The Great Recession Continues

There is no coincident data which is demonstrating this recession is over. Some may be at the bottom, others have a way to go. A summary of where we are......

2Q 2009 GDP Less Bad

There is a lot of significant points to be made with the advance 2Q 2009 Gross Domestic Product (GDP) data released on Friday. The headline is that the economy shrank a ‘less bad” 1% (annualized) but the story is much more complex.

Concurrent with the release of this 2Q 2009 GDP data, there was a major change to the National Income and Product Accounts (NIPA), the first since 2003, which incorporates changes in definitions, classifications, statistical methods, and source data.

Further, the reference year for price and quantity measures has changed from 2000 to 2005. The BEA will not release the full history immediately, providing data for 1995 forward in this week’s initial release with full history dating back to 1929 some time around mid-August.

The above table shows the effects of this baseline revision to the quarterly GDP numbers in our Great Recession. The bottom line is that our recession to date is now a little worse under the new criteria. I suspect that the BEA’s new criteria will end up showing a flat recovery in better light than the previous method.

A summary of what I took from the data:

• As consumers are the main driver of the economy, there was little good news looking at the trends. Consumers are spending at 2005 levels for goods, and the downward trend on spending remains at recession high levels. Consumer services spending remains flat. This is the most disturbing information that can be drawn from 2Q 2009 data.

• Private and consumer investment is still trending down but the rate of decline is significantly less bad. My take on this portion of the 2Q 2009 data is that we could be close to the bottom on investment simply because I cannot believe it could get much worse. Investment is at late 20th century levels.

• Falling inventories removed over 1% from GDP. On one hand, once inventories stop declining there will be bounce to GDP – but on the other hand, business will have lower profits because they will not be able to profit by selling down inventories. This much inventory reduction confirms business is expecting a new normal which will require less demand and inventory.

• Both imports and exports declined, with imports declining more. On a QoQ basis, this makes 2Q 2009 GDP look less bad by approximately 1.5% annualized. This makes the -1% 2Q 2009 GDP number look better than it really is as this will disappear when the economy bottoms.

• Government spending increased GDP QoQ by over 1% annualized. It is assumed this was caused by the stimulus starting to kick in. State and Local governments also showed an increase in spending which does not jibe with the states financial crisis.

click some images to enlarge

According to the Bank of Tokyo-Mitsubishi UFJ, the average contraction for post WWII recessions has been around -2.0 percent with an average length of 10 months. The U.S. economy has contracted by -3.7% to date and has now lasted for 18 months, the longest recession post-WWII.

Overall, except for the consumer goods data, the data is less bad and would indicate we are in the late stages of the Great Recession. The consumer goods data throws a wrench into optimistic recession ending scenarios.

3Q 2009 GDP should be supercharged with stimulus, and at this time there is no reason to believe it will not be positive based on the 2Q trends. But the fact remains that GDP is improving based on temporary economic effects – and the underlying economy will still be struggling.

Meanwhile, the economic headwinds will grow from the debt created for the government spending which made GDP turn positive.

Just more smoke and mirrors.

Unemployment Continues to Get Less Bad

The 4 week moving average of advance initial unemployment claims decreased to 559,000.

Initial unemployment claims are trending down, however the actual number of unemployed is significantly higher than the “Ins. Unemployment” numbers in the table above.

At this point in the Great Recession, the number of people receiving unemployment benefits is no longer a number which can be accurately analyzed using unemployment insurance data. The real unemployed number is much higher as many no longer receive unemployment insurance benefits.

The important data point now is how many jobs are being created. Employment statistics are conjured using polling methodology – and next week this number will be released for July. As the seasonal adjustments to employment / unemployment data seem so off target in the current environment, nothing would surprise me how this employment data will look.

Unfortunately, employment / unemployment numbers have been subject to changes in methodology making backwards comparisons problematic – and using polling itself raises issues whether there is actually representative sampling for each segment of society 10 years into a census cycle. This unemployment report should provide a relative look so that we can trend unemployment / employment – even if you do not accept the actual statistic.

Regardless, as far as recessions since 1990 are concerned, the unemployment rate is not a marker for end of recession.

Home Price Fall Paused

America has not had a national decline in home prices in the post WWII era and its relationship to the ending of this Great Recession can only be theorized. It is my belief that once home sales and prices stabilize, it should signal the bottom of the recession cycle as there is a direct link between consumer spending and consumer wealth. Consumer spending is the backbone of the economy.

The question is whether home prices have bottomed. The May 2009 Case-Shiller showed a one month price bottom. However, this data is from the strong spring / summer season, and will need it to hold into winter to confirm a bottom is occurring.

Without a large surge in sales volumes, housing prices will resume a downward progression. Depending on the degree of improvement in sales volumes, the decline can be slow enough to allow the recession to end.

The National Association of Realtors existing-home sales prices rose for the third consecutive month MoM in June 2009, while home prices and sales volumes were up for the second month. This index is useful when correlated to Case-Shiller – but it is the wolf's explanation of what is going on the hen house. This is the high season for home sales. The question is whether these volumes will hold going into fall and winter.

A portion of the quote of Lawrence Yun, NAR chief economist was interesting where he blamed new appraisal standards for weak home sales:

The increase in existing-home sales occurred in all major regions of the country. We expect a gradual uptrend in sales to continue due to tax credit incentives and historically high affordability conditions. Despite the rise in closed transactions, many Realtors® are reporting lost sales as a result of new appraisal standards that went into effect May 1 of this year.

Wealth is determined with existing home prices. New home prices and volumes effect economic expansion. The June 2009 new home sales data shows a statistically significant 11% gain MoM in volume, but a continuing less bad new home sales price reduction. However, because of the way the data is collected, this increase may or may not exist – and the US Census disclaims trends less than 4 months in duration – and June is the first month of sales volume increase.

The home data reviewed above has a time lag. A real time peek into real time data is mortgage applications. New mortgage applications remained relatively unchanged which brings into question any real volume changes in the housing market.

Having talked to realtors in different parts of the country, they indicate there is an increase in the number of all-cash buyers which could explain the discrepancy between NAR home sales volumes and mortgage application volume trends.

The four week moving average of mortgage loan application volume (which includes refinancing) increased 2% WoW, and decreased 16% compared with the same week one year earlier. The refinance share of mortgage activity increased slightly to 53% of applications. The average interest rate for 30-year fixed-rate mortgage increased 5 basis points to 5.36%.

Manufacturing Still Looking for the Bottom

Manufacturing has not yet found its bottom and still has a slight negative bias.

The most confused data came from the June 2009 durable goods report. Transport durables (specifically non-defense aircraft) dragged the data into negative territory.

But if transport was ignored, shipments are slightly trending down while new orders are slightly trending up. Both shipments and new orders must trend up for a few months to validate a bottom.

The portion of the Fed's Beige Book for July 2009 which addressed manufacturing continues to show less bad conditions. This is a summary of all twelve Federal Reserve districts, and usually is a fairly accurate (although subjective) indicator of what to expect when real data comes available.

Comments on the near-term outlook varied across Districts, but on the whole they appear consistent with a forecast of modest and uneven recovery in manufacturing output beginning during roughly the coming six to twelve months. New York, Philadelphia, and Atlanta indicated that manufacturers have a generally positive or improved near-term outlook.

The Chicago Fed's Midwest and US manufacturing index as less bad, and could be bottoming in June 2009.

Recessions Can End with Banks in Crisis

The Bank of Tokyo – Mitsubishi UFG graphed the conditions of bank lending and commercial and industrial (C&I) loans during the last one or two recessions. It destroys the belief that banks have to be in relatively good shape at the end of a recession.

The banking graphs above ignore consumer credit. The last two recessions did not end until consumer credit charge-offs peaked. Based on current news reports, credit card charge-offs have not peaked. Can this recession end without consumer credit charge-offs peaking?

Additional Economic Data This Week

The Conference Board's Consumer Confidence index fell in July 2009 for the second month – and both current and future expectations both continued to decline. Consumer confidence remains a litmus test of the success of the economic propaganda machine.

The Federal Reserve issued their July 2009 Beige Book which summarizes economic conditions in all 12 Federal Reserve districts. This is subjective information months ahead of actual data, and to date during this recession has been remarkably accurate. The scorecard for the economy in this report = 5 districts slow, subdued or weak; 1 contracting; 2 less bad; and 4 stabilizing. Overall, this document will leave you with a feeling of a slight negative trend, a bottom close at hand, and few areas for economic improvement for the remainder of the year.

Filing for Bankruptcy: Applied Solar (APSO.PK), Station Casinos (STN). Bank failures this week:

Economic Forecasts Published this Past Week

The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index which continues its gain on this indexes 5 year high.

Lakshman Achuthan, managing director at ECRI, provided the following statement:

The recession is already beginning to wane, and that increased stimulus from Washington is not necessary for economic growth. Not only is the U.S. recession set to end this summer, but the recovery is apt to be stronger than many expect. The weekly index rose in the latest week due to firmer housing activity

Summary Wrap

However I cut the data, the end of this recession will be sloppy and “recovery” will be so weak it will not be noticeable to the average citizen. ECRI and a few others believe the recovery will be stronger than anticipated but the data is continuing to whisper a different message.

I suspect the NBER will delay their end of recession call for fear of an economic relapse as the recovery will be so weak. While it is unlikely (bordering on impossible) that the NBER would end a recession while GDP is negative, GDP turning positive is not an end of recession marker either.

We entered this recession with the NBER using the peaks in employment and manufacturing data. Although the NBER is free to use any criteria, I would suggest they will keep with the same criteria (jobs and manufacturing) in calling the end of the recession. If this is true, this recession will not end in July 2009 as manufacturing still has a negative trend. We will get the July employment numbers this week but it is doubtful they can be positive.

There is no area of economic strength which can be identified to drive real economic expansion – unless government spending is considered an economic strength.

Disclosures: long MMFs, AAPL, AMZN, ORCL, EWZ, EWY, IWF, EWA, EWC, EWT, PIN, Physical Gold

Comments

[fran:]

when temps begin to be hired followed by three three successive quarters of-- increasing perm hires, increasing retail sales, increasing sales revenues by major S&P500s, reduced contribution to GPD by gov't spending--
then i'll begin to have positive views about recovery in the economy.

Aug 02 09:49 AM

[CitizenPat:]

Steven, as usual, a masterful piece of work. Thank you!

Aug 02 11:21 AM

[John Lounsbury:]

One more week and one more thanks, Steve.

I appreciated your discussion on housing. One imponderable is the foreclosure overhang (foreclosures not yet executed). Another is the bank backlog of foreclosures executed but not yet on the market. The future foreclosure pattern will be influenced by how unemployment goes, so a lot of the factors you are discussing are intertwined. This is a mess and quick calls on how it will play out may be ill advised. I had an article on TheStreet.com this week in which I pointed out metrics that would indicate prices were near a bottom and others that indicated another 10% down to go. All the factors regarding foreclosures, unemployment, etc I mentioned above will determine how this plays out. I'm working on the analysis of the problem but haven't got to a publication stage yet.

If I was forced to place a bet today, I would bet on your prediction that prices still have more to fall. I do not have enough confidence, though, to volunteer to put my money down.

Aug 02 12:59 PM

[John Lounsbury:]

Steve - - -

Let me add one other comment about the unemployment rate curves rising for recent recessions long after the end of the recession. The earlier recessions had unemployment peaking near the end of the recession. You did not mention it in this article (but you have previously) that the amount of labor intensive production has decreased and so GDP can increase in the absence of significant increase in employment. Thus, inertia in employment change can persist (ie, unemployment can keep rising), with increased government expenditures and decreased imports driving GDP more than labor intensive production.

Aug 02 02:14 PM

[Gary Griswold:]

Your analysis is missing an historical comparison of stock market performance vs these indicators in past recessions. Instead, your analysis seems to assume that the market will not recover until the indicators you have selected are returning positive numbers. I think you need to drop that assumption and investigate the relationship of this data to stock market performance with real data.

Aug 02 02:22 PM

[Mad Hedge F...:]

But for how long? My favorite coincident economic indicator, the “Boot Index,” is showing that we may be entering a very modest economic recovery. That is the price at which you can buy Asolo’s top line mountaineering boot at the REI member sales. I bought this hiker’s dream for $5 last March (click here to see report) , and yesterday the price had climbed back up to $27. Of course, this is not the full retail price it should be selling for of $280, with tax. Similarly, we should be equally cautious about Friday’s report of Q2 GPD growth of minus 1%, and the downward revision of Q1 from minus 5.5% to minus 6.4%. To say this is an improvement is like taking money out of one pocket and putting it in the other, then booking a profit on the transaction. The hard truth is that consumer spending, business investment, housing, and inventories are still in terrible shape. Consumers are broke and getting broker, a big problem when they account for 71% of GDP. Only massive federal government spending is supporting the economy, and what happens when that runs out? The next $2 trillion in stimulus is going to be a lot more expensive than the first. Sorry, but I remain a skeptic. I’d rather go hiking in the Sierras than put money in the market here.

Aug 02 03:49 PM

[Isnt_It_Jus...:]

WLI has a negative second derivative and a first derivative approaching zero (i.e. WLI looks like it wants to roll over). Does this qualify as a withering shoot (brown shoot)?

Aug 02 05:14 PM

[Steven Hansen:]

Gary Griswold
i have made no inference or comment on the market vs the economic indicators - nor implied in any way that the market should be going up or down.

i am an investor. i live on my investments. i personally believe the market is a traders market (i am engaged in trading - see my disclosures). and my economic wrap does not help me as a trader (yes, i have tried very hard to find correlations which work).

i could 'prove' any point you would like using historical market prices vs various economic indicators. IMO, the long term economic outlook should be considered mixed at best which should logically imply a bull economy.

does this correlate to a bull market? here again, history shows bull and bear markets appear independent of economic conditions.

look, every punter out there pushes the concept that the market starts rising six months before the end of a recession. this makes the march lows probably correct. as long as bernanke and company can keep the wheels on the cart this low should hold.

but this is as far as i am willing to use economic forecasts at this time for investing.

Aug 02 07:22 PM

[Steven Hansen:]

John Lounsbury,
thank you for pointing out (correctly) about how the migration of our economy from a manufacturing to service base economy most probably has altered the way unemployment rate curves behave relative to the end of recessions.

this is a very important point as it validates the argument that things are different - and using historical markers to pre-guess the future can lead you astray. i have never been a lover of history repeating or rhyming arguments. things end up a certain way and everyone twists the results so it fits into a nice box for future consumption.

the recent trend has been unemployment keeps rising after the end of a recession. there are a variety of reasons for this, but the biggest factor is that service type job loss seem to lag economic conditions. manufacturing jobs correlate to economic conditions.

Will this recent unemployment trend be true this time? obama and bernanke appear convinced that unemployment will keep growing into next year. we are already hearing about banking industry branch closings.

i am not convinced yet. i suspect unemployment levels will remain bad but not necessarily grow much. i base this on the feeling that i do believe the service industry did not overstaff - and we had a low employment recovery earlier this century. i think we are already lean and mean.

Aug 02 07:46 PM

[Steven Hansen:]

isn't it just money
ECRI uses change in direction of indictors to signal changes in business cycles. you are just viewing two of their indexes. changes in the rate of increase or decrease does not signal anything.

Aug 02 07:52 PM

[PainfullyAware:]

You Rock Steven !!! - Condensed, Concise and with more "Neutrality" than most.

Just some other info to ponder:

Case-Schiller and OFHEO (Office of Federal Housing Enterprise Oversight) are Weighted statistical "Housing" indexes that track "Relatively Different" Housing trends. (Areas Covered, Weighting, and Transactions Included)

Case-Schiller is biased to "Higher End" transactions while the OFHEO includes more rural and "Lower End". (OFEHO comes directly from Fannie And Freddy Data and is a "Finished Sale Index" where the Case Schiller is an "In Process" index)

Differences and Correlation Papers - (in case someone wants to peruse)

Summary Table From Report Below
www.fhfa.gov/webfiles/...

Jan 2008 Differences In Indexes
www.fhfa.gov/webfiles/...

Effect Of Distressed Sales On Index - CA Study
www.fhfa.gov/webfiles/...

Other Housing Index Information
www.fhfa.gov/Default.a...


As Always I Appreciate The Information "The Hand" Provides. - (reference to an old moniker of Steven Hansen)

Aug 03 02:29 PM