Econintersect is declaring a recession watch on 28 September 2010 as the underlying data flows are now approaching recession territory.
The USA has not returned to the economic levels of December 2007 when the Great Recession was deemed to have begun. Without getting bogged down with semantics using the words “recovery” or “depression“, 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. With hat tip to David A. Rosenberg in his 22 September 2010 Breakfast with Dave, the levels of decline:
• From the lows in real GDP in June/09, 69% of the recession losses have so far been recouped.
• From the lows in employment in Dec/09, 9% of the recession losses have been recouped.
• From the lows in household net worth in 2009Q1, 28% of the recession losses have been recouped.
• From the lows in wages & salaries in March 2009, 36% of the recession losses have been recouped.
• From the lows in housing starts in April 2009, 7% of the recession losses have been recouped.
• From the lows in home prices in April 2009, 13% of the recession losses have been recouped.
• From the lows in consumer sentiment in November 2008, 27% of the recession losses have been recouped.
• New and existing home sales are at all-time lows – they have never recovered.
To a significant degree, business and Joe Sixpack understand there has been little recovery but the question is where is the economy headed. Instead of a normal recovery, this has become the Great Disappointment.
This recovery is very unusual from prior recession. Using GDP as the metric, economic activity since the beginning of the recession is worse than any other recession since WW2.
The worst case until the Great Recession was the back-to-back recessions of the early 1980′s. As we now have an official Great Recession end date, we can plot the “recovery” of all post WW2 recessions.
Four quarters after the end of the recession, it is in league with the slow recoveries of the 1990 and 2001 recessions – even though the GDP contraction was much more severe in the Great Recession.
Econintesect is not a big fan of GDP as a measure of the economy for Joe Sixpack’s world. It uses monetary flows as an economic basis – and many flows in the 21st Century are not productive. This is confirmed when you compare private employment to GDP.
Somewhere around 2000, jobs disconnected from GDP. As the private sector’s world revolves around jobs – then employment is the real metric to judge the health of the main street economy.
For main street and Joe Sixpack, this was the worst recession since the Great Depression.
Econintersect has developed a forward looking economic indicator which 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 economic flows below retail level are hardly growing. In the last 30 days, the underlying strength of the economy has rapidly degraded.
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).
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.
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.
At this point, Econintersect is now concerned that the underlying flows are losing strength before regaining pre-recession peaks. Pumping almost $1 trillion of stimulus into the economy, and having the economy’s grow rate slow before reaching pre-recession levels raises concern that the stimulus may have masked the true recession end.
Here we are, literally days after the NBER called the end of the Great Recession – Econintersect is issuing an indicator showing the economy is again approaching a recession. The EEI is built on a two part index where taken independently – neither part is in recession territory but both parts are declining rapidly. Taken together, they are moving in a lockstep decline similar to the declines in 2001 and 2007.
The economy now is remarkably close to a second dip, 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.