Trade Balance is the Recessionary Metric to Watch Next Week

My weekly economic summary (and a preview of next week) is overshadowed by the passing of Steve Jobs.  I offer personal condolences to his family, friends, and all of us whose lives were improved or touched through Steve’s vision.  Steve rocked my world revolutionizing corporate work process flows.

One major component Econintersect’s model of the economy is imports and exports:

  • Imports signal how consumers and business are doing
  • Exports signal global demand

Imports have historically been a canary in the economic coal mine. In our analysis of import data, it was observed:

Contracting imports historically is a recession marker, as consumers and business start to hunker down. Main Street and Wall Street are not necessarily in phase. During some recessions, the consumers and business hunkered down before the Wall Street recession hit – and in the 2007 recession, the contraction began 10 months into the recession.

But both imports and exports have been improving less well (still up but with a negative second derivative – acceleration), with imports’ growth slowing faster than exports. On an inflation adjusted basis, the USA is importing less “things” than it did a year ago.

If this was due to a shift to consumers buying more from domestic production, this is a positive development. But real (inflation adjusted) final sales in GDP EXCLUDES sales of imported products and services, and is also trending less good, so the situation is not clear. Growth is currently 1.9% year-over-year and at a level consistent with past recessions.

Both imports and inflation adjusted domestic goods purchases are trending less good – with imports already negative.  An ominous data point is that August 2011 sea container imports have contracted 7% more than the July data, and have been contracting year-over-year for three months.

When the headlines this week announce the trade gap has shrunk because of declining imports, it could be one more warning flag of a recession.

Economic News this Week:

The Econintersect economic forecast for October 2011 predicts very weak growth. It is worrisome that the economy is this weak as any methodology error or abnormal condition could produce the wrong conclusion. A more positive note is that there has been a mediocre improvement in the data over the last two months.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect’s data is not yet recessionary (one month look-ahead) – we take this recession call seriously.  This week the actual level of ECRI’s WLI index continues its downward trend lines indicating the economy six months from today will be worse.

Initial unemployment claims rose 6,000 (from 395,000 which was revised up from a preliminary 391,000 last week) to 401,000.   Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here).   The real gauge – the 4 week moving average – declined 4,000 to 414,000 because of the backward revision.  Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week was remarkably strong.  There were no new recessionary flags – and in some of the data, there were anti-recessionary flags.  Keep in mind (except for the September Jobs data) that this is coincident data over 30 days old – not forward looking markers.  However, the data is stronger than Econintersect’s economic model had forecast.

Weekly Economic Release Scorecard:

August Wholesale Sales: Strong – broke downward trend line
August Consumer Credit: Student credit contracted month-over-month
September BLS Employment: Downward trend line broken
USA Macro Policy:  Is Fiscal and Monetary Policy Constrained by Iraq War?
September ISM Non-Manufacturing: Data contains a strong “no recession” flag
September ADP / Challenger Jobs: Not worsening data is good
Private Investment:  Is this the end of improvement on return on capital?
August Manufacturing Sales: Strong growth
August Construction Spending: Broke a 45 month decline with a gain
September ISM Manufacturing: Positive by meaningless data
Greece: Focus must be on its real problems, not on temporary measures
Greece: Failure is preordained based on economic dynamics
College Dropouts: Setting the USA up for further economic woes
USA: Is the Wall Street demonstrations the start of an “Arab Spring”?
Europe: The question is not operational solutions, but sustainable political ones
USA Employment: Is there a tie between unemployment and home equity?
ECB: Will there soon be a TALF (U.S. style)?
Greece: A return to Drachma might be a good solution
USA Banking: Another view of the TBTF issue relating to hidden MBS transactions
Solyndra Loans: Likely this involved administration misconduct
Wine: Investing for Profit
Steve Jobs: Our tribute to Steve
Recession Signs: Four potential flags of recession
Investing: Sorting out perceptions and reality
Euro:  What will it look like in five years?
High Yield Bonds: Now giving a sell signal for bonds and equities
Charting:  How to catch market tops

Bankruptcies this Week: Star Buffet, Real Mex Restaurants, Decorator Industries, Chef Solutions Holdings, Friendly Ice Cream, CDC Corp. (CHINA), Open Range Communications, HealthSport

Failed Banks this Week: