How to Tell a Real Economic Recovery 47 comments
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Right now many economists believe the US economy is poised for recovery. Even I believe the economy will recover by year’s end. But for the man in the street, things hardly look like a recovery right now. Harried by falling house prices, foreclosure and lost employment, the US consumer is over-indebted and has run out of gas. Ordinary Americans are probably more concerned about building a savings cushion and reducing credit card debt than buying the latest SUV or flat screen TV. Naturally, one should then ask, “what is this recovery that economists and market pundits keep talking about and when’s it going to happen?”
Mark Thoma does a good job of explaining it in his recent post “How Will We Know when the Economy Turns the Corner?” He points out three areas that need to recover: the banking system, business investment, and personal consumption. His conclusion: when these three areas can show sustainable growth without the helpful aid of government stimulus, we will be in a real recovery.
Therein lies the problem. The banking system is systemically weak because it is being propped up artificially by government. Commercial property is to 2009 what residential property was to 2007 and 2008. And the US consumer will be in balance sheet repair mode for years. Clearly, a real recovery is not coming anytime soon.
But a recovery is still likely to come. It will be a fake recovery, a technical recovery, a statistical recovery, a partial recovery, not a real recovery. And this has major implications for the economy and for your investments. Let me explain.
The fake recovery
Back in April, I wrote about the apparent desire of the Obama Administration to recapitalize the fragile US financial system by relying on a cyclical rebound and government largesse to increase bank profitability before another crisis came ashore. Team Obama seems to believe we have had a liquidity crisis in the financial sector, not a solvency crisis. In this view, aggressive policy action and time would heal most wounds.
And, indeed, here we are in August with the US economy looking much more robust. This quarter might even see positive growth in the economy. But, it is not a liquidity crisis we have been witnessing in the US; it is a solvency crisis. US financial institutions still have hundreds of billions of toxic assets on their balance sheets which have not been written down. Any recovery we experience would be a fake one, papering over weak balance sheets and overcapacity in the financial services sector. At the first sign of economic weakness, these problems would magically re-appear, doing untold additional damage to the economy.
The technical or statistical recovery
And signs of economic weakness are already on the horizon. The recent employment and consumption data have been poor – below expectations, causing equity markets to sell off globally. As I mentioned at the outset, ordinary Americans are still in a world of hurt. The economy is at a much lower ebb today than it was in, say, November 2007, the last month before recession took hold. Recovery will begin as a technical recovery only. For most people, the rest of 2009 and even 2010 will not feel like a recovery because people will still be losing jobs and homes and we will still be operating below that November 2007 level. The recovery becomes real to most people only when we reach and surpass the previous level of economic output we had before the downturn began.
The partial recovery
Likely, we will start a technical recovery in manufacturing as Monday’s Empire State index report suggests. This will move into the services sector later. That’s the output-oriented view. Looking at this from who’s doing the consuming, government spending is already expanding aggressively. Business Investment will probably be soon. Last will be personal consumption. So, there could be a long lag between between when output and production turn up and when income, employment, and retail sales do.
Van Hoisington and Lacy Hunt have coined the term partial recovery to describe this disparity. Their analysis reveals that from 1967 until 1999, there was a fairly uniform recovery in all five of those economic factors in all business cycles. However, in the 2000-2001 recessionary period, employment and income lagged substantially. The US only had a partial recovery for a year-and-a-half. This is very bad for stocks.
The S&P 500 bottomed before the economy in those other business cycles. However, at the beginning of this decade, because of the partial recovery, the S&P 500 bottomed 15 months after the recession had ended.
Translation: stock prices anticipate a complete, not a partial recovery. If employment and retail sales data continue to disappoint, shares will turn down and test new lows.
Major themes
- Look to the industrial sector as a leading indicator of recovery. Since manufacturing is clearly leading out of recession, one should expect this sector to be the canary in the coal mine telling us how robust the upturn is likely to be.
- Expect the banking sector to continue to benefit from government largesse. The only way we get recovery is if the financial sector recapitalizes by making a lot of money now when firms can borrow cheap funds due to low interest rates. No bank recovery equals no recovery.
- Sell retail stocks. Retail was at the forefront of the rally in 2009. These stocks have had an enormous run-up with bank stocks. Their stock prices reflect expectations of a V-shaped recovery that is not going to happen. But, unlike banks, they don’t have government policy padding their bottom lines. Consumption growth is likely to be weak. The only way that individual retailers can earn more money is by stealing share or cutting costs.
- Watch for signs of a partial recovery as a market sell signal. If we see the ISM Manufacturing Index is hitting 50, but retail sales remains disappointing and the employment market is still weak, you know we are going to have a partial recovery. That’s a big market (SPX) sell signal.
I expect the macro data to be the key to market direction in September and October. So, point 4 is the most important one. Data that reflects a unified recovery would be bullish even if it disappoints. Weak retail and employment data, on the other hand, means this rally is about to hit a brick wall.
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On Aug 18 01:07 PM ebworthen wrote:
> True in post WWII recessions.
>
> However, our current circumstance aligns only with 1930.
>
> Employment will be the leading indicator, and the market and corporate
> profits lagging indicator.
>
> There is enough of the population uenmployed, underemployed, over-leveraged,
> over-taxed, nickle and dimed to death from every corner, that the
> contraction of consumer spending will be the anchor that keeps the
> good ship lollipop from sailing back out to the Sea of Quarterly
> Profit and the Piracy of Banks and Government.
On Aug 18 02:19 PM chap08 wrote:
> On "viruses"
>
> In case this helps anyone, I don't have a (visible) problem. Possibly
> the reason is I set my browser to block pop ups (?)
I just wrote to Boaz Berkowitz at SA, and I suggest others do the same.
I use the standard Norton firewall. I just went thru the log and identified repeated intrusion attacks that the firewall had blocked. I have passed the details on to SA. Anyone out there with Norton firewall who has problems?
(I don't have any link to Norton)
This financial idiot thinks we are pretty much in an artificial economy, kept up by media hype, government cheerleaders, and a Goldman Sachs controlled Federal Reserve that is throwing money at anything that looks it's way to keep the economy stumbling along. We'll see how long they can do it. The manufacturing has been exported and cheap labor has been imported. The economy has been gutted. It's all cheap tinsel. Would someone please tell me how we can sell each othe Chinese products, shine each others shoes, and expect the economy to "come back". Just ramblings from a village idiot.
www.scribd.com/doc/182...
These Trojan Horse's are designed to trick you into thinking your computer is under Pearl Harbor sneak attack and death is near if you do not down load their software to stop the attack then it will hold your system hostage until you pay their fee for the fix to the problem they create. The first thing you need to do is close your SQ browser window fast. You can then open a new brouser window. I use Microsoft Windows Live OneCare. It kicks the Horse in the ass before it can do any damage. God help those who have no protection.
As David says call in the IT Calvery -e-mail Boaz Berkowitz at SA, boaz@seekingalpha.com .
1. Employment
2. Production
3. Personal income, and
4. Sales
Anything else is partial recovery. The current sugar high that the market and economy is on right now is only due to stimulus and suspension of M2M (lie and pretend). The fundamentals of the economy are broken it simply has to reset unfortunately to a lower level. Home ownership is still too very high at 69% has to come down to 62-63%. Just imagine the inventory and foreclosures that would occur. Consumer deleveraging - form 72% of GDP to 65% - about a Trillion off the GDP. All this will happen - it would be a painful and protracted transition.
And China - yes its latest bubble will pop too.
All those who are in the V camp await a rude surprise
I too fear a market W. But others do rationalize that we had our W in the Sept-Nov 08 tumble and Nov-Dec surge up and then the Jan-March 09 surge to new lows.
On Aug 18 08:07 AM Edward Harrison wrote:
> Chap, your rationale for the market bottoming late in 2002 misses
> the fact that the recession began in March and ended in November
> 2001. The recession had nothing to do with 9-11. Stocks were headed
> down before it. And they continued down well afterward. In fact,
> the upturn in shares coincided nicely with the upturn in employment.
>
Is it possible that the US economy could bounce along without a lot of vigor yet those companies (US included) with products to sell globally will remain in good shape?
Also agree that we will not see true economic recovery until the cooked books have boiled off, but I also think the recovery could be real for those US companies and employees that are competitive in the global environment. Unfortunately we have done a poor job creating these types of jobs in the nation as a whole, and that is the biggest challenge we face for the next twenty years (assuming we start doing a better job now).
I also noticed there was an option to show my user password, when I log in, as a clear text password.
I'd highly recommend Seeking Alpha to do a security audit on their code to look for potential holes. I have stayed away from this site more than normal because of the security risk.
On Aug 18 04:08 PM David Van Knapp wrote:
> I have the same problem. A new variation occurred about an hour ago.
> Instead of the forced bogus virus scans, new browser windows kept
> opening--it got up to 82 before I was able to pull the plug.
>
> I just wrote to Boaz Berkowitz at SA, and I suggest others do the
> same. His e-mail address is boaz@seekingalpha.com .
how to tell when a recession really ends? that is easy, state sales tax
InitiaI claims and housing starts look good. Leading home price index is up for last 5 months.
Retail sales are stabilized and inventory channels are clear - meaning that any shift in demand will translate directly into activity. Back to school will proaby surprise to the upside.
Manufacturing activity is increasing
Prices are not moving. Low inflation is a good thing.
Lending is slow - that's bad but understandable given the banking sector. The yield curve and chep money will help them heal. It's happening now. Libor spread is low and back to "normal" this is important.
ECRI leading indexes are rising. Look it up. It has a 70% chance it points to recovery - 6 months out. It turned up - well you can look at it. The latest figure is 123.
Here is the data
09-Jan-09 109.02
16-Jan-09 108.05
23-Jan-09 107.79
30-Jan-09 107.23
06-Feb-09 106.69
13-Feb-09 107.48
20-Feb-09 105.94
27-Feb-09 105.39
06-Mar-09 105.04
13-Mar-09 105.55
20-Mar-09 105.96
27-Mar-09 106.33
03-Apr-09 107.47
10-Apr-09 107.33
17-Apr-09 107.47
24-Apr-09 108.09
01-May-09 109.8
08-May-09 111.3
15-May-09 111.51
22-May-09 112.57
29-May-09 114.33
05-Jun-09 116.32
12-Jun-09 117.27
19-Jun-09 117.93
26-Jun-09 117.95
03-Jul-09 119.02
10-Jul-09 118.09
17-Jul-09 118.29
24-Jul-09 119.55
31-Jul-09 121.77
All of this screams recovery is here. You can ignore the data. That is your right.
That's all.
One thing I disagree with is business investment. I think the corporate world sees this as most of the bears do. A fake recovery. They will continue to cut costs in the attempt to beat Wall Streets low ball estimates and pocket any uptick in revenues that they get out of this temporal statistical recovery. Add in the fact that banks are still tightly lending and only the big companies will be able to get funds, and even if they get them, I suspect they will use them for M&A rather than internal growth, picking up the dying mid and small caps (and then laying off more people on the backs of those M&As).
It's like when you plant grass seeds and fertilize liberally on bad soil. Sure you get a lot of healthy green shoots early on, but once the fertilizer runs out, those green shoots turn brown pretty quickly.
Good Luck all
In 1934 employment started going back up.
The stock market fell along with employment.
My point being, the stock market doesn't hire people. It can go up on speculation, but people without jobs don't pay bills and buy stuff, and will pull it down sooner or later.
On Aug 18 02:58 PM chap08 wrote:
> But employment wasn't a leading indicator in the 30s either. It never
> is and never can be, because employers do not recruit people unless
> they can see work for them to do.