August 2011 Economic Forecast: Terrible

Econintersect’s Economic Index is designed to spot Main Street economic turning points.  We warned in April of an economic slowing – and most indicators have now confirmed that the Main Street slow down began around the beginning of the 2Q2011.

GDP, however, is designed more as a Wall Street indicator – and does not measure distress of Main Street.  If it did, the economy would be considered in a deep depression based on employment, industrial production, or even net worth of the average Joe.

Personal consumption expenditures expanded at 1.47% in 1Q2011, have fallen to 0.07% in 2Q2011.  Main Street literally did not grow in 2Q2011.

Econintersect’s Forecast for August 2011 says the slowdown continues.

Our Jobs Outlook: Terrible

Starting with employment, there is no good news.  We are accustomed to digesting seasonally adjusted data handed out by the Bureau of Labor Statistics (BLS).  Econintersect believes the methodology of the BLS is too complex, and whilst over time it yields the correct answer – the month-to-month answer creates a poor picture of the underlying jobs picture.

The much simpler methodology of ADP likely creates a better feel of employment dynamics when looking at month-over-month change.

But folks, we need to understand that all these numbers are seasonally adjusted – and in truth – the economy historically does not grow jobs in the second half of the year.

So when you hear there was jobs growth – it is imaginary in reality, grown by an algorithm in the computer of the BLS.  So when Econintersect tries to forecast jobs, it forecasts by second guessing an algorithm.

Likely actual jobs growth is zero, or more likely down.  Jobs have grown 5 times in the last 10 years in August – but this August we are in a soft spot.  So when you hear employment is up – it could actually be down.  But even in the best of Augusts, your friend Frank down the street is not likely to find a job in August.

The current economy continues to run well under pre-recession levels. Econintersect’s Employment Index is based on economic elements which create jobs. Econintersect’s Job’s index (explanation here) was at a cycle low in June.

This index measures the historical dynamics which lead to the creation of jobs, but it is not precise as many factors influence the exact timing of hiring. This index should be thought of as a measurement of jobs creation pressures.

At this point, the jobs growth YoY is well above Econintersect’s Index. May 2011 employment data was weak and only 2/3rds of Econintersect’s forecast. June 2011 employment data was even weaker at 44% of Econintersect’s forecast.  We believe this same weakness will continue for the coming months until the YoY BLS non-farm private jobs growth returns to Econintersect’s Index’s year-over-year growth rate.

The index projects August 2011 non-farm private jobs growth is projected at 140,000 (up from July’s forecast of 135,000) – however it could be as low as 60,000 based on correlating this index to “reported” jobs growth.

As you can see from the red line in the graph above – Econintersect is projecting very poor jobs growth for the rest of the year.

The Main Street Outlook: Terrible

The Econintersect Economic Index counts things using pulse points.  It is not a monetary index, it does not need to adjust data for inflation.  Further its methodology handles seasonality by looking at data year-over-year and considering rate of change.

This model says the Main Street economy rolled over severely – and August likely will be the worst month since the end of the recession – not necessarily contracting but definitely not growing.

The real time data in the next few weeks are critical in understanding whether the potential of an economic contraction on Main Street is looming.

Econintersect believes the non-monetary transport counts are the canary in the economy. Transport counts have collapsed since our last forecast. The transport counts are literally at the doorstep of contraction, and in most cases remain below pre-recession levels.

Last month it was pointed out that transports and the main index itself softened last year about the same time, and at that time many warned of a possible double dip recession which did not occur. However, this year the downtrend in the transport portion is much more severe.

The Main Street economy will be worse in August 2011 than it was in July 2011.

For a complete explanation of the EEI, please see the October 2010 forecast.

Past EEI Forecasts