Recession Is Not In View, But Economy Is Ugly

Every day recently readers have had to digest a growing number of pundits screaming “upcoming recession” giving a cacophony of reasons. Other than a horribly weak economy, there are no major signs indicating an outright contraction.

As I have stated previously, a discussion of whether the USA is in a depression would be more pertinent.  In a depression, there are no economic drivers for expansion – and the economy flops around (one step forward, on step back).

One year ago, Econintersect was worried the economy was in danger of recessing, and the same event is occurring this year (a new seasonality not considered in the BEA methodology?).  The difference last year was that stimulus spending was peaking, inventory was rebuilding, and lower oil prices kept GDP looking pretty – even though it was just a real ugly pig with some glossy lipstick.  This year GDP looks as ugly as it really is with stimulus disappearing and cutbacks at federal, state and local levels.  The lipstick has worn off.

GDP is expressed in a manner that New Normal seasonal distortions could be effecting the quarterly releases.  The recent revision of GDP going back several years adds credence to this view.  As this same event happened last year, it behooves us to be more prudent before making a recession call.

As readers know, Econintersect focuses on the transport sector, which we consider a coal mine canary for the economy.

Employment in the transport sector is currently growing – and normally a year or more before a recession – the transport sector growth rate begins to contract.  And notice the turning points at the end of a recession are among the earliest of all employment sectors.

But overall, the economy is ugly.  There is a huge difference between the economy of Wall Street and rich (which is recovering), and Joe Sixpack’s economy.  The mixture currently has enough strength to keep us from a technical definition of recession.  But there are enough areas of weakness that large segments of the economy will experience recessionary affects.

Joe’s world has less jobs, yet on the surface Joe is making more money per capita.  But Joe’s family is not making more – it is Wall Street and the rich.  More importantly – all indications are that the depression for poor Joe began in 2000.  Poor distribution of income (income inequality) is worse than ever.  Using Austrian terms, one might say that there is extreme malinvestment of personal income.

There is no lipstick to paint on the ugly pig, so it remains a what-you-see-is-what-you-get animal.  The economy may be ugly, but there is little evidence (yet) it will be recessing.

Economic News this Week:

The Econintersect economic forecast for August 2011 indicated the soft patch will continue – and there will be little growth. All elements of the Econintersect Economic Index are falling, with certain key indicators at contraction’s door.

This week the Weekly Leading Index (WLI) from ECRI went negative this week – slipped from a downward revised 1.5% to -0.1%.   In theory, a negative number implies the economy six months from today will be worse.  This index has been eroding and has been in a four month overall downtrend. This week’s value breaks the tight pattern of this index’s value of between 1.6% and 2.1% since the end of June 2011.

The exact composition of ECRI’s WLI is known only to ECRI.  One must speculate the cause of this larger-than-normal weekly decline.  Our guess is that it is the massive reduction in treasury yields – as the cutoff date of 12Aug2011 precludes influence from the latest market meltdown.

Initial unemployment claims rose 9,000 (from an upwardly revised 399,000) to 408,000. Historically, claims exceeding 400,000 per week usually occurs when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. However, this “400,000” is not necessarily magical – and the equilibrium point can occur anywhere between 350,000 and 400,000. The reason is that labor market forces (terminations and hiring) work in concert, and there have been periods of high layoffs and high hiring.

The real gauge – the 4 week moving average – fell 3,500 to 402,250. Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge.

The data released this week confirms the economic soft spot is continuing.  If current trend lines remain, price inflation will begin to moderate over the next few months. The decline in rail traffic and import counts is troubling.  The only good news in the data was Industrial Production which remains an economic green shoot.

Weekly Economic Release Scorecard:

Item Headline Analysis
Record Low In Treasuries

Is this a telling economic forecast for poor growth?
July Leading Economic Index
The Conference Board says data shows a slowing economy.
July Existing Home Sales
Up YoY, Down MoM
The seasonal housing decline began one month early.  July is down 4.4% YoY
August Philly Fed Business Survey
This index collapsed into territory associated only with recessions
July Consumer Price Index
Unchanged at 3.6%
Signs are that the YoY increase will moderate in the coming months.
China Purchase of US Treasuries

Michael Pettis shares his view of multilateral trade of goods and currencies.
USA Budget Reduction Supercommittee

Derek & Jeff Miller analyze the dogmatic nature of the 12 members.
July Producer Price Index
Up to 7.2%
Signs future price inflation may be moderating.
USA Deleveraging

Elliott Morss argues for more monetary and fiscal stimulus.
July Residential Building Permits
Contracted 3.2% MoM
The data continues to show residential construction is at trough.
July Export / Import Prices
Prices Up
Data suggests prices will moderate in months to come.
July Industrial Production
Up 0.9%
No signs of recession in this data.
July Sea Container Counts
Imports are contracting YoY, Exports much less good.
August Consumer Metrics

Rick Davis explains why his index is saying the worst is over for consumers.
August Empire State Manufacturing Survey
New Orders were up.  Survey is better than headlines indicate.
Post USA Debt Ceiling Deal

James Hamilton Economy will remain weak.
USA Employment

Menzie Chinn: weak jobs growth should be no surprise.
Systemic Risk from Banks and Sovereign Debt

Elliott Morss, Amar Bhide and Edmund Phelps debate how to limit risk.
Capitalism and Democracy

Frank Li suggests these USA cornerstones may be on a collision course
Investing Logic

Frederick Sheehan argues investing community is mispricing the market.
S&P USA Downgrade

Karl Smith suggests the USA downgrade has shaken the national psyche.
USA Spending vs Cutting to economic health

Menzie Chinn:  Only productive government spending can stimulate the economy. productive activities
World Austerity Measures

Marc Lavoie and Mario Seccareccia argue the G20’s approach to debt ensures Japanization of the global economy
S&P USA Downgrade

Andrew Butter implies the downgrade was “asked for” – and offers solutions to balancing the USA budget
USA Bankruptcy

Susan Feiner explains why the suggestion of USA bankruptcy is a hoax
Global Banking Crisis
Robert Heubscher relays Jeffrey Gundlach’s message on bank risks.
Headline Risk

Jeff Miller looks at recent market reactions to news.
USA Market Crash

Jason Simpkins correlates events to S&P downgrade; suggests places for investors to hide
USA Market Valuations

Andrew Butter looks at market valuation models – and the future.
Market Trading

David Grandey compares the cyber world of the Matrix to current conditions
Comparing Global Markets

John Lounsbury ranks global markets during this correction

Bankruptcy this Week: Evergreen Solar

Failed Banks this Week:

2 replies on “Recession Is Not In View, But Economy Is Ugly”

  1. The “depression” view is intriguing. Certainly it seems the recovery is not in view, even in hindsight. One wonders if we can have an investment-less recovery and a jobless recovery and still have any meaning to the business cycle which is the context for “recovery.”

  2. demand side – – –

    The business cycle has an interesting history when the data is deconstructed and analyzed. I have written about this in past years but need to bring some analysis up to date and get some new material out for discussion.

Comments are closed.