April 2011 Economic Forecast: Likely At Sub-Cycle Peak

Every month before preparing our economic forecast, Econintersect reviews many sources of coincident data, forward looking data,  anecdotal information – as well as  updating our proprietary forecasting tools.

The real economy is not presented in the world of Gross Domestic Product (GDP) which is a dinosaur left over from the days of the gold standard and the industrial revolution.  Economic forecasting requires a broad brush integration of many economic related elements.

Regardless, GDP is a rear view mirror of economic activity.  Knowing that GDP was 3.1% (analysis here) in 4Q2011 tells you little about where the economy is headed.

The purpose of preparing a quantitative economic forecast is to give weight to the dynamics we are seeing.  We present the results of our economic data,  and then try to explain why this is – or is not – the correct answer.  Our objective is to be very critical of the data we produce.

Obviously, our methodologies are based on modeling of past dynamics, and the future is never a result of an simple extrapolation of the past.

April 2011 Forecast

The economy will continue to expand in April 2011, but there is every indication that the rate of growth will be nearly flat.  We are living in a tortoise economy where the rate of growth has seldom been been strong since the 2001 recession.

This is indicative of a topping action in a moderately expanding business sub-cycle which began in December.  There are no indications of a contraction at this time.  The Economic Accelerometer in the above graphic is an indicator of the growth rate seen in March, while the underlying economic pressure is the rate of expansion forecast for April 2011.

The economic speed is a weighted summation of the economic elements supporting growth.   In other words, approximately 80% of the dynamics are supporting positive economic growth in the next 30 to 60 days.

One major component of the EEI is transport related.  Econintersect considers transport (truck, rail and sea container) counts a primary economic pulse point – and its trend represents underlying economic pressure.

This month, the transport portion of the EEI index flattened.  This portion of the index is quite noisy, and a 3 month moving average is used to remove some of the noise.

This month, Econintersect introduces a new component to its economic forecast – employment.   Forecasting employment is problematic as:

  • whether hiring or firing occurs in any given month is subject to the whims of business;
  • measurement error uncertainty each month for NFP (non-farm payrolls) is of the order of +/-100,000;
  • neasurement error uncertainty for total employment, which is used to calculated the unemployment rate, is of the order of +/-300,000;
  • the BLS, who produces the official employment data, uses controversial methodology in adjusting its data.  Their birth / death modeling alone can adjust employment up 150,000 in a given month; and,
  • employment is not a result of a simple dynamic but a long term economic pressure on a multiple of fronts.

The Econintersect Jobs Index (EJI) is designed to indicate the underlying jobs dynamics or pressures.

The caveat in using this index is that during periods of economic contraction, the jobs market tends to over-correct for the contraction.  Conversely,  in the early periods of recovery / expansion, jobs expansion tends to over-correct the expansion.

The index suggest jobs growth should be relatively the same for February, March and April 2011 to support the current economic dynamics.  Actual data suggest we may be in an over-correction part of the cycle and jobs growth may exceed an equilibrium level.

Using round numbers, Econintersect projects private non-farm payroll growth at 150,000 for April 2011.

For a complete explanation of the EEI, please see the October 2010 forecast.

Past EEI Forecasts for: March 2011, February 2011, January 2011, December 2010, November 2010October 2010September 2010.