How 'Technical' Is Our Recovery - With No Jobs or Consumer Spending?

Fed Chairman Ben Bernanke Saying the recession was probably "technically over" this week has put my imagination into overdrive.

I am keying off of the word “technical”.

In this sense, we are probably in a “technical” recovery.

I had this in mind when I looked at new residential construction stats for August 2009 issued this week.

If you compare the ratios between the construction permits issued column to housing completions column, you get the feeling that things are still getting worse (if the industry is improving there will be more permits than housing starts or housing completions).

But, technically, if you simply stay within a column, we are trending up on the number of permits being issued and housing construction starts.

And, technically, the initial rate of unemployment is getting better with 8,750 people less people being made redundant in the 4 week moving average for unemployment insurance claims. Just do not think about the growing number of people who are unable to find a job..

However, not-just-technically, there was a real green shoot among the technical ones – industrial production.

Our big industrial production report which is used by the NBER to call the end of a recession has posted a second month of gains in August 2009. Statistically, we need three months of data to confirm a trend.

The gain in August was widespread across all industrial groups – and the results are not heavily influenced by cash-for-clunkers. The 0.8% gain in August is based on preliminary quantitative data as this side bar graph indicates.

Industrial Production is only 10% of the business portion of the economy, but yet has a high correlation to GDP. The following graphs demonstrate this correlation.

Technically, despite the green shoots, the recovery lacks certain structural factors necessary which would make it “normal”.

The first factor is jobs

Most economists believe that economic growth creates employment growth – because it has always been true. Remember things are true until they are no longer true. This has not been true since 2000.

This negative pressure just due to jobs should create negative economic pressure - but how much? Going back to the last recession employment levels had no noticeable effect on recovery.

If we carry the argument to its illogical conclusion, we could have no employment and a rising GDP. This we know is not true. So there is some point where the lack of employment will start to drag on GDP.

We could be at this point today as employment levels are currently lower than January 2000. America has literally lost a decade of jobs growth. The graph below (hat tip to Barry Ritholtz) shows the 120 month moving average of job growth.

In the olden days, we called a decade with negative employment growth a depression. Consider that our population grew almost 9% this decade.

Most people think employment only as an economic issue. We are proving every day that we can grow GDP without creating jobs – we have done it since 2000. The costs of unemployment is adding to the debt – and because the way GDP cherry-picks spending – this is a hidden cost. I doubt we really had economic growth this decade.

There is also a social impact by not creating jobs. It effects the less educated more than the educated, the poor more than the rich. It widens the wealth divide. It nurtures crime. It creates a class of Americans who live without producing. It fosters excessive socialism.

This technical recovery’s final factor is the consumer. We know that every robust recovery was driven by the consumer, but there is yet to be a single economist ready to claim that the consumer will return. Other than the historical pattern, there is no evidence or basis to expect the consumer to return to past spending patterns.

I wrote on this subject last week. I believe there is no short term reason for the consumer to ramp up expenditures. This is what will make the recovery technical. However, there is a very real effort being made to restore wealth by the Fed and government actions – and the medium/long term effects of these actions warrant constant consideration.

There is a correlation between wealth and expenditures. The short term task is to make Americans feel wealthy. 2Q2009 data is beginning to show the Fed and the government are making headway.

These two factors – employment and spending – will make this recovery technical. The negative effects from each factor reinforce each other creating an economic headwind larger than the sum of each factor.

Therefore, we are in for a technical recovery in the near term.

Manufacturing and Business

The Philly Fed’s September 2009 Business outlook survey stated that business conditions in their region are no longer deteriorating. Order backlog and inventories continue to decline, and layoffs will continue in this region.

This is the first month I have seen shipments improve which is validating the increase in new orders. It is the increase in shipments and new orders which demonstrates that conditions are improving – but it is improvement from a position in a very deep hole.

There was a large jump in the New York Fed’s September 2009 index for manufacturing activity in their area into positive territory indicating growth. Looking into the backup (which is particularly difficult), the majority of businesses are reporting business activity is declining or static. What is most disturbing is the unfilled orders which are what will drive our “recovery” remains very negative, and the overall trend on unfilled orders shows an almost imperceptible improvement over the last 5 months.

These data are not indicating the recession is over.

The same conclusion can be drawn from the July 2009 business sales and inventory numbers. Although the government in their press release claimed sales were up 0.1% MoM, the reality was they need smoke and mirrors (and cash-for-clunkers) to get the data to say this.

Using the seasonally adjusted data, the increase came from merchant wholesalers (how bad would the data have been without cash-for-clunkers?), even though the non-seasonally adjusted data shows a decline. My warning remains that you cannot trust seasonally adjusted data during economic turning points.

The Producers Price Index for August 2009 showed a 1.7% price increase MoM for finished goods. I always sit back and try to understand what changes in this index mean for the economy. Literally all changes in this index came from an increase in the price of oil. My conclusion this month is that the PPI data this month is an economic non- event.

As expected, the advance August 2009 data for retail sales shows that cash-for-clunkers helped push up MoM sales by 2.7%. Excluding autos, there was a very small increase which statistically is less than the range of error. In common English, this means retail sales are unchanged from the previous month if we ignore the increase caused by cash-for-clunkers.

Additional Economic Data This Week

Correct interpretation of the Consumer Price Index (CPI) is impossible except when it trends strongly up or down. No one is that imaginary person who spends their money in the same manner that the government envisions. Each of us who review the detail, mentally adjust it to our world.

For August 2009 the headline CPI-U rose 0.4% MoM, but is down 1.5% YoY. Core inflation, according to this report is still ever-so-slightly trending down. The reason for the increase this month was oil (energy).

I have decided if you are receiving government benefits – you want it to rise as it increases what you receive. Conversely, if you are working, you want it to fall as many taxes fluctuate based on CPI changes.

As everyone has a different spending pattern, this report is always wrong.

The rate of new mortgage applications decreased 11% this past week and is at the lowest level since April 2009. As this data is adjusted for the holiday, I would withhold judgment that this decline actually occurred until the release of mortgage application data next week.

The four week moving average of mortgage loan application volume (which includes refinancing) increased 3% WoW, and increased almost 18% compared with the same week one year earlier. The average interest rate for 30-year fixed-rate mortgage increased 6 basis points to 5.08%. As treasury rates are rising, I would expect a further increase next week.

Filing for Bankruptcy: Barzel Industries (TPUT) Triple Crown Media (TCMI)

Bank failures this week:

Economic Forecasts Published this Past Week

The Economic Cycle Research Institute (ECRI) released its Weekly Leading Index which gained slightly on its all-time high. Lakshman Achuthan, Managing Director at ECRI added:

Such a rise in ECRI's WLI growth to a record high confirms that in the coming months, the economic recovery will surprise a cautious consensus.

Disclosures: Long MMF's, GLD, IOO, EWZ, EWY, EWA, EWC, PIN, Physical Gold - as well as numerous calls which comprise less than 1% of my portfolio

Hat tip to Steve at MEMETICS & MARKETING for editing support.

Comments

[Dave Wrixon:]

Technically, it isn't a recovery at all, it is just reflation of a deflating bubble. Ultimately, nothing is being resolved. In fact many of the underlying problems are simply being exacerbated. The problem is that the US doesn't have the political cohesion required to address the real issues.

Sep 20 05:56 PM

[John Lounsbury:]

Steve - - -

The rising GDP 2003-2006 occurred at a time when the fraction of the S&P 500 earnings attributed to the financial sector rose from somewhere around 20% to somewhere around 40%. Could that have contributed significantly to the GDP rise in those years? I ask you because I recognize that you are more of an expert on the structure of GDP than I am.

If that is a significant contributor to the rise in GDP, it would have occurred with no improvement in employment. The compensation of finance folks can go through the roof while the number of people employed is unaffected (at least directly). The result would be GDP growth profiting a few and leaving the many still out of work.

Sep 20 06:18 PM

[TinyTim:]

Thanks for the thought provoking article on our recoveryless recovery.

Two points:
"Remember things are true until they are no longer true."
I wasn't sure if this was rhetorical, but I've always believed the opposite.

Definition 6 of technical relates to technical versus fundamental, as in chart analysis.
IMHO, I thought definition 3 was more relevant:
"based on a strict interpretation"

In this case, Bernanke gets to formulate the "strict interpretation" of what constitutes a recovery or end of recession.
In the past, it was based exclusively on GDP changes. Now, things are so "irregular", Ben gets to guess and make his own rules.

The intangible part of Ben's job is the jawboning that goes along with the perceptions or mentality of the markets. His strict interpretations must be a tremendous aid with this.

Sep 20 07:08 PM

[Steven Hansen:]

John,
Because of the quirks of GDP, it is a measure of spending - not earnings. What gets into GDP is the portion spent so we should leave the general answer as no - the S&P earnings were not the cause.

We should also remember between 2003 and 2006, employment returned to its normal growth cycle of over 1% - then of course falling back off in 2007.

Using employment as a metric, we surely had a growth cycle.

As we both know, there was a depression literally for the entire 2000's (your article today). The issue is finding the metric which proves this point.

GDP is such a bastard - it has no logic for our current economy. It surely made sense up to 1970 until we started migrating from an industrial base. Now, too much of our economy is the types of things (like the S&P earnings) you are talking about.

Sep 20 07:46 PM

[Steven Hansen:]

TinyTim - I like your definition of technical too.

Sep 20 07:49 PM

[John Lounsbury:]

TinyTim - - -

You said:

"Remember things are true until they are no longer true."
I wasn't sure if this was rhetorical, but I've always believed the opposite.

I always thought this was something like Yogi Berra's: "When you come to a fork in the road, take it."

Sep 20 07:53 PM

[Denis Gould:]

"In the olden days, we called a decade with negative employment growth a depression". The mood does seem to be changing from a focus on GDP growth as the key barometer of economic success to a focus on jobs. We have rather sneered at Japanese (over) employment practices in the past but maybe we are now at a point when government and corporations need to put employment creation as a key target

Sep 20 09:07 PM

[bricki:]

I think that the metric that defines the idea of the depression of the 2000's is the increase in debt that occurred during that period, and is continuing. Public and private it represents the hollowing out of the economic strength of our society.

Sep 20 09:16 PM

[Steven Hansen:]

Bricki...
you are correct about debt also. however, the excessive public debt growth has only been in the last two years (the 2000 to 2007 debt growth happened before under Reagan and we recovered from that). However, now we have entered uncharted territory with public debt.

private debt has moderated since 2006, and although it remains at historically high levels - it is trending down. if this continues, it reinforces the consumer spending headwinds which i believe is good thing long term for our economy.

Sep 20 10:04 PM

[Dave Wrixon:]

Public debt did but Private Debt was already at very high levels and it was Private Debt rather than Public Debt that caused the system to break. Public Debt whilst unsustainable did tend to help mask the problem for a while. The over-riding problem was the ridiculously easy availability of money, which will never again be available to you. You were showered with foreign investment at low interest rates whilst printing huge amounts of money without weakening the dollar. The whole situation was totally paradoxical. It was a Ponzi scheme. But Ponzi schemes don't tend to work very well once the truth is out. The Federal bubble is now subsiding because dollar value is falling faster than they can expand the money supply. The consumer either cannot or is unwilling to borrow more, and is indeed being forced to pay down his debts. Soon Uncle Sam faced with much higher interest rates will be forced to cut benefits and hike taxes, whilst slashing defense spending. Anyone who thinks this recession is over is subject to the same GDP mirage as you are describing.


On Sep 20 10:04 PM Steven Hansen wrote:

> Bricki...
> you are correct about debt also. however, the excessive public debt
> growth has only been in the last two years (the 2000 to 2007 debt
> growth happened before under Reagan and we recovered from that).
> However, now we have entered uncharted territory with public debt.
>
>
> private debt has moderated since 2006, and although it remains at
> historically high levels - it is trending down. if this continues,
> it reinforces the consumer spending headwinds which i believe is
> good thing long term for our economy.

Sep 21 01:08 AM

[Steven Hansen:]

Dave, consumer debt ratio is the same and business debt ratio. What is being left out of the discussion is what percentage of consumer debt was being used for investments (like rental income as mortgages comprise most of consumer debt). as the revolving and non-revolving lines of credit have dropped appreciatively, it is not clear to me how much debt played in getting us into this crisis.

once the crisis began, the levels of debt of course worked as the fuel for the meltdown.

If you are implying that the ease of obtaining the debt helped make the bubbles larger, this too I would have to agree with.

Sep 21 09:40 AM

[Solar child:]

The "ethics" or lack thereof of our leaders is so deceptive and contrived. Our leaders think that if the facts were presented in a factual manner and that the results negatively
impacted confidence and trust that they might somehow enhance outcomes. Liars understand the short-term implications and their consequences to be such, however,
in the longer term the failure of the deception becomes
even more costly. This has been evermore evidenced
by the economic trade policies, agreements, and contracts
Americans have been led to believe would benefit them.
Only to have the bottom open up as a pit too swallow the
unsuspecting. Me thinks the blind are leading the blind.

Sep 21 10:34 AM

[Mr. Ed, Jr.:]

"Predictions are hard. Especially about the future."
Yogi Berra


On Sep 20 07:53 PM John Lounsbury wrote:

> TinyTim - - -
>
> You said:
>
> "Remember things are true until they are no longer true."
> I wasn't sure if this was rhetorical, but I've always believed the
> opposite.
>
> I always thought this was something like Yogi Berra's: "When you
> come to a fork in the road, take it."

Sep 22 11:34 PM

[Outofchips:]

What's your expectation on future dollar devaluation/serious inflation?

Sep 23 10:03 AM

[aja8888:]

We had a jobless recovery since 2000 by allowing a "large number" of people to buy real estate with having to show employment or another ability to pay a loan back. Couple that with uncanny amounts of credit card use and we had prosperity (for a while). So now it is damn near impossible to get a mortgage unless you meet 1978 bank lending criteria and credit cards are not falling out of mailboxes anymore. Add a dose of 10+% (and rising) unemployment, and we have a situation where even the talking heads can't turn into a recovery.

Sep 23 12:00 PM

[adan:]

"We are proving every day that we can grow GDP without creating jobs – we have done it since 2000. The costs of unemployment is adding to the debt – and because the way GDP cherry-picks spending – this is a hidden cost. I doubt we really had economic growth this decade...." -

it was nice to see this so clearly stated, thank you!

Sep 28 02:20 PM