The Recession Is Far from Over

Last week I wrote a blog titled "Recession over? Tell the bankrupt and unemployed". I took a lot of flack from readers saying that I picked a lagging economic indicator and was unfair in my criticism of the Fed's press release. For those of you who followed me in the 2008 Strategy Lab you might remember that I always looked forward to and commented on The Conference Board's US Business Cycle Indicators. Just like I look at BarChart every week to get a read on the short, mid and long term market movement, I look at the Conference Board to give me the Leading, Coincident and Lagging economic indicators.

The latest report is dated September 21, 2009 and has the Leading Economic Index (LEI) up 0.6%, the Coincident Economic Index (CEI) unchanged and the Lagging Economic Indicator (LAG) down 0.1%. How do we interpret this data? When I taught Graduate School I told the students to think of the economy as a roller coaster with 21 cars.

When the coaster gets to the top, the first cars go over and begin to go down while the last cars are still going up. When it gets to the bottom of the trough, the leading cars begin going up while the last cars are still going down. The LEI is like the lead cars, the CEI the middle cars and the LAG the last cars. Not really that hard to figure out.

Let's take a minute and list the components of the Indexes:

Leading (LEI) -- 10 indicators 5 were up for a 0.6% increase.

1. Average weekly hours, manufacturing
2. Average weekly initial claims for unemployment insurance
3. Manufacturer's new orders, consumer goods and materials
4. Index of supplier deliveries -- vendor performance
5. Manufacturer's new orders, nondefense capital goods
6. Building permits, new private housing units
7. Stock prices, 500 common stocks
8. Money supply, M2
9. Interest rate spread, 10-year Treasury bonds less federal funds
10. Index of consumer expectations

Coincident (CEI) -- 4 indicators 3 were up of an unchanged

1. Employees on nonagricultural payrolls
2. Personal income less transfer payments
3. Industrial production
4. Manufacturing and trade sales

Lagging (LAG) -- 7 indicators 3 were up for a 0.1% decrease

1. Average duration of unemployment
2. Inventories to sales ratio, manufacturing and trade
3. Labor cost per unit of output, manufacturing
4. Average prime rate
5. Commercial and industrial loans
6. Consumer installment credit to personal income ratio
7. Consumer price index for services.

Are all these indicators 100% right and do I understand each one? No, but I don't need to. I don't understand all the technical analysis indicators on BarChart but I can see where the short term, mid term and long term indicators seem to be going. I don't have to understand all of the Conference Board's economic indicators but I can tell if the leading, middle and last cars on the economic roller coaster are going up or down.

Disclosure: No positions mentioned

Comments

[Mad Hedge Fund Trader]

nf t The autumnal equinox is today. That is the day when the sun crosses the equator headed South, and daylight equals darkness. I know this because I am so old that celestial navigation with a sextant was a requirement to get a commercial pilot’s license. That means that I can shoot an angle off of the North Star and tell you your latitude, the same method used by Christopher Columbus to first cross the Atlantic. Now that’s old! Moving on to navigation of the financial sort, many long in the tooth, grizzled old veterans insist the movement of the sun, moon, and stars, as well as sun spots, have a major impact on the markets. History is certainly replete with financial disasters this time of year, most recently in 2008 when Lehman went under, almost dragging the entire banking system with it. These were easily explainable a century ago when 50% of our GDP came from agriculture, and the harvesting of the fall crop placed huge trains on a then nascent financial system. But today, less than 2% of the economy comes from Green Acres. So maybe history is not repeating itself, but rhyming, or reverberating. Certainly everything good, from currencies and commodities, to energy, emerging markets, and private and public debt, need a rest and are overdue for a pull back. The short term risk/reward for everything is not good here. Watch the run up to end Q3, when the fireworks may begin.

2009 Sep 22 10:52 AM

[Larry House]

Anyone not looking through rose-colored glasses can see that the recession is not over, and just as importantly, the prospects for growth are not good. Consumers are dealing with debt, have lost their desire to spend beyond their means, and are going to save more for years to come. The national debt is bloated at a time when tax revenues are declining. The list of problems goes on and on.

2009 Sep 22 12:05 PM

[chap08]

The economy is like the roller coaster cars - there is no engine.

2009 Sep 22 01:07 PM

[Mr. Big]

It's possible that the current recession may be "technically" over. But the double dip recession may be just months away....

To build on the previous post, not only are consumers reducing debt and saving more.....their savings will be gutting by rising taxes (to reduce deficit and pay for healthcare) and inflation (caused by continuing weakness in the USD, making imports costly).

The American consumer is about to be hit by a "perfect storm" via the combination of:

1) Restricted credit access
2) Weaker greenback
3) Higher taxes
4) Higher unemployment
5) Increased borrowing costs (eventually)
6) Higher inflation (eventually)
7) Higher energy costs

When you really think about it, there is nothing out there that will lend any support to the consumer for the next 5 to 10 years! Beyond that, there are still signficant headwinds....

Without the consumer....there will be no recovery for America.

2009 Sep 22 01:21 PM

[tunaman4u2]

But will a worse economy lead to more money printing?

It seems bizarre that a worse economy would lead to a more loose fed, hammering the USD helping the market? Unemployment & Bankruptcy staying bad keeps the Fed fueled party going?

Thats the logic going around right now... the USD is toast.
Thoughts?

2009 Sep 22 01:30 PM

[Socialism cannot compete!]

Without Liberty and drastically smaller government...there is no recovery of the consumer.


On Sep 22 01:21 PM Mr. Big wrote:


>
> Without the consumer....there will be no recovery for America.

2009 Sep 22 01:52 PM

[Gary A]

The dollar will not be toast. Reason is, when these commodities go through the roof people will just quit spending. You watch. Milk went to 5 bucks a gallon and people simply stopped buying. If gas goes to 4 people will stop driving. The consumer is the great equalizer, the preserver of the dollar and the ruin of the arrogant and yet dependent financial system. Goldman can drive oil to the moon, but then no one will drive to the store, let alone to the moon.

2009 Sep 22 03:18 PM

[conceptwizard]

We are living through one of civilization’s great seismic reversals. The ideology of globalization, like all utopias that are sold as inevitable and irreversible, has become a farce. The power elite, perplexed and confused, cling to the disastrous principles of globalization and its outdated language to mask the political and economic vacuum before us. The absurd idea that the marketplace alone should determine economic and political constructs caused the crisis. It led the G-20 to sacrifice other areas of human importance—from working conditions, to taxation, to child labor, to hunger, to health and pollution—on the altar of free trade. It left the world’s poor worse off and the United States with the largest deficits in human history. Globalization has become an excuse to ignore the mess. It has left a mediocre elite desperately trying to save a system that cannot be saved and, more important, trying to save itself. “Speculation,” then-President Jacques Chirac of France once warned, “is the AIDS of our economies.” We have reached the terminal stage.

2009 Sep 22 03:40 PM

[The Geoffster]

Jimmy Carter will save us. I'm sorry I meant Barack Obama. Like Mad Hedge, I'm showing my age.

2009 Sep 22 05:33 PM

[Mr. Big]

Ask yourself one thing......

What would Chuck Norris do?

.

2009 Sep 22 08:21 PM

[inthemoney]

> The dollar will not be toast. Reason is, when these commodities go through the roof people will just quit spending. You watch. Milk went to 5 bucks a gallon and people simply stopped buying. If gas goes to 4 people will stop driving.

The dollar is at the level it was a year ago but commodities are much lower right now. Will we get commodities "bubble" again in anticipation of lower dollar, I am not sure. CFTC is trying to crack down on commodities traders to prevent the repeat of last year and delay the inevitable.

2009 Sep 22 08:38 PM

[Denis Gould]

It doesn't matter if it is a lagging indicator unemployment is the thing that matters, after all you only really care about a recession if you lose your job. A realignment of government policy and corporate objectives towards providing employment is needed

2009 Sep 22 08:47 PM

[Moon Kil Woong]

With this much government debt rudden money flowing into the market it is scary that the indicators are only up such a meager amount during summer which is one of the best quarters in the year (certainly for homebuilding and sales). With energy spiking, you could write off most all the gains coming from non-core inflation and summer temporary employment. Is this really a recovery?

It is clear that the market is betting on a weaker dollar, rising US Treasury rates, lots of government stimulus, and a stagnant economy with possible inflation. That means less treasuries more equities and commodities, money moving offshore, bets on government run bubble mayhem, and a high chance that when stimulus starts to end a steep fall off in stock market prices unless even more wasteful spending is substituted for it. If the latter: then rinse and repeat until the dollar becomes a substitute for toilet paper (which you wouldn't be able to afford).

2009 Sep 22 10:01 PM

[Mark Bern]

Excuse me? But how is it that if the dollar goes down in value relative to other currencies, oil will not go up? Oil is traded in $US, and so denominated. Unless the world stops using the $US as a reserve currency (which could happen) oil will most likely be denominated in dollars. If you have any understanding of the purchasing power parity theory, it is obvious that when the dollar declines in value, oil will eventually rise in dollar price, unless demand also drops enough to counter the value change in the dollar.

Yes. U.S. consumers may reduce their purchases of higher priced commodities to some degree. But I recall that when gasoline went to over $4..00 per gallon previously, the roads were no less congested. People did not stop driving. Those who could reduced driving some. But this nation's commerce is too dependent upon the gas-powered transportation to just say no! That may be unfortunate, but it's the truth. We have an unhealthy dependency and have not taken the necessary steps to get clean.


On Sep 22 03:18 PM Gary A wrote:

> The dollar will not be toast. Reason is, when these commodities go
> through the roof people will just quit spending. You watch. Milk
> went to 5 bucks a gallon and people simply stopped buying. If gas
> goes to 4 people will stop driving. The consumer is the great equalizer,
> the preserver of the dollar and the ruin of the arrogant and yet
> dependent financial system. Goldman can drive oil to the moon, but
> then no one will drive to the store, let alone to the moon.

2009 Sep 22 10:24 PM

[Donald Ingram]

On the whole - such great comments!
And the winner is - roller coaster cars don't have an engine in front!
In the words of Peter Shiff "We are not the engine. We are the caboose and we are being cut loose". Shiff for senator.

2009 Sep 22 10:27 PM

[raising4daughters]

Hey, how did Omarosa work her way from the Apprentice to the White House?


On Sep 22 05:33 PM The Geoffster wrote:

> Jimmy Carter will save us. I'm sorry I meant Barack Obama. Like Mad
> Hedge, I'm showing my age.

2009 Sep 22 10:57 PM

[johngonole]

I second that. Peter Shiff for Senator!

2009 Sep 23 12:52 AM

[Carlos Lam]

On Sep 22 03:18 PM Gary A wrote:

> The dollar will not be toast. Reason is, when these commodities go
> through the roof people will just quit spending. You watch. Milk
> went to 5 bucks a gallon and people simply stopped buying. If gas
> goes to 4 people will stop driving. The consumer is the great equalizer,

You may be right: consumers will change their behavior in response to rising prices. I also have no doubt that the dollar will keep diving and we'll see expensive commodities. My concern is what the feds are going to do when this happens. Wage/price controls? Capital controls? War? When government gets desperate, I get scared.

2009 Sep 23 07:19 AM

[ed233]

During the time Paul Volcker was Fed Chairman he raised interest rates into double digit figures to eventually bring stagflation under control. Can you imagine how much money the US and Great Britain would have to print in IOU's (paper currency) just to cover interest on deficits going forward?
These two countries couldn't survive very long without a major default. The amounts would be staggering. When you look at it from that aspect then Zimbabwe doesn't seem that far away. Hyper-inflation may be closer than you think. LOL Looking after your money.

2009 Sep 23 08:15 PM

[Jim Van Meerten]

It is like a roleer coaster because the front car starts up while the last car is still going down


On Sep 22 01:07 PM chap08 wrote:

> The economy is like the roller coaster cars - there is no engine.

2009 Sep 25 12:03 PM