Distilling the Economic Data: No Recovery News 17 comments
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Taking a measure of the economy is a matter of reviewing employment, consumer spending and manufacturing – and throw in a few financial measures for spice (such as liquidity and interest rates).
All means of measuring the economy are imperfect to varying degrees. GDP fails to account fully for financial transactions. Employment / unemployment cannot capture data (and must estimate) large segments. Timely issued retail sales only captures the big boys. Manufacturing is a shrinking portion of the economy.
We have a two to three month time lag to be able to analyze good quality quantitative data from enough difference sources and economic groups to be able to paint a reasonably good picture. If a trend seems to appear, we need to wait many more months to confirm the trend.
A simple timely quantitative sensor of economic activity is shipping. All goods must be shipped several times until it reaches your home or business. Shipping is the nearly perfect pulse point for the economy. There is some obvious holes in the data but it contains a good representative sampling. The graphs below are the most recent data for trucking, rail and sea freight. It is fairly obvious that truck and rail counts are down and remain depressed.
Sea container counts take a little more analysis as this is the fastest growing segment of shipping – growing over 10% per year between 2000 and 2007 before the world economy hit the fan. Sea containers have replaced a significant portion of break-bulk shipping, and is how high value manufactured goods are shipped (which is what makes it a good pulse point).
Also, sea container volumes are cyclic with low points in 1Q and high points in mid-year. Sea containers measure import and export levels. May 2009 counts show a moderate increase, however they are down YoY. Taken in conjunction with rail and truck – shipping is still trending down.
Using shipping as an economic pulse point, this recession ain't over.
Remember the liquidity crisis last year? Looking at the Fed data, the Fed's balance sheet attributable to resolving the liquidity crisis is declining at a nice clip.
Liquidity is slowly becoming a non-issue based on non-audited Federal Reserve data. Liquidity is an important issue for leading economic indexes, and one major reason why leading indexes are pointed up.
But the intervention by both the Fed and the government is unprecedented in this Great Recession. Normal economic forces which act naturally to correct imbalances have been manipulated to unprecedented levels. Will improved liquidity turn out to be an ingredient in ending this Great Recession when many economic imbalances have been manipulated or simply papered over?
A large factor in a consumer driven economy is the residential mortgage volume in the housing market. Every week I report mortgages – both new and refinances. This is the pulse point for the housing market as it forewarns the volume of home sales (both new and existing).
Real recovery is impossible while home values keep declining as Joe feels his net worth disappearing and controls spending. Over this 2Q2009, the amount of mortgage applications have fallen. Without volume, this translates to declining demand and in turn lower prices.
Using residential mortgage originations as an economic pulse point, the consumer ain't coming back in June 2009.
The timely quantitative economic factors that can be analyzed are not pointing to an end of a recession in 2Q2009. Except for equities, there is no bull factor in the economic data. Most believe a recovery will be weak. I worry that the rising twin economy killers of interest rates and commodity prices that will constrain economic improvement, or may send us on another downward ride.
We continue to live in interesting times.
Additional Economic Events from This Past Week
The US current account deficit fell in 1Q2009 to 1999 levels. According to Bank of Tokyo – Mitsubishi UFJ:
The extreme flight to dollar safety and the reversal in petrol prices played a large role in bringing marked improvement to the current account deficit in Q4 2008 and Q1 2009. Overall improvement in 2008 was driven by strong export growth, faltering import growth, as well as net foreign purchases of U.S. Treasuries.
The consumer price index (CPI-U) for May 2009 was basically unchanged. There were a lot of small changes, but this index would have fallen in May if not for the transportation portion which increased almost 10% on an annual basis (cost of vehicles and gasoline). The CPI-U has declined 1.3% YoY, but if food and energy is removed the index would have increased almost 2% YoY. There is some discussion about the YoY number decline being the worst since 1950 - but with the energy prices currently increasing, there does not seem to be any long term downward trend.
Two ABC News consumer polls (here and here) reveal consumers are still not buying into the spin. What is not shown on the graphs below is the future expectations of consumers which have degraded somewhat, but are still well above the polls historical average.
My take on this is that when you are deeper in the hole than you have ever been during your lifetime – the future has to be better.
Industrial Production dropped 1.1% MoM in May 2009. To put this in perspective to past recessions, we have to go back to 1975 to find a similar monthly drop - even though this is not even close to the worst month of this Great Recession.
As this is objective data, we can correlate this against the subjective ISM surveys (indexes rising) and the Biege Book (things are getting less bad). It appears the ISM survey is inaccurate (a nice way of saying it is a fairy tale). Unless you are a serious Kool-Aid drinker, this Great Recession will definitely not end in the 2Q 2009 based on industrial production.
Energy components forced slight inflation into the Producer Price Index for May 2009. Overall, except for energy, these indexes are still acting abnormally with a slight deflationary bias. For me, this index is demonstrating that systemic issues have yet to work their way out of the supply chain.
The June 2009 Empire State Manufacturing Survey was down moderately for the second month in a row. Looking through the diffusion indexes of the categories which make up the current business conditions, I could not identify any trend (up or down) which is indicative that the respondents are believing they are close to the bottom .
I have added the results of one of the special questions on capital spending which continues to confirm low investments which will put American manufacturing at a disadvantage in the future.
The subjective June 2009 Philadelphia Fed Manufacturing survey is analytical bullshit. I have provided the graphical results of their survey which screams the headline “we have bottomed”. However, the backup is whispering we are in a recession – falling order backlog and falling workweeks.
Mortgage applications continue to fall. The four week moving average of mortgage loan application volume decreased 13.5% (after dropping the same amount last week) and essentially unchanged compared with the same week one year earlier. The refinance share of mortgage activity decreased to 54% of applications. The average interest rate for 30-year fixed-rate mortgages decreased slightly this week to 5.50%.
The sentiment survey for home builders declined slightly in June 2009. Take most sentiment surveys (including this one) with a grain of salt. NAHB Chief Economist David Crowe gave a profound observation:
As expected, the housing market continues to bump along trying to find a bottom. Meanwhile, builders are taking their cue from consumers, who remain uncertain about the economy and their own situation. Builders are also finding it difficult to complete a sale because customers cannot sell their existing homes.
A few punters got excited about the May 2009 new residential construction data as the headline read housing starts increased 17.2% MoM. Take a look at the table below and view the bogus housing start number in April 2009 – May 2009 simply evened out the housing starts. Overall, the only conclusion I draw from new residential construction is that it appears to be in the process of bottoming.
The 4 week moving average of initial unemployment claims improved slightly to 615,750. Some punters have pointed to an good sized decrease in continuing unemployment insurance claims as a good sign, but fail to indicate that the 4 week average actually increased (as well as considering that unemployed are dropping off the end of the unemployment insurance eligibility without getting a job).
Overall initial unemployment claims is continuing to trend down.
Filing for Bankruptcy: Six Flags, Inc. (SIX) , Extended Stay (ESA), Building Materials Holding (BMHC), SendTec (SNDN), Eddie Bauer Holdings (EBHI), MEC Pennsylvania Racing Services (MECAQ.PK), Metromedia International Group (MTRM.PK).
Bank failures this week: First National Bank of Anthony - Anthony, KS; Cooperative Bank - Wilmington, NC; Southern Community Bank - Fayetteville, GA.
Economic Forecasts Published This Past Week
The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said:
With WLI growth rocketing up almost 30 percentage points in six months, it's virtually pounding the table about the recession ending this summer.
The Conference Board Coincident Economic Index™ (CEI) for the U.S. declined 0.2% in May 2009, following a 0.3% decline in April, and a 0.7% drop in March. The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.2 percent in May, following a 1.1% increase in April, and a 0.3% decline in March. The comment by Ken Goldstein, Economist at The Conference Board:
The leading economic index increased for the second consecutive month. The coincident economic index is still declining, but the declines are less intense. The recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing. If these trends continue, expect a slow recovery beginning before the end of the year. However, employment will take longer to turn around.
Disclosure: long MMFs, PYEMX, EWZ, TBT, PGJ, EWY, DBC, EWA, EWC, EWT, PIN, Physical Gold
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This article has 17 comments:
Your data is self explananatory and suggests that both mainstream media and the markets are too far ahead of the curve..........and too far ahead of the actual recovery. Before addressing this last point, let me share some material from Dennis Gartman by way of John Mauldin.
Dennis also looked at rail shipments: "Since the start of this year this year, when the year-on year comparison was a relatively tepid -8%, the trend has been steadily 'from the upper left to the lower right' on the charts. By March, the year-on-year comparisons were averaging -15%. By April, -22%; by May -25%; and now, after a week or two of June, they are -26%. This is not a trend to be tampered with; this is a trend of some very real severity, and for now we fear that it is a trend rather firmly intact. Thankfully, it looks back, not forward; but if the past is prologue to the future, the future still looks rather bleak.
"Finally, there is a glimmering of hope on the rail horizon, and that is that the June figures, as they are compiled, are showing some signs of life. According to the AAR, 'freight traffic on US railroads during the week ended June 13 continued to show signs of gradual improvement ... [as] rail car loadings and intermodal were up from the previous week with carloads at their highest level in 10 weeks.'"
I am happy to cede that things are getting less worse but would point out that this deceleration in deterioration does not say we have hit bottom or says very little about the recovery. Getting to the bottom is one issue; recovering and moving away from the bottom is another.
This allows me return to the point that we .......the markets and mainstream media........are getting too far ahead of ourselves. We know the market is a forward looking discounting mechanism but I believe what the market presently "sees" is something robust and V shaped; what I believe the future will deliver will be less robust and almost anemic.........the new normal.
Many developments will contribute to the new normal but, in the main, it will resuslt from a macroeconomic reset in which the consumer increases savings from virtually zero to 9% to 10% and reduces consumption. This will put a brake on the economy as will reductions in capex spending by firms that serve the consumer who will see excess capacity until population growth offsets contactions in spending patterns.
I think unemployment will remain a problem until this correction has run its course; I am somewhat fearful of additional fiscal efforts to circumvent this necessary, painful adjustment.
From all of the detailed analysis, one relatively banal statement stands out: "Real recovery is impossible while home values keep declining as Joe feels his net worth disappearing and controls spending."
Not only is this true, it actually goes to the heart of the problem: many Americans (and this applies in other English-speaking countries as well) cannot sustain their current lifestyles in the absence of a debt-fuelled asset bubble. It has been far more profitable for corporate America to run an economic model based on debt and bubbles rather than on rising real wages and meaningful saving.
The model is utterly shot. Regretably, an elite focused entirely on the election cycle or the next financial quarter/year-end bonus is intent on papering over the structural cracks rather than on fixing them.
Your review articles are my favorite week-end read and your comment stream is always well informed.
I am seeing a clear pattern of the recession settling into a bottom. As Cautiousinvestor points out, the green shoots crowd may be ahead of itself, looking for the "V" while the real outcome may go to "L". (Pardon the homophonic pun.)
I was interested by the New Residential Construction numbers for May and their big jump over April, the stuff of green shoots and wishful thinking. If one were to add up any two consecutive monthly new starts figures going back to last Fall, thereby smoothing the numbers somewhat for weather and other external factors, one would see that the April/May numbers were virtually unchanged from the March/April numbers, which were themselves abysmally low... and this coming into the peak residential home buying season. That's progress, that's a bottoming? Maybe if we were in the dead of winter those would be good numbers.
New residential mortgage originations for Q2 (nearly completed)? Abysmal.
Industrial Production? Abysmal, and look at the rapidly widening spread between capacity and production, the largest gap since at least the 1960's, and the 17% fall in production since 2007 is now the worst since the G.D. and wind-down of WW2 production as the War neared its end. Utilization? Draw some trend lines -Collapsing.
With a middle class that is absolutely shell-shocked and on life support due to the collapse of their real estate, credit access and retirement assets, and suffering a high proportion of the ongoing job losses that are still at near record levels (quibble all you want about a few K here and there when we're looking at numbers in the hundreds of thousands) how one can see a quick return to "normalcy" is beyond me.
This is a multi-generational catastrophe the likes of which very few of us now alive have ever experienced. How we can make assumptions about recovery timelines when many of the metrics are still dropping, some rapidly, is just beyond rationalization in my opinion.
I think the most important difference is that it is a recession driven by a global financial crisis. Rogoff & ????? (can't remember the other guy's name--need another cup o' joe!) performed an excellent service in analyzing all recessions for several hundred years, and pointing out the difference between most recession and those driven by financial crises. Bottom line: They are longer, more severe, and recovery is much slower.
Second, I believe the United States in particular is a significantly different country economically, demographically, and socially than it has been in any other recession (or the Great Depression). I believe we are economically far weaker nationally (deficit, debt, BOP, currency--but still #1 here) and as households (lost jobs, lost wealth, greater debt, much smaller middle class) than in the past. Our demographic is shifting older with the consequent impacts on retirement living, retirement expectations (which I have been high until 2008), tax burden of the working. And, finally, it strikes me that today, compared with the Great Depression, we have a substantially larger proportion of whiners who expect someone else (usually the government) to make things right. The contrast with my parents' and their parents' generation couldn't be more stark.
Third, despite what Dr. Bernanke, Romer, et al., may have learned from their studies of the Great Depression, our economic policy initiatives so far--while relatively huge--have been far too timid to substantially diminish the length or severity of the ongoing recession. They have been based on politically-driven view of our economic condition and prospects (see the White House & Treasury estimates of prospective unemployment that underlies the stimulus and TARP assessments, for example; conditions now are worse than either of those assessments worst case projections). They have largely favored Wall Street over Main Street; the total commitments of $12 trillion run 7:1 in favor of bailing out Wall Street rather than rescuing homeowners, workers, and small businesses.
Finally, and pulling the other points together, while I accept Mark Twain's perspective that although history does not repeat itself, it frequently rhymes, I'm not sure this recession is in the same rhythm, much less the same rhyme, as previous recessions. No simple iambic pentameter here, I think we are off on some new alternative poetic direction. And we won't begin to know the outcome of the poem for months or maybe years.
Under these conditions, it is extremely unlikely we will see a sustained upturn in the economy until at least mid-2010. (Note: I have said elsewhere that the economy may turn up momentarily in 4Q on stimulus and holiday spending, but will revert to negativity thereafter.)
Are inventories climbing that rapidly? Are empty containers being offloaded? Is there a new magical good distribution network I'm not aware of?
But with unemployment is continuing to grow, credit continues to plummet, home prices continue to plunge - where is the recovery - what is the trigger for it. Consumer the biggest part of the economy continues to suffer and deleverage and save - he will not save this economy - he is desperately trying to save himself. BRICs, China and the rest - this has been way overplayed - all the BRICs combined are less than half of US economy. As long as US, Japan, Germany - the biggest economies continue to shrink - you cannot have sustainable growth. China etc are all too dependent on exports - their internal consumption growth not only is small and slow – it cannot in any way offset the loss of exports.
Stock market and commodity price jumps are giving the wrong signals, of course Wall Street is always wrong.
L is a best case scenario, worse outcomes are possible - a total lost decade – I think that is where we are headed.
But with unemployment is continuing to grow, credit continues to plummet, home prices continue to plunge - where is the recovery - what is the trigger for it. Consumer the biggest part of the economy continues to suffer and deleverage and save - he will not save this economy - he is desperately trying to save himself. BRICs, China and the rest - this has been way overplayed - all the BRICs combined are less than half of US economy. As long as US, Japan, Germany - the biggest economies continue to shrink - you cannot have sustainable growth. China etc are all too dependent on exports - their internal consumption growth not only is small and slow – it cannot in any way offset the loss of exports.
Stock market and commodity price jumps are giving the wrong signals, of course Wall Street is always wrong.
L is a best case scenario, worse outcomes are possible - a total lost decade – I think that is where we are headed.
the leading indicators use stock market prices. sort of a self fulfilling indicator.
the purpose of analyzing coincident indicators is to validate the curves of the leading indicators. we are at the doorway where coincident indicators should be turning up based on the leading indicators.
Good point and exactly correct on the self fulfilling indicator comment. And given the "unusual behavior" ie. the frequent late day stock market spikes that have heavily supported the stock market uptrend, it is entirely possible, nay probable, that the stock market would have shown some significant downward correction by now. Which in turn would also undermine the leading indicators as well.
On Jun 21 01:39 PM Steven Hansen wrote:
> Alphameister,
> the leading indicators use stock market prices. sort of a self fulfilling
> indicator.
>
> the purpose of analyzing coincident indicators is to validate the
> curves of the leading indicators. we are at the doorway where coincident
> indicators should be turning up based on the leading indicators.
Excellent Article!
With the real underlying indicators, once data mined, showing major sluggishness 18 months into a recession, the summation or the indicators may be pointing to the simultaneous deployment of QE and Keynesian Deficit Government spending in a current environment of high government debt is not the prescription for recovery. One must remember that both QE and Keynesian Deficit Government Spending were theories developed in low to zero existing Government Debt.
Simultaneously deploying QE and Keynesian Deficit Government Spending has only been attempted in a modern advanced economy once: Japan 2001- 2006. That experiment was in a current environment of moderate to high existing government debt. Japan remains in a 20 year long recession.
QE and Keynesian Stimulus are devoid of incentives for Private Capital Formation. Incentives leading to accelerated Private Capital Formation leads to private sector employment. The failure to address Private Capital Formation is a major error.
However, there is also a fundamental supply demand relationship between asset prices, especially equity prices. There is still a tremendous wall of cash on the side lines which needs to be deployed. Maybe the current market level is the normal in asset prices, san leverage. Maybe the March lows were just a mispricing and this new level in the markets are the levels where we are going to hold as the economy bumps along at the bottom. Bottoms up analysis in vogue again?