Economic Forecast October 2012: Huge Decline, Fundamentals Degrading

Written by Steven Hansen

Econintersect‘s October 2012 economic forecast is relatively nasty after September’s upbeat forecast.

  • Let me start by saying one month is not a trend, but the degradation in the indicators Econintersect believes are intuitive were very large – the largest one month drop in our one month index (not the 3 month rolling average) since January 2009.
  • If this were a political post, I would point out that January 2009 is the month President Obama took office.
  • If the poor economic performance continues, there are markers now for the 2012 recession start date in August 2012.  Recession start dates are defined by peak economic activity (see technical requirements of a recession below).

This is a relative index modeling the Main Street portion of the economy – it still shows that tomorrow will be better than today, but now this difference is marginal.

Econintersect prefers to forecast the economy using non-monetary measures which of late have been more stable than the dollar based expenditures, incomes or stock market indicators.

This post will summarize the:

  1. leading indicators,
  2. predictive portions of coincident indicators,
  3. review the technical recession indicators, and
  4. then interpret our own index – Econintersect Economic Index (EEI) – which is built of mostly non-monetary “things” that have shown to be indicative of direction of the Main Street economy at least 30 days in the future.


  • the “New Normal” economy is pulsing or growing in unpredictable spurts. These spurts are evident in ECRI’s WLI, Econintersect Economic Index, and the Chicago Fed’s National Activity Index (CFNAI). This makes the economy at times seem like it is gaining traction, and other times about to fall off a cliff. These economic pulses cause some to believe the economy is heading towards a recession – as forecasts use growth rate-of-change to assess economic trends. Further, these cycles are out of phase with the calendar – and the commonly used seasonal adjusting methodologies seem to exaggerate these cycles.;
  • the consumer is still consuming – and the last several months of data is now showing the consumer is spending more of its income. There is nuances in consumer spending and the current background is available here;

Seasonally Adjusted Spending’s Ratio to Income (a declining ratio means consumer is spending less of its Income)

  • Joe Sixpack’s economic position may be strengthening. This Econintersect index’s underlying principle is to estimate how well off Joe feels. The index was documented at the bottom of the July 2012 forecast. Joe and his richer friends are the economic drivers. Joe is the blue line in the graph below, and is not close to the levels associated with past recessions.

Joe Sixpack Index

  • the poor jobs growth in the last few months is commensurate with the poor economic fundamentals.
  • Econintersect views the relationship between the year-over-year growth rate of non-farm private employment and the year-over-year real growth rate of retail sales. As long as retail sales grows faster than the rate of employment gains (above zero on the below graph) – a recession is not imminent.

Growth Relationship Between Retail Sales and Non-Farm Private Employment – Above zero represents economic expansion

  • Most economic releases are based on seasonally adjusted data which is revised for months after issuance so a contraction in a particular release may not be obvious for many months. The Econintersect forecast is based on non-adjusted data which for the most part is not subject to revision.

The Leading Indicators

The leading indicators are to a large extent monetary based (in the case of ECRI it is a knowledgeable guess as the makeup of this index is proprietary). Econintersect‘s primary worry in using monetary based methodologies to forecast the economy is the current extraordinary monetary policy which may (or may not) be affecting historical relationships. This will only be known in future hindsight.

Econintersect does not use any portion of the leading indicators in its economic index.  All leading indices in this post look ahead six months – and are all subject to backward revision.

ECRI’s Weekly Leading Index (WLI) – ECRI has been strongly arguing for almost a year that a recession is coming. In July, they stated the country is currently in a recession. ECRI’s WLI index value is now solidly above zero which according to definition means the economy six month from today will be better than today. A positive number shows an expansion of the business economy, while a negative number is contraction.  This index has been on an improving trend most of 2012.

Current ECRI WLI Index

The Conference Board’s Leading Economic Indicator (LEI) – Looking at the historical relationships, this index’s 3 month rate of change must be in negative territory many months (6 or more) before a recession occurred.  Over the last several months, this index’s rate of change has been jumping in and out of negative territory.

Leading Index for the United States from the Philadelphia Fed – This index is the super index for all the state indices.

The leading index for each state predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.

Leading Indicators Bottom Line:

  • In the case of ECRI, they have several indices only available to clients. ECRI is saying the preponderance of their data (even though the WLI is clearly positive and improving) is indicating a recession is here.
  • The Conference Board (LEI) is on the warning track that a recession could be around the corner (but is not here yet).
  • The Philly Fed’s Leading Index is at a value of 1% – which is a warning that a recession could be coming.  There has been several false warnings at the 1% line – but the 0% would be a 100% indication a recession was either underway or about to be underway.

Forward Looking Coincident Indicators

Here is a run through of the most economically predictive coincident indices which Econintersect believes can have up to a six month warning of an impending recession – and do not have a history of producing false warnings.

Consider that every recession has different characteristics – and a particular index may not contract during a recession, or start contracting after the recession is already underway. In all the data Econintersect analyzes, there are recessionary warnings in the monetary and non-monetary import indices which are used (in part) to model future consumer behavior.

Truck transport portion of employment – to search for impending recessions. Look at the year-over-year zero growth line. For the last two recessions it has offered a six month warning of an impending recession with no false warnings. Transport is an economic warning indicator because it moves goods well before final retail sales occur. Until people stop eating or buying goods, transport will remain one of the primary economic pulse points.

Transport employment growth is far above the zero growth line. As transport provides a six month recession warning – the implication is that any possible recession is further than six months away.

Rail – Weekly and monthly Econintersect evaluates rail movements. As stated in Truck transport employment data above, movement of goods and materials have logical and provable economic correlations. Rail particularly moves materials and finished goods months before final sales to the ultimate consumer.

Current Rail Data

Here rail year-to-date is contracting over 2011 levels – mostly due to coal and grain. If coal and grain are removed from the equation, growth has been running between 1.5% and 3.5% per year (slightly less good month-over-month for the second month in a row). Coal is an alternate fuel, and the current USA government policy is to discourage coal usage.  Grain movements have little correlation to the economy.

Business Activity sub-index of ISM Non-Manufacturing – this index has been jumping around most of 2012 with no clear trend.  The index remains above 55 (below 55 I would consider a warning that a recession might occur, whilst below 50 is almost proof a recession is underway).

Predictive Coincident Index Bottom LineEconintersect believes:

  • True economic activity (not monetary based GDP) was expanding in July and August 2012 somewhere around 2% (plus/ minus) in many sectors of the economy using non-monetary pulse points based on these indices shown above, and other indices which Econintersect are indicative of the real economy.
  • Late September’s non-monetary pulse points (based on the last few weeks of data) seem to be well under 2% annual growth, but more than zero.  An educated guess would be around 0.5% which is too close to zero to be comfortable.
  • This was again slightly less good than last month’s look at the coincident data.

Technical Requirements of a Recession

Sticking to the current technical recession criteria used by the NBER:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

….. The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

Here is a one graph says it all looking at the month-over-month change (note that multipliers have been used to make change more obvious).

Month-over-Month Growth Personal Income less transfer payments (blue line), Employment (red line), Industrial Production (green line), Business Sales (orange line)

In the above graph, if a line falls below the 0 (black line) – that sector is contracting from the previous month. At his point, only employment is growing – and the rest are declining. Again, this is a rear view mirror, is subject to revision, and is not predictive of where the economy is going. Another way to look at the same data sets is in the graph below which uses indexed real values from the trough of the Great Recession.

Indexed Growth Personal Income less transfer payments (red line), Employment (green line), Industrial Production (blue line), Business Sales (orange line)

NBER Recession Marker Bottom Line – subject to backward revision, there were recession markers put in place in August by personal income and industrial production – with business sales peak several months earlier.  Recession start dates are defined by peak economic activity.

Econintersect believes that the New Normal economy has different dynamics than most economic models.

Economic Forecast Data

Econintersect‘s Economic Index (EEI) is designed to spot Main Street and business economic turning points. This forecast is based on the index’s three month moving average – but note the monthly reading is zero which is the lowest value since April 2010.  The current three month rolling index value is the lowest seen in 2012.

The EEI is a non-monetary based economic index which counts “things” that have shown to be indicative of direction of the Main Street economy at least 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 economic rate of change seen by business and Main Street.

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

/images/z forecast1.PNG

The red line on the EEI is the 3 month moving average which is at 0.36 (up from last month’s 0.60), while the monthly index fell precipitously from 0.70 to 0.36. The economic forecast is based on the 3 month moving average as the monthly index is very noisy. Readings below 0.4 indicate a weak economy, while readings below 0.0 indicate contraction.

The upward trend of this index has been broken.

A positive value of the index represents economic expansion. If the economy was growing at the same rate, this index would return a value of 0.50. This month’s value of 0.36 shows the economy’s rate of growth is declining.

Consumer and business behavior (which is the basis of the EEI) either lead or follow old fashion industrial age measures such as GDP depending on the dynamic which is driving the economy. The main street sector of the economy lagged GDP in entering and exiting the 2007 Great Recession.

As Econintersect continues to back check its model, from time-to-time makes slight adjustments to the data sets and methodology to align it with the actual coincident data. To date, when any realignment was done, no change altered trend lines or recession indications. Most changes to date were to remove data sets which had unacceptable backward revisions or discontinued series. Documentation for this index was in the October 2011 forecast.

Jobs Growth Forecast Improves

The Econintersect Jobs Index is forecasting non-farm private jobs growth of 145,000.

Comparing BLS Non-Farm Employment YoY Improvement (blue line, left axis) with Econintersect Employment Index (red line, left axis) and The Conference Board ETI (yellow line, right axis)


The Econintersect Jobs Index is based on economic elements which create jobs, and (explanation here) measures the historical dynamics which lead to the creation of jobs. It measures general factors, but it is not precise (quantitatively) as many specific factors influence the exact timing of hiring. This index should be thought of as a measurement of jobs creation pressures.

In addition, the BLS seasonal adjustment methodology creates wobbles in the way the data is reported.

At the present time, jobs growth year-over-year is averaging above the levels forecast by the Econintersect’s Jobs Index. The table below lists the private non-farm payroll forecasts against the current (not original headline) BLS private non-farm payrolls. Please note that the BLS data continuously is revised, and this employment forecast section of the economic forecast uses the most current BLS estimates.

Still, the Econintersect Jobs Index was predicting fewer jobs then are actually occurring. A discussion of the problem is in Ben Bernanke and the Puzzle of Employment. In the last three months, the index has been over estimating.

Econintersect Employment Forecast (blue line), Fudged Forecast* (red line), and Actual Current Estimate of BLS Non-Farm Jobs Month-over-Month Growth (green line)

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* fudged growth based on deviation between forecast & current actual using a 3 month rolling average

A fudge factor (based on deviance over the last3 months between the BLS actual growth and the Econintersect Employment Index) is also provided. The fudge factor is fluid as the BLS has significant backward revision to their jobs numbers.

Analysis of Economic Indicators:

Econintersect analyzes all major economic indicators. The table below contains hyperlinks to posts. The right column “Predictive” means this particular indicator has a leading component (usually other then the index itself) – in other words has a good correlation to future economic conditions.

Links to Analysis Of Indicators:

Leading Indicators
ECRI economic forecasts x
Leading Economic Indicator x
Economic Metrics
Gross Domestic Product
Chicago Fed National Activity Index Limited
Federal Reserve View of Economy (Beige Book)
Federal Reserve FOMC Meetings
Trade Balance x
Rail Traffic x
Sea Container Counts x
Truck Transport Tonnage
University of Michigan Consumer Sentiment
Consumer Credit
Conference Board Consumer Confidence
Personal Consumption Expenditures (PCE)
Prices and Inflation – CPI, PPI and Export/Import
Business & Manufacturing
Wholesale Sales
Retail Sales Limited
ISM Non-Manufacturing Survey x
Manufacturing Sales
ISM Manufacturing Survey
Durable Goods
Industrial Production x
Empire State Manufacturing Survey
Philly Fed Business Survey
Construction Spending
New Home Construction
Real Estate
Pending Home Sales
Case-Shiller Home Price Index
New Home Sales limited
Existing Home Sales
CoreLogic Home Price Index
Weekly Initial Unemployment Claims
Job Opening and Labor Turnover Survey (JOLTS) Limited
Bureau Of Labor Statistics Jobs Report x
ADP Employment Report

General Economic Indicators:

Monthly Data: [click here to go to source file]

Quarterly Data: [click here to go to source file]

Aruoba-Diebold-Scotti Business Conditions Index: [click here for source file]

Past EEI Forecasts

2 replies on “Economic Forecast October 2012: Huge Decline, Fundamentals Degrading”

  1. “Consider that every recession has different characteristics – and a particular index may not contract during a recession, or start contracting after the recession is already underway.”

    To my mind, this comment in the article is most important. The other thing I consider important is to look at sectors, both of the economy, of employment and of the population.

    Construction was/has been in recession for about 5 years in the US. If you worked in that industry in 2007 you are relatively likely to have been unemployed for a significant part of the last 5 years. You and your family have been in recession, and it is of no comfort to you if GDP has not had two quarters of contraction in the last 5 years.

    High school graduates with no further education/unskilled labour have been the bulk of the unemployed in the US. Those people and their families as a group have been in relative recession/depression for 5 years. Even if there has been some growth in employment it has been from such a low base that to claim their recession/depression has ended is patently false because the relative level is so far below what it was and has averaged.

    Youth in minority groups have also borne the brunt of unemployment (possibly because of a large overlap with the Unskilled group. They continue to be in a recession/depression situation, ameliorated by better family circumstances for some who have been able to live at home with the support of family.

    Similarly we are all familiar now with the statistics of growth in income by percentiles of the population and that the middle class (say the middle 30 percentiles) have been in recession even while the economy has grown because of disparities in growth in income and the relative proportions of financial/business assets owned by the top say 10% compared to home values in 2006.

    To understand the suffering/loss of many people a patchwork analysis is required. Totals (particularly without being on a per capita basis and by industry, employment type, education/skill level or age ), averages and medians (without quintile breakdowns) are meaningless to such large swathes of the population as to be meaningless in the “new normal”, “patchwork” economy.

    To me, it seems that there is a lack of concern for a significant portion of the population enduring massive hardship, so long as the top level figures of GDP, S&P and employment are showing some growth in total (not by the author, but in the US as a gross generalisation based on 4 years of generally intense reading of US centric blogs.)

    My point? Top level figures without underlying sectoral analysis are no longer good enough, given we have the intellectual and computational capacity to provide that analysis.

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