September 2011 Economic Forecast Shows Contraction

Econintersect is forecasting a slight contraction of the Main Street economy in September 2011.   For those who only have time for the 10 second soundbite:

Although Econintersect is forecasting a contracting economy in September 2011, there is a possible economic cycle bottom forming.  Therefore Econintersect is NOT issuing a recession watch at this time.

Econintersect’s Economic Index (EEI) is designed to spot Main Street and business economic turning points. We began warning in April of an economic slowdown.  In this September forecast, we are now advising that an economic cycle expansion MAY be beginning.  It will take several months of data to confirm IF this is a turning point.

This forecast is based on Econintersect’s non-monetary based economic index which counts “things” that have shown to be indicative of direction of the economy 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 economy seen by business and Main Street.

The EEI is not a monetary index.  It does not need to adjust data for inflation. Further its methodology handles seasonality by considering rate of change of year-over-year data.

While continuing to expand in some areas, the economy is contracting in other areas.  Where contraction is occurring, it is not severe in any one of our pulse points. But on the other hand, in the last two months, the total index has dropped over 0.7 point.  This is steeper than any other decline since the tracking point beginning in January 2000.

This model says the Main Street economy rolled over severely beginning in June 2011, but, before that, the cycle peak actually occurred in March or April 2011.  Last month we stated “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.”  In September this remains an open question.

Some small contractions do not develop into a recession, but our procedures suggest we call a recession watch.    Our methodology has been borrowed from the alert system used by the U.S. Weather Bureau:

Watch: A contraction is occurring and recession is possible.

Warning: A contraction is deepening and recession is probable.

Recession: A recession has started.

Because of an improvement in our transport indicators which is the coal mine canary in this index, Econintersect has decided NOT to call a recession watch at this time.  Historically, a recession is unlikely when transports are growing.

A single month of contraction in the index does not a recession make, but creates a more watchful awareness . It takes several months (or quarters) of negative data before a recession is determined.

Note this index does not measure severity of contraction – only that a contraction is occurring across weighted pulse points. In the case of the Great Recession – all pulse points went negative for more than a year.

Jobs Growth, While Not Good, Is Not Recessionary Either

The last time this Econintersect Economic Index went negative was in October 2007. Econintersect points out the the NBER recession dating committee used non-farm payrolls as the marker for the 2007 recession.

It is employment that is refuting a recession is imminent.  Econintersect’s Employment Index continues to forecast positive rate of growth until December 2011 where another decline is projected to begin.  Leading into the Great Recession, the EEI employment index rate of growth began a steady decline in July 2007, and the actual data (BLS) began an uninterrupted steady rate of growth decline in October 2007.

Before you are sold that a recession is not eminent based on employment data, consider that the actual employment numbers (blue line above) are seasonally adjusted by the Bureau of Labor Statistics (BLS).  We are relying on the BLS methodology – which is questionable on a month-over-month basis.  Econintersect believes the BLS long term comparable employment data is accurate. Econintersect believes the data produced by ADP is likely more accurate for a month-over-month comparison in real time.

In truth, however, the economy does not grow jobs in the second half of the year.  All jobs growth you will hear about for the remainder of the year will be grown by an algorithm in the computers of the BLS and ADP.  So when Econintersect tries to forecast jobs, it is forecasting by second guessing an algorithm.

The USA economy is historically weak and the underlying fundamentals (New Normal) have changed.  An event may occur which can tip the economy, but the tipping point may be difficult to define.  This is especially true in the New Normal following the Great recession.  Econintersect questions whether the traditional coincident indicators (such as industrial production or retail sales) may be showing the true fundamental underlying strengths and weaknesses at the present time.

Econintersect’s Employment Index is based on economic elements which create jobs. Econintersect’s Jobs index (explanation here) was at a cycle low in June.  The jobs 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.  For July 2011, Econintersect forecast private non-farm employment growth at 135,000, while the actual number came in at 154,000.  The index projects September 2011 non-farm private jobs growth is projected at 145,000.

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.

Transports Are Improving?

Econintersect believes transport counts (rather than monetary measurements) are the canary in the economic coal mine. Transport counts which collapsed beginning with our August forecast – took a turn for the better in September.  The transport counts in most cases remain below pre-recession levels.

In our July 2011 forecast, 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 was much sharper and entered negative territory, but recovered into positive territory in September.

The Main Street and business economy will be weaker in September 2011 than it was in August 2011.

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

Past EEI Forecasts