Economic Data Showing Signs of Negative Trends

The September 2009 Chicago Fed National Activity Index (three month average) rose again last month but remains below the historical marker which confirms a recession is over. In my opinion, this is the best indicator in economics land.

As this is a three month average, it is interesting that the non-averaged indexes have been falling for the last two months after a July peak. The Chicago Fed summarized the data:

Thirty-two of the 85 individual indicators made positive contributions to the index in September, while 53 made negative contributions. Thirty-nine indicators improved from August to September, while 46 indicators deteriorated.

The bad news in this data is that the monthly data has been falling for the last 2 months. If this trend continues, next month this index will fall. Whatever is going on, the recovery appears to be stalling.

GDP Rise Confirms Recession Is Over

Regardless of the inferences you can draw from the CFNAI data, the BEA released the advance estimate 3Q 2009 GDP numbers which boldly evinces the recession is over. The government boys are now estimating GDP is clicking along at an annual 3.5% growth rate – up from the recessionary -0.7% in 2Q 2009. This is a very healthy growth rate!

And GDP growth after an economic contraction historically is the evidence NBER uses to confirm the recession is over.

Wow! While admittedly not being a fan of GDP to measure economic activity – I now discover the USA is in a full blown recovery (this is sarcasm). I was anticipating a number around 2%.

Unfortunately, being an advance estimate of GDP – the underlying data is not complete, and precludes my ability to do a meaningful detailed analysis. However, as much as I think this 3.5% annualized increase does not represent what has really happened economically, it is the system we use to measure economic activity.

First, we must consider the road to real recovery will be long when you view the road GDP has taken over the last several years.

The second point is that the bulk of the improvement has come from the consumer (see graph below). It did appear the consumer was powering up in the early part of 3Q 2009 – and was pushed to spend more through cash-for-clunkers and first home buyers incentives.

But the September and October consumer data has come in weak, and definitely not expanding at 3.5%. (Please read further down about negative consumer spending for September 2009).

Continuing significant GDP improvement does not appear to be sustainable into the 4Q 2009. The recession may be over, but our “recovery” is weak – and the economic driver for recovery is illusive.

Consumer Confidence Remains Weak

This economic weakness is manifesting in the declining consumer confidence. Although economists believe consumer confidence is a leading indicator, I consider consumer confidence a coincident indicator. Economists believe it is an expression of what shall be. If this is true, we can look forward to a very poor Christmas season.

Both ABC News and The Conference Board (Consumer Confidence Index™) both indicate declined consumer confidence. Lynn Franco, Director of The Conference Board Consumer Research Center:

Consumers' assessment of present-day conditions has grown less favorable, with labor market conditions playing a major role in this grimmer assessment. In fact, the Present Situation Index is now at its lowest reading in 26 years (Index 17.5, Feb. 1983). The short-term outlook has also grown more negative, as a greater proportion of consumers anticipate business and labor market conditions will worsen in the months ahead. Consumers also remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays.

Real Estate Data Not Encouraging

The Case-Shiller home price index for August 2009 revealed, as expected, rise in home prices. The issue here is that the data is not detailed enough to understand whether this is a real floor in housing prices, or a shift in more higher value homes sales (which this author believes is true).

Non-the-less, I have graphed the non-seasonally adjusted data comparing YoY housing prices. Every month I have graphed this data in a different way, and I am not convinced any method really gives a feel of what is actually going on for housing prices. I do see housing prices stabilizing, but I believe we need to watch the data at least into 1Q 2010 until we can validate any opinion.

New home sales declined MoM 3.6% in September 2009 – and 7.8% YoY. To get a graphical feel of this decline which overlays the mortgage interest rates in effect.

Don't lose too much sleep thinking about this. First, it is seasonally adjusted data at a trough of a recession – the seasonal adjustment factors are suspect.

But most importantly, the methodology used to collect this data builds such a huge margin of error that US Census says it takes 4 months of data to establish whether a trend is occurring. The graph below from Clusterstock illustrates that the real home sales based on stated confidence factors could be in a range between 6.6% and -13.8% - not simply the decline of 3.6% headlined.

The unfortunate news about real estate comes from the weekly Mortgage Bankers Association mortgage application data. Although the data is seasonally adjusted, it has recently embarked on a downward spiral foretelling anemic home sales volumes which will manifest in home sales data released for the 4Q 2009.

With falling volumes, the real estate values will continue their downward price spiral.

Manufacturing Data Mixed

Not trusting seasonally adjusted advance durable goods September 2009 data during a recession trough, I have ignored the headline data of a 1% rise in new orders and instead looked at non-seasonally adjusted data.

The data is definitely mixed. Contracting inventories drag on GDP. Unfilled orders which carry on into October shipments are down. On the other hand, shipments and new orders are up. The data itself is inconsistent as shipments and new orders increases do not square with a falling backlog. Overall, there is little evidence of economic expansion.

Unemployment Growth Indicates Economic Headwind

Every week I continue to be surprised by the initial unemployment claims numbers. This week they are again essentially unchanged. As the employment ratios were low coming into this Great Recession, I was expecting a relatively small labor contraction as I felt the USA was already lean and mean. What is happening to unemployment is beyond the dismal numbers – it is indicative of a serious underlying dynamic which I blame on the business environment created by Bush and Obama.

It is natural that personal income and personal consumption data would begin to be effected by these continuing unemployment gains. In September 2009, personal income decreased slightly (less than 0.1%), disposable personal income (DPI) decreased 0.1%, and consumer expenditures (PCE) decreased 0.6%.

This is the largest decline since December 2008. Sorry, this kind of data does not define an economy in a recovery. This will not be a Merry Christmas if this keeps up.

Additional Economic Data Released this Week

This has been an interesting month for treasuries. It seemed difficult for trends to develop a footing, and as the month ended it was confused. Any bets on November?

Bankruptcies this week: Capmark Financial Group (aka GMAC Commercial Holding), FairPoint Communications, California Coastal Communities, CanArgo Energy, Rancher Energy

Failed Banks This Week:

Economic Forecasts Published this Past Week

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

Despite coming off its early-October record high, WLI growth remains robust, suggesting that the U.S. Economic recovery will continue to gather strength in the coming months.

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

Hat tip to Princess Cruises for providing internet access for publishing this article.

Disclosures: long MMFs, GLD, short S&P, IOO, PIN, UUP, Physical Gold - as well as numerous puts and calls which comprise less than 3% of my portfolio.

Comments

[apppro:]

Steve you always give very complete and complex data to support your thesis. I can only comment by adding this quote from my recent blog:
<<You may ask, “Why should I care? I’m not in the market or I own mutual funds, why should this matter to me?” It matters because you may be one of those lucky people who still has a job, or one of those still trying to find one... all these swings and angst are not healthy. They make everyone so full of fear and uncertainty that no one can muster up the desire to spend, invest, invent, inspire, etc. And don’t make the mistake of thinking that CEO’s of big companies are any different. I told you before, you keep bashing someone over the head over and over; sooner or later they will break! This is especially true of small businesses, the major driver of employment in the U.S. Would YOU spend thousands or go into debt to start a new business if every 5-minutes someone else is telling you that everything will crash in the next 10-minutes? I don’t think so!>>

It is really impossible to rationalize or even justify today's market with facts. As a mathematician by heart and a compulsive anal personality - I do love facts, but leaving out emotions makes all the facts in the world meaningless. Fear & greed are far greater powers then facts. We allowed a few to scare the crap out of ourselves over a year ago, through their abuse of M2M and total lack of SEC regulation. We allowed them to destroy our confidence in our markets - and in ourselves. If we don't change our own view of the markets and our society in general will we not survive. We must take this short-term mentality we have fostered and smash it into oblivion. A nation is not built over 3 weekends, but we sure allowed a few to almost destroy it over that same period of time.

Nov 01 08:55 AM

[Old Trader:]

Steve,

As always, a nice summation of data that really matters. As you point out, adding insult to injury, everything I've heard/read to date, points to a bleak holiday retail season, with the most optimistic reports calling for it to be "flat".

Nov 01 08:58 AM

[flow5:]

The old saying that some people would lose money having tomorrows WSJ is right. But in forecasting, why do you vacillate between the seasonally-adjusted data, and the non-seasonally-adjusted data? Use only the "real" stuff.

The evidence of our economic health is not so elusive. It is incontrovertible. We've learned our catechisms.

Nov 01 09:34 AM

[apppro:]

On this all I can say is that I freelance at Macy's for a group of vendors overseeing their merchandise. (Just can't get retail out of my blood!) THE STORE IS A MADHOUSE ALMOST EVERYDAY! Their sales are consistently up and the merchandise is flying off the shelves. I even go into the stockrooms and shelves are lean & tight.

Bad holiday season - not from this store's perspective. But if we keep telling everyone not to shop because Armageddon 2 is coming - what do you think will happen?


On Nov 01 08:58 AM Old Trader wrote:

> Steve,
>
> As always, a nice summation of data that really matters. As you point
> out, adding insult to injury, everything I've heard/read to date,
> points to a bleak holiday retail season, with the most optimistic
> reports calling for it to be "flat".

Nov 01 09:44 AM

[Old Trader:]

apppro,

I'm glad to hear things are going well at your particular location, but a couple of questions.

First, I wonder how representative your location is? For example, here in Chicago, Macy's acquisition of Marshall Fields has not gone very well.

Second, what SORT of merchandise is flying off of the shelves? What I've heard from various retail analysts is that the consumer is being VERY selective in where/how they're spending their dollars. "Value priced" items are doing relatively well....the rest, not so much.

Thanks for providing a "worm's eye" view!

On Nov 01 09:44 AM apppro wrote:

> On this all I can say is that I freelance at Macy's for a group of
> vendors overseeing their merchandise. (Just can't get retail out
> of my blood!) THE STORE IS A MADHOUSE ALMOST EVERYDAY! Their sales
> are consistently up and the merchandise is flying off the shelves.
> I even go into the stockrooms and shelves are lean &amp; tight.<br/>
>
> Bad holiday season - not from this store's perspective. But if we
> keep telling everyone not to shop because Armageddon 2 is coming
> - what do you think will happen?

Nov 01 09:55 AM

[Jeff Miller:]

Old Trader --

The Naperville Macy's (Chicago burb, as you know but others may not) was very busy yesterday when my wife and son were out shopping for his new suit. They had to compete for their sales person, and overall activity was high.

There was a sale, of course, and people had coupons. I don't know about their inventory or profitability.


On Nov 01 09:55 AM Old Trader wrote:

> apppro,
>
> I'm glad to hear things are going well at your particular location,
> but a couple of questions.
>
> First, I wonder how representative your location is? For example,
> here in Chicago, Macy's acquisition of Marshall Fields has not gone
> very well.
>
> Second, what SORT of merchandise is flying off of the shelves? What
> I've heard from various retail analysts is that the consumer is being
> VERY selective in where/how they're spending their dollars. "Value
> priced" items are doing relatively well....the rest, not so much.
>
>
> Thanks for providing a "worm's eye" view!
>
> On Nov 01 09:44 AM apppro wrote:

Nov 01 11:32 AM

[Old Trader:]

Jeff,

Thanks for the additional "boots on the ground" perspective!


On Nov 01 09:55 AM Old Trader wrote:

> apppro,
>
> I'm glad to hear things are going well at your particular location,
> but a couple of questions.
>
> First, I wonder how representative your location is? For example,
> here in Chicago, Macy's acquisition of Marshall Fields has not gone
> very well.
>
> Second, what SORT of merchandise is flying off of the shelves? What
> I've heard from various retail analysts is that the consumer is being
> VERY selective in where/how they're spending their dollars. "Value
> priced" items are doing relatively well....the rest, not so much.
>
>
> Thanks for providing a "worm's eye" view!
>
> On Nov 01 09:44 AM apppro wrote:

Nov 01 11:51 AM

[apppro:]

Old Trader,

Can only speak for what I see, but according to the media and their own figures, storewide sales are up. I have to admit that people are coming in for sales, but that is to be expected and Macy's knows it. We have trained the U.S. consumer to wait for a sale, so like Pavlov's dogs they buy only as soon as someone rings the sales bell.

We forced everyone to take out a lot of leverage out of our system and we fired a lot of people in the process. Those that are lucky enough to still be at work want to spend and shop. We allowed a few pundits and short sellers to screw the rest. As soon as we realize this and allow business to get back to business, we'll all be better off. Remember: all that leverage that those shorts and scholars wanted us to eliminate - only became bad when all those shorts and scholars shoved down our throats that it was bad. (Boy am I going to get yelled at for that comment!)


On Nov 01 09:55 AM Old Trader wrote:

> apppro,
>
> I'm glad to hear things are going well at your particular location,
> but a couple of questions.
>
> First, I wonder how representative your location is? For example,
> here in Chicago, Macy's acquisition of Marshall Fields has not gone
> very well.
>
> Second, what SORT of merchandise is flying off of the shelves? What
> I've heard from various retail analysts is that the consumer is being
> VERY selective in where/how they're spending their dollars. "Value
> priced" items are doing relatively well....the rest, not so much.
>
>
> Thanks for providing a "worm's eye" view!
>
> On Nov 01 09:44 AM apppro wrote:

Nov 01 11:58 AM

[thotdoc:]

I love it. A macro economics discussion ends up in a conversation about what is going on in one Macy's. No wonder many people have difficulty making decisions about how to invest.

Nov 01 12:10 PM

[Valley Boy:]

I've read somewhere that increased Starbucks sales would indicate positive consumer sentiment at least in the early part of a genuine recovery. If $4 coffees are beginning to sale briskly at Starbucks, then chances are that $50 clothing will begin to sell somewhat at Macy's.


On Nov 01 12:10 PM thotdoc wrote:

> I love it. A macro economics discussion ends up in a conversation
> about what is going on in one Macy's. No wonder many people have
> difficulty making decisions about how to invest.

Nov 01 12:58 PM

[apppro:]

A lot of micros make up a macro. :-)


On Nov 01 12:10 PM thotdoc wrote:

> I love it. A macro economics discussion ends up in a conversation
> about what is going on in one Macy's. No wonder many people have
> difficulty making decisions about how to invest.

Nov 01 01:08 PM

[bobdark:]

You blame shorts for the market correction? You think it is realistic that people can borrow beyond their means to repay? You think it is realistic that real estate prices should go up 20% every year? If anybody should be angry it should be the savers who are now watching their hard-earned savings get flushed down the government toilet by the huge tax burden in order to bail out people who were rediculously irresponsible and presumed that they were entitled to wealth through speculation instead of the old-fashioned way of working and saving.

The bottom line is that this crisis was caused by overleverage and rediculous real estate speculation, whether it was pointed out by shorts or scholars or not, the system had to collapse. Just be glad the shorts were there to buffer the downside, otherwise it would have been much worse. In fact, next time around, it will be much worse, because America still has not learned the lesson, that it is wrong to lie and cheat your way to achieve a lifestyle that is beyond a level of income required to sustain it and that eventually there are consequences. Some day, there won't be any money left to bail out all the irresponsible people unless the government simply decides to nationalize everything and eliminate the middle class.


On Nov 01 11:58 AM apppro wrote:

> Old Trader,
>
> Can only speak for what I see, but according to the media and their
> own figures, storewide sales are up. I have to admit that people
> are coming in for sales, but that is to be expected and Macy's knows
> it. We have trained the U.S. consumer to wait for a sale, so like
> Pavlov's dogs they buy only as soon as someone rings the sales bell.
>
>
> We forced everyone to take out a lot of leverage out of our system
> and we fired a lot of people in the process. Those that are lucky
> enough to still be at work want to spend and shop. We allowed a few
> pundits and short sellers to screw the rest. As soon as we realize
> this and allow business to get back to business, we'll all be better
> off. Remember: all that leverage that those shorts and scholars wanted
> us to eliminate - only became bad when all those shorts and scholars
> shoved down our throats that it was bad. (Boy am I going to get yelled
> at for that comment!)

Nov 01 02:17 PM

[Kimball Corson:]

Good article, Steve. I concur, and here I go a step further and suggest what we should do to repair our economic mess.

I just posted three comments on Paul Krugman's blog under his article Stimulating Thoughts: Third Quarter Edition in which he unsurprisingly argues for ever bigger stimulus programs. My comments are:

I. In fact, consumer spending could clearly be better because in truth it tumbled 1.5% in September, as vehicle sales plunged, following a 1.4% gain in August (previously 1.3%). The saving rate rose to 3.3% as consumers returned to saving after buying cars to get clunker monies in August. Real spending dropped 0.6%.

Like too many government programs, including the stimulus program, the effects are too transient and the programs are too expensive. Too little bang per buck and too little impact on the real economy.

The answer is not therefore, as you suggest, to then just make the (stimulus) programs bigger.

___ Kimball Corson

II. The Chicago Fed´s National Activity Index indeed rose for the last quarter, but it is interesting that many of the non-averaged components have been falling for the last two months after a July peak. The Chicago Fed summarized the data:

"Thirty-two of the 85 individual indicators made positive contributions to the index in September, while 53 made negative contributions. Thirty-nine indicators improved from August to September, while 46 indicators deteriorated."

The bad news in this data is that much monthly data has been falling for the last 2 months. If this trend continues, next month this index will likely fall. This would be significant evidence that the recovery is now stalling, after the effects of the government's bump-up programs have passed.

We must face and address our structural problems of the trade deficit, the maldistribution of income, the dysfunctional banking sector and the decline of employment in the manufacturing sector if we want GDP to grow on a solid footing. Until we do this our prospects are poor.

The problem is none of the Keynesian policy makers even recognized these problems or take them seriously enough or believe they really matter. We are barking up the wrong tree, as I keep saying.

___ Kimball Corson

III. What we should be doing is addressing our structural problems of the trade deficit, the maldistribution of income, the dysfunctional banking sector and the decline of employment in the manufacturing sector and we could do that as follows:

The Trade Deficit: adopt an auctioned quota certificate system allowed by the WTO for persistent deficit countries and develop tax employment incentives for the more labor intensive companies in the US engaged in export. Put a surtax on gasoline and use the money to press for the development and use of smaller vehicles that use less or no gas. Provide tax incentives for their purchase. Put a luxury tax on gas guzzlers. We need a big and serious push here, politics be damned.

The Maldistribution of Income: use the tax system and a negative income tax if necessary to quickly redistribute income and raise the marginal propensity to consume. Now, those earning over $85,000 a year get half of all income and dump too much of it into secondary financial markets to create bubbles and messes.

The Dysfunctional Banking System: Run the money center banks through one or another type of FDIC insolvency proceeding to correct incentives, repair debt damage and pass financial reform with less opposition from those banks, while at the same time getting better supervision over them in the interim. We need to get serious here.

Employment in the Manufacturing Sector: We need to subsidize and support employment in this sector and companies with higher labor to capital ratios engaged in exporting a high percentage of what they make. All kinds of programs should be considered to do this.

We need to focus in on our problems and adopt some real fixes if we want to see more sustainable real economic improvements, not just throw more money at the priming pump of aggregate demand and getting temporary increases in aggregate demand that do not last.

We are on the wrong track. Stimulus programs alone won't do it.

___ Kimball Corson

Nov 01 03:03 PM

[DavyJ:]

Why is it that we need two negative quarters to declare a recession has begun and only one positive quarter to declare a recession has ended?

Nov 01 03:36 PM

[apppro:]

This system did not collapse because of the over valued real estate market. You are right it was (and in some areas still is) over valued, but that didn't bring the financial system down. We've been thru these housing boom and busts before and never did they lead to this depth of financial destruction and despair. Taking down Ambac then Bear then WAMU then Lehmans is what destroyed us. These companies could have survived the real estate debacle, but they could not survive the destruction of the confidence they needed to go on. Real estate may have been the reason things had issues, BUT they were not the CAUSE of this financial mess.
And as far as the over leverage part of your argument - YES I AGREE, but that leverage did NOT have to be taken out of the system overnight as demanded by those very short sellers whom you seem to glorify.
Place the blame where it belongs - not where you want it to be.


On Nov 01 02:17 PM bobdark wrote:

> You blame shorts for the market correction? You think it is realistic
> that people can borrow beyond their means to repay? You think it
> is realistic that real estate prices should go up 20% every year?
> If anybody should be angry it should be the savers who are now watching
> their hard-earned savings get flushed down the government toilet
> by the huge tax burden in order to bail out people who were rediculously
> irresponsible and presumed that they were entitled to wealth through
> speculation instead of the old-fashioned way of working and saving.
>
>
> The bottom line is that this crisis was caused by overleverage and
> rediculous real estate speculation, whether it was pointed out by
> shorts or scholars or not, the system had to collapse. Just be glad
> the shorts were there to buffer the downside, otherwise it would
> have been much worse. In fact, next time around, it will be much
> worse, because America still has not learned the lesson, that it
> is wrong to lie and cheat your way to achieve a lifestyle that is
> beyond a level of income required to sustain it and that eventually
> there are consequences. Some day, there won't be any money left to
> bail out all the irresponsible people unless the government simply
> decides to nationalize everything and eliminate the middle class.
>

Nov 01 06:08 PM

[untrusting ...:]

Total nonsense. Shorting had virtually nothing to do with bringing the market down, that is just your misguided opinion. If you think that is a factual statement then provide any type of proof or factual evidence to back it up. Shorts comprise a tiny fraction of the market, maybe on average approximately 5-10% of outstanding shares, and cannot possibly overwhelm the hugh numerical superiority of the outstanding long positions. In fact shorting provides some highly benefical functions to the market including liquidity and exposure of scams just to cite a couple. It is totally illogical to maintain that an investor/gambler should only be able to bet on rising prices and never bet on falling prices.

Thye real reasons that Bear and Lehman failed is because they were overleveraged, relied on overnight hot money, and ultimately nobody would lend them any more overnight money, so they were effectively insolvent and could not meet their cash requirements. No different than you and if you lose your job and can't make your mortgage and other payments and nobody will lend you any money, then you are insolvent and you lose all your assets.

If shorting is such a hugh problem, then why have the many many attempts to short the market during the "recovery rally" all been turned back and the levels of short interest dropped dramatically for many months now?

Nov 01 08:12 PM

[ebworthen:]

Macy's? Umm...likely in large cities with upper middle class and elites; which equals 5% of retail. Just as more taxes on the highest earners can't fund the deficit, a lack of retail spending amongst the masses at Wal Mart and other discounters does not equal recovery.

A store can be very busy selling snuggie's and sweatshirts while the bottom line inventory and revenue is break even or negative.

Nov 01 10:34 PM

[Ted Kavadas:]

Thanks for the article. I find it particularly noteworthy that the CFNAI's last two monthly readings are falling. This is similar to an array of other indicators that have been published which seem to indicate that weakness is reasserting itself.

I don't believe the 3Q GDP number "prove" a recovery; neither does it "guarantee" future economic expansion. What I believe we are seeing,unfortunately, which is common during long periods of economic weakness, is intermittent economic strength that will lead to further economic weakness.

For those interested, I have been seeing persistent underlying weakness in the financial markets. My latest post on this issue can be found here:

seekingalpha.com/user/...

Nov 02 09:51 AM

[apppro:]

Today's, 11/02 deplorable market action is just a further confirmation that the short-term trader/traitor mentality we have fostered over the past 10 years MUST END. These swings will destroy us in the end. No one can function like this for very long.

Nov 02 03:23 PM