This Week’s Data Dispells Recession Fears For Now

Written by Steven Hansen

The amount of economic data and analysis in cyberspace is overwhelming.  One must pre-decide what is important, and not important.  Even with automation where human minds do not touch the data – weighting factors or algorithms are used when sifting through the data.  With all the data out there, I could make strong cases the economy was recessing, muddling or expanding.

On occasion, some pundits mine the data to prove a point.  But the economy is not a single dynamic or grouping of data points but millions of dynamics interacting.  While many parts of the economy will be expanding and different rates, it is also true that many will be contracting at different rates.

The governing groups of dynamics are constantly in a state of flux.  One must always question if this time is different – and also question if that particular model is correctly forecasting.  Using several economic models which have different views of the governing dynamics provides a broad perspective.  Generally, all economic models are forecasting economic expansion with the major exception being ECRI’s Weekly Leading Indicator until this week (this index is now positive).

GDP and Consumer Spending

GDP is a rear view economic mirror – and to consider it a forecasting tool is ignorant.

This past week the second estimate of second quarter GDP  revised upward economic growth to 1.7% based on more detailed information.  Generally, if the second half of a quarter is stronger than the first half – GDP will tend to strengthen with each subsequent estimate and the carry forward to the next quarter is often positive.

GDP is telling us the economy may have been growing more strongly going into the third quarter.  GDP is not my favorite tool to understand economic history – as it tells only part of the story of the consumer  – namely spending.  Yet, while the consumer appears to have hunkered down compared to 1Q2012, the consumer also appears to have been spending more in the second half of the second quarter than the first half.

My theory is the uncertainty on the economy and their jobs going forward has caused the consumer to be a more conservative.   Yet there is no indication (yet?) of a spending contraction while there are glimpses consumer spending is improving.

And for those who believe we are currently in a recession, would have to ignore the Personal Consumption Expenditures (PCE) for July 2012 released Thursday.  It shows a strong spending growth in the first month of 3Q2012.  It is interesting that the backward revisions have almost removed the contractions originally shown in the PCE data for 2Q2012.  It is the backward revisions which make real time analysis of consumer spending literally impossible.

Econintersect Forecast

In doing the Econintersect Forecast for September, the Main Street economic drivers appear to be gradually strengthening through 2012 – unfortunately the growth takes a microscope to see, and has been very turbulent (up one month, down the next).  I warned when the September forecast was published:

Before you break out the champagne, this is a relative index – it shows that tomorrow will be better than today, but does not quantify the amount of the improvement.  It appears the downward trends have at least temporarily abated.

Econintersect Economic Index (EEI) with a 3 Month Moving Average (red line)

Chicago Fed Economic Model

The Chicago Fed has a dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting.   I bring this up because this model is predicting short term weakness in GDP and the return of the consumer.

My Takeaway

It is very easy (although intellectually lazy) to add up only the negative data, and believe the economy is headed into darkness.  However, overall the USA economy appears to be muddling along with a subtle (unnoticeable to some segments) improvement.  With all the negative trend lines earlier this year, I was concerned the economy was headed for contraction.  It still might, but for now trends are improving.

Other Economic News this Week:

The Econintersect economic forecast for September 2012 shows moderate growth continuing. Overall, trend lines seem to be stable even with the fireworks in Europe, and poor data from China.  An emotional component of my mind cannot help thinking this is the calm before the storm.  But a logical component in the same cranium sees there are no recession flags showing in any of the indicators Econintersect follows which have been shown to be economically intuitive. There is no whiff of recession in the hard data – even though certain surveys are at recession levels.

ECRI stated in September 2011 a recession was coming, and now says a recession is already underway. The size and depth is unknown. A positive result is this pronouncement has caused much debate in economic cyberspace.  I will be glad when ECRI removes this warning (and hopefully not when the economy actually crosses into darkness).

The ECRI WLI growth index value moved this week into positive territory. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

/images/z weekly_indexes.PNG

Initial unemployment claims rose from 372,000 (reported last week) to 374,000 this week. 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 – rose slightly from 368,000 (reported last week) to 370,250. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2010 (blue line), 2011 (red line), 2012 (green line)

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Data released this week which contained economically intuitive components (forward looking) were

  • Rail movements (where the economic intuitive components continue to be indicating a moderately expanding economy).

All other data released this week does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

Weekly Economic Release Scorecard:

Apple Inc.: The Euphoria Dims
This Week’€™s Data Dispells Recession Fears For Now
Fixing the Mortgage Mess: The Game-changing Implications of Bain v. MERS
Quanticipation in the Gold Price
Minxin Pei: Worries About China are the Wrong Ones
Realtors: Secret REO Bulk Sales Damage Economy, Taxpayers
U.S. Stocks Rise on Dovish Air from Bernanke
Jackson Hole: Bernanke Sends Mixed Messages on QE3
ECRI’s Weekly Leading Indicator Growth Is Now Positive for w/e 24 August2012
Chicago Purchasing Managers Barometer Improves Slightly in August 2012
Final August 2012 Michigan Consumer Sentiment
Manufacturing Sales Data in July 2012
Towards An Ideal Form of Government: A Mid-Term Summary
Skill Building is Key to Trading Success
EU Commission: Centralize Banking Control
Richmond Fed Study: Where Have All the Workers Gone?
Investing Bets: China and/or India?
Economics: A Gaping Separation Between Theory and Operations
Rail Week Ending 25August2012: Traffic at 2011 Levels
Economic Forecast September 2012: Actually Improving
Kansas City Fed: Manufacturing Activity Improved Moderately in August 2012
25August2012 Unemployment Claims: Slight Growth in Unemployment
July 2012 Real Personal Consumption Strong, No Recession
Low Volatility: Avoid the Trading Temptation
Securitized Rentals are the Next Big Scam
GDP: Little Changed at 1.73%
Middle Class: A Candle Burning at Both Ends (Pew Survey)
America: Aging Without Growth, or Awaiting a Singularity?
August 2012 Beige Book: Economy Expanding Except Boston
Is Household Deleveraging Continuing?
Pondering the Effect Of Negative Interest Rates
July 2012 Pending Home Sales Data Improves, However ….
CoreLogic Reports July 2012 Completed Foreclosures Continue Falloff
Second Estimate 2Q2012 GDP Up to 1.7% – Consumption Now Better
Summary Week Ending 27 Augist 2012, Focus on Drug Companies
Stairway to the Stars? Elevator to the Moon?
New York Stock Exchange Seats Losing Value?
August 2012 Conference Board Consumer Confidence at 9 Month Low
Richmond Fed Manufacturing Activity Contracted at a Slightly Slower Pace in August 2012
Case-Shiller Home Prices Finally Show Year-over-Year Gain in June 2012
Saving the Post Office: Letter Carriers Consider Bringing Back Banking Services
Valuation Plays: Healthcare Stocks
U.S. Weapons Sales Skyrocket
Exchange Rate Policy and Full Employment
Render Unto Caesar, Part I
Average Gasoline Price Rises $0.034 Week Ending 27August2012
USA Financial System Assets Reported Improved in August 2012 Fed Report
Texas Manufacturing Expands at Slower Pace in August 2012
Is There $1.5 Trillion Idle Cash At the Federal Reserve?
Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.8% in July 2012
Four of the Best Currencies to Invest in for 2012
Review: American Monetary Policy Since the Financial Crisis
Minsky and the Narrow Banking Proposal: No Solution for Financial Reform
Drought, Crop Losses Intensify
Adding Reverse Mortgages to Retirement Portfolios
The Week Ahead: Is Jackson Hole Over Hyped?
The Biology of Politics
Insider Trading 24 August 2012: Facebook’s Peter Thiel Sells $395 million of Shares
Trefis: Highlights Week Ending 24 August 2012
Advancing Towards A World Without Jobs
Durable Goods New Orders Shows a Mixed Picture in July 2012
July 2012 New Home Sales Shows Improving Growth

Bankruptcies this Week: Ampal-American Israel, CHL, Contec Holdings