI index was flat MoM. This portion of the index is quite noisy as it quantifies the month-over-month (MoM) change (positive numbers indicate seasonally adjusted MoM growth, negative numbers represent seasonally adjusted MoM contraction).
To Econintersect, transports represent the pulse of the real economy – the economy of Joe Sixpack. All of our man made surroundings, the clothes we wear and the food we eat are moved several times by transport during their processing / delivery cycles. A growing economy consumes more (and therefore transports more), a contracting economy consumes less.
There is growing anecdotal evidence that the transport indicator portion of the EEI may soon start to decline.
For a complete explanation of the EEI, please see the October 2010 forecast.