Signs of Life in the Economy

I find humor in following discussions on what is an important (or unimportant) economic release.  Take Industrial Production (IP) which will be released next week.  As an example, Yahoo Finance sees IP’s importance as a “B-” (using a school grading system of “A” thru “F”).

Manufacturing accounts for only 1/3 of our business world (based on Census Sales), and less than 9% of employment.  Most believe that the USA makes nada (not true) – and the USA is simply a service economy.  On the surface, the “B-” rating is justified.

When trying to find economic turning points, any data set which has a history of turning before or coincident with hindsight selected recession dates needs to be utilized.  Excluding elements from an  economic model because it is relatively insignificant might be killing an economic canary – and the manufacturing portion of IP is a very good canary.

The USA economy began shifting around 2000 to a New Normal – with the metamorphosis completing with the 2007 Great Recession.  I usually graph / trend beginning in 2000, and sometimes go back as far as 1990.   But data and trends prior to 1990 definitely represent different USA economic dynamics.  When you trend data, you become sensitive to the changing relationships between data sets occurring around 2000.

In the 2001 recession, manufacturing IP turned “less good” almost one year before the official recession, while in 2007 the turn was almost coincident – these were two very different recessions with different drivers.

Note:  By “less good” I mean that the rate of growth was slowing.   Growth was still positive but by smaller amounts so as time went on.  Using a physics term, acceleration was negative.

It is likely based on the current conditions that a “new” recession would be similar to 2001 with business, not consumers driving the decline – but I would not bet on this.

Following a single data set as a recession indicator is dangerous – and this includes GDP, IP or even trade data.  GDP has history of significant backward revisions – and unfortunately, this also includes IP which at times seems to be morphing completely after the real time announcement.

The current data shows IP with a four month flat data trend.  The little IP canary is saying the economy is not yet close to contraction.

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 declined 1,000 (from 405,000 which was revised up from a preliminary 401,000 last week) to 404,000. 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 7,000 to 408,000. Since the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week was mixed – but was not recessionary.

Weekly Economic Release Scorecard:

August Business Sales:  Broke downward trend line
September Retail Sales: Down Slightly month-over-month but still good
September Export / Import Prices: Import prices up, export prices down
August Trade Balance: Shows improving USA economy
Employment: Long term view is less & less lifetime working hours
Consumer Metrics: Good short term growth followed by less good
August JOLTS: Shows low jobs growth will continue
September Diesel Usage: Usage Declined & possibly recessionary
Mortgage Crisis: Who is culpable in shouldering costs of Liar Loans?
Operation Twist: Can it overpower other dynamics in play?
September Rail Counts: Modestly improving data
Dow Recovery: At 655 days, the Dow recovery drops to fifth place
Bull Markets: In Just a few days the Bears have become Bulls globally
Bear Markets: An updated look at global markets
Dogs of Dow:  An updated look at this trading strategy
Occupy Wall Street: What should their manifesto be?
Q3 Earnings:  Is there a reason to be worried?
Resistance Levels: Watching market pricing in the week ahead.
People vs Business:   Is the political system the cause of the USA problems?
Effective Markets:  Regulation needs to be transparent and reduce fraud risk
Euro Haircuts:  Will Greek haircuts set the precedent for other PIIGS?
Economic Objectives:  Are economic prescriptions providing the good life?
USA: Does the USA enjoy monetary sovereignty?
Eurozone: Should outsiders fund Euro debt when the Eurozone will not?

Bankruptcy this Week: Wyndstorm, The City of Harrisburg (Pa)

Bank Failures this Week: