Economic Indicators that Show Weak Recovery at Best

 |  Includes: DIA, JJC, QQQ, SEA, SPY
by: Trading Alpha

Given the heavy bias coming out of Washington these days, it is important to track more data than just those that show up in headlines if one wants to know where the economy is. Ideally these are metrics that the government does not prepare or where the measure is so broad that any temporary economic policy, seasonal adjustment or stimulus does not influence the metric. This would help reveal the state of the real economy without the effect of stimulus or seasonal adjustments.

I'll review each one describing what it is, what it is telling us and where to find the data so you may track the indicator yourself.

Five of such indicators that I track are noted below. The first four show a weak recovery at best and the fifth one may well be pointing to the same soon enough.

1. The Chicago Fed National Activity Index, a collection of 85 separate metrics calibrated like the PMI where the overall reading has context to whether we are contracting or growing. The three month moving average is a good measure to follow. Anything below 0 is below trend and for the last five months the index is stalled in the -.54 to -.87 range. December's report came in at -.61, slightly improved from -.68 in the previous month. A reading above .2 is needed as a strong indicator we have emerged from the recession and we are not even close.

I like this report because of its breadth and calibration. I first learned of it through fellow SA author Steven Hansen who covered this monthly report yesterday in one of his routinely excellent posts (found here). If you don't follow him you should; he has one of the best weekly and most comprehensive posts I have found on this site.

The monthly report comes out in the last week of the month for the prior month and can be found here along with graphs and further detail.

2. Consumer credit. Given that we are in a massive deleveraging process, as long as consumer credit continues to contract, people will not be back to the animal spirits of the past decade and consumer spending will be subdued. This metric usually does not contract much. It might be stable in past recessions but the below graph clearly shows this recession is different.

Notice the rate of decline in the last month and over the last five months. This reflects people paying off debt which has become the latest four letter word. It also reflects the cancellation of debt by banks - credit cards, lines of credit. I liken this to margin debt which also contracts in bear markets as investors pull in their horns and avoid risk in their portfolios. Who knows where this stops but it is delivering a strong message that the deleveraging is not close to being over and people and banks are scared.

I like this metric as it is all in. The entire U.S. economy. It is not a small sample but a straight up and unadjusted tabulation of total consumer credit.

It can be found on Bloomberg's Economic Calendar around the 8th of the month for the previous month.

Also follow the link on "Why Investors Care" to learn more about it.

3. Federal tax receipts. This has similar breadth to the consumer credit only this is the total federal tax receipts from corporations and individuals. This provides an unvarnished look at payroll levels, corporate incomes and taxes paid. Due to tax penalties, it is also unlikely that payments are being temporarily held back. It offers a straight up look at America's income statement through the tax expense line. Less taxes paid, less income. Take a look at the continued declines even through December 2009. Due to large tax months like April, this is best to view Y/Y to address seasonality. The months are presented following the federal government's fiscal year which begins on October 1.

What this tells me is we not only finished the year ended 9/30/09 very weak but not that we are lapping the weak quarter ended 12/31/08, the most recent three months shown under October - December above are even weaker. no recovery here.

This data may be found on the U.S. Treasury website - look under publications for the monthly report.

4. Baltic Dry Index. This can be volatile but it is an unaltered spot rate on the demand for shipping of dry goods. For context it peaked in 2008 at almost 12,000 and was in the range of 3,100 to 6,000 from mid 2005 to mid 2007 before the run-up to almost 12,000. It recently broke down through 3,000. If there was an economic rebound underway we should see at least a steady rise over many quarters. It is volatile but the spurts seen in the summer and late fall of 2009 were not sustained and more likely a temporary demand from places like China to stock-up on cheap commodities.

This metric is available on market days at the linked Bloomberg page.

5. Copper - Another greater indicator and universal raw material. Copper goes into many things and the spot price on copper is a clear tell for economic expansion. It is a metal used around the world. No seasonal adjustments or birth death assumptions.

Click to enlarge

This chart does show strong recovery up until the last two weeks. If we hold $3 over the next month this will be a positive sign. If not this will be a fifth indicator of a weak to non-existent recovery.

Prices for copper with various views may be found here.

Disclosure: No positions