Recession Watch Remains

Econintersect declared a recession watch on 28 September 2010 as the underlying data flows were approaching recession territory.  This recession watch remains in effect with the underlying data continuing to be “slightly less good”.  Using an airplane analogy, the economy barely has enough air speed to maintain level flight – and any down drafts or worsening conditions would result in loss of altitude.

The USA has not returned to the economic levels of December 2007 when the Great Recession began. It is clear that conditions for business and the consumer Joe Sixpack is still below (and in many cases well below) this December 2007 peak.

Econintersect has concerns that historically based economic reference points (such as GDP and indicators based on money flows) have been distorted by the introduction of stimulus into the economy which initially overstated the real economy – and may now be understating the real economy as the stimulus is exhausted.   In other words, the stimulus spending created an artificially high baseline which current economic activity will be compared.  The stimulus was not a stimulus, and only provided temporary money flows to boost GDP.

While it should be argued that the purpose of the stimulus was to prevent the economic collapse, it was unfortunately named a “stimulus” which implies it was a trigger for economic expansion.  Little real economic expansion has occurred.

Further complicating the longer range economic picture is the never ending mortgage crisis which was summarized for Global Economic Intersection by Yves Smith of Naked Capitalism.  There is little precedent to predict the economic impact of this mortgage crisis although it is hard to envision it would economically beneficial.

Econintersect is focused on predicting relative economic changes.  For those interested in economic money flows, the economy’s rate of growth is slowing to a snail’s pace – but there is little evidence of a looming contraction in the coincident indicators.  At issue are the seasonal adjustment factors used in analyzing the economic data:

1) Econintersect believes there is a New Normal.  When indicators are compared to 2008 and 2009 data, the seasonal adjustments draw one conclusion, but when compared to 2005 through 2007 data – a different conclusion is drawn;

2) The very negative Great Recession data distorts the quantitative methods used for seasonal adjustments; and

3) Now in the coming months, the artificial boost of the effects of the stimulus are now reversing causing year-over-year seasonality distortions.

The various economic releases headline the month-over-month growth or contraction.  With such slow and imperceptible growth occurring, and combined with seasonal adjustment factor methodology issues – it is literally impossible to make any real claim that the economy is growing or contracting on Main Street.

In this environment, there will be many legitimate answers to what is considered “normal”, and defining economic growth or contraction is problematic as growth or contraction needs to be measured against a baseline – and no good baseline currently exists.  Econintersect believes employment is the economy – and concentrating on employment alone offers a clear and unmistakable economic baseline.  The employment hole and future potential outcomes were brilliantly presented in a NY Times graphic presented below:

Econintersect does not use employment or unemployment in its economic indicator – yet lack of jobs is one of the primary constraints in the USA’s primary reason real recovery is not underway.  If the level of employment in America falls, this will be clear evidence the economy is contracting.  After the severe employment contraction of the Great Recession, business is currently lean-and-mean.  If employment falls further, it is due to the economy contracting.

So conversely, seeing private sector jobs growth over 100,000 per month would be clear evidence of expansion.  Any lower growth will leave the economy in economic doldrums – the dreaded Japanese L (or non-recovery) – as the economy is growing slower than the population growth of the labor pool.

Econintersect forward looking economic indicator uses non-monetary economic pulse points that have a general – not specific correlation with Gross Domestic Product (GDP). These pulse points are geared to anticipate consumer and industrial income / spending for 30 to 60 days after the indicator is issued.

Econintersect uses relative scales in evaluating the economy – zero means tomorrow will be the same as today.  The indicator is unchanged near zero growth due to backward revision of some elements of the EEI.  The EEI is built on a two part index  – and both parts are declining but not yet considered recessionary.  Taken together, they are moving in a lockstep decline similar to the declines in 2001 and 2007.  Both parts must be negative for several months before Econintersect considers a recession is likely underway.

The economy remains close to a recession, and for that reason Econintersect has issued this recession watch.  It takes several months (or quarters) of negative data before a recession is determined.  If the current trend continues , the watch will be replaced by a warning.  If contraction ensues, our metric will declare a recession has arrived.

Our methodology has been borrowed from the alert system used by the U.S. Weather Bureau:

Watch:  A recession is possible.

Warning:  A recession is probable.

Recession:  A recession has started.

The Econintersect Economic Indicator© (EEI) Described

The EEI is built using non-monetary pulse points below retail sales / personal income receipt. The EEI would have called the Great Recession in August 2007 (NBER date December 2007) and the 2001 recession in February 2001 (versus NBER March 2001).

Again the EEI is not monetary based, and targeted closer to the relative changes in the economy for Joe Sixpack.  Therefore, Econintersect does not expect exact, but a general correlation to GDP

The difference between the NBER and the EEI is that this index is determined within 25 days after period closing.  Most likely, the recession call would have been made in November or December 2007 – a full year before the NBER made the recession call.  This indicator has several parts – the historical data for the part which is used to call the recession is summarized on the graph below:

Data for several elements of the EEI were not available prior to 2000.

Calling the end of the Great Recession is problematic. The data shows four shifts :

1) indications of economic improvement Mar 2009,

2) evidence of recovery dip September 2009 (sliding back into recession),

3) evidence of full blown recovery underway December 2009, and

4) peak recovery rate of growth Feb 2010.

Econintersect provisionally calls the end of the Great Recession as December 2009, based on when the economic underlying flows returned to relatively healthy growth. This “provisional” end is subject to revision.

Econintersect’s analysis is not based on money flows. Using money flows, the NBER has determined that the Great Recession ended in June 2009. Econintersect agrees using money flows and the specific definitions of a recession, the recession did end in June 2009.

Reference: EconIntersect US Economic Outlook