U.S. Economy: Sick, But Not Dying

by: Steven Hansen

Last week I stated that "other than a horribly weak economy, there are no major signs indicating an outright contraction." This needs to be expanded as an economy is not a homogeneous mechanism that ebbs and flows in unison. There are economic elements which can be pointed at that are contracting or, if not contracting, showing less growth.

The US economy is weak and the underlying fundamentals (New Normal) have changed from pre-recession history. In the current situation, we at Econintersect question whether traditional coincident indicators (such as industrial production or retail sales) may be showing the real underlying strengths and weaknesses. At any time a tipping point can change the economy to general contraction, but detecting such an event is more difficult than in earlier times because the baseline is unusually uncertain.

Pundits can connect a bunch of dots to “prove” or “refute” that a recession is coming. This pundit believes the preponderance of evidence at this point is not suggesting the initial recession markers are in view.

There are three reasons for this view:

  • Most of the rationale for recession comes from surveys – ISM or business and manufacturing regional Fed surveys. Surveys are not reliable and consistently are not supported when hard data is released. They have been proven inaccurate at economic turning points.
  • Transport counts which have been growing more and more less good (but not actually declining) throughout 2011, quantitatively have bottomed in the last 30 days. Transports are considered by Econintersect as the canary in the economy coal mine.
  • Employment also is running at a positive level (but historically weak). While employment contraction does not necessarily indicate a recession, employment expansion is a very contrary recession signal.

The NBER recession dating committee used non-farm payrolls as the marker for the 2007 recession.

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It is employment that is refuting a recession is imminent. Although the employment picture is far from strong, employment is still expanding.

And as a peek into our September Economic forecast which will be released next week, Econintersect’s Employment Index continues to forecast positive rate of growth until December 2011. This employment index’s rate of growth began a steady decline in July 2007, and the actual employment data began an uninterrupted steady rate of growth decline in October 2007.

ECRI’s WLI (see below) which is considered the best long range forward indicator is degrading and is in negative territory indicating a possible recession beginning six months from today. Econintersect cannot see six months ahead except in its employment indicator which is also degrading six months from today. However, a decline in this employment index has happened many times without a recession occurring.

Econintersect is not selling a product, or touting an investment – there are no vested interests or clients to appease. Obviously our analysis could be wrong, or a future event could change the economic dynamics for the worse. Our economic forecast which will be released next week is being finalized – and the data is both good and bad.

For now, this remains the worst economy I have seen in my lifetime – recession or not. If I were not going through details of the analysis myself – I too would believe the economy was about to contract based on the overall “feel.”

Instead, I have convinced myself the USA is in a depression.

Economic News this Week:

The Econintersect economic forecast for August 2011 indicated the soft patch will continue – and there will be little growth. All elements of the Econintersect Economic Index were falling, with certain key indicators at contraction’s door.

This week the Weekly Leading Index (WLI) from ECRI slipped further into negative territory – from -0.1% to -2.1%. In theory, a negative number implies the economy six months from today will be worse. This index has been eroding and has been in a four month overall downtrend. This index’s value of between 1.6% and 2.1% since the end of June 2011 held until August when this new downward trend began.

Last year this index went deep into recession territory – and ECRI did not call a potential recession. They have been abnormally silent on their opinion and economic outlook. Guessing that this weeks drop could be due to market fluctuations, and if so more drop will follow next week.

Initial unemployment claims rose 5,000 (from an upwardly revised 412,000) to 417,000. Historically, claims exceeding 400,000 per week usually occurs when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. John Lounsbury this week penned Unemployment Claims and Job Losses showing the “magic” in this 400,000 number.

The real gauge – the 4 week moving average – rose 4,000 to 407,500. Because of the noise (week-to-week movements), the 4-week average remains the reliable gauge.

The data released this week confirms the economic soft spot is continuing. If current trend lines remain, price inflation will begin to moderate over the next few months.

Weekly Economic Release Scorecard:

Item Headline Analysis
Gold Trend Lines

John Lounsbury explores the question whether gold is overpriced
2Q2011 GDP
Revised Down to 1.0%
Little good news inside of this revision – and shows the green shoot of exports is dying
Michigan Sentiment
Down to 55.7
Confidence among U.S. consumers dropped in August to the lowest level since November 2008
Housing Market

Rick Davis shows real time data on the “bump” in the housing market
Economic Order

Frank Li describes the Loop Theory – the natural flow of development
Consumer Metrics

Rick Davis discusses improving Consumer dynamics.
July Durable Goods
Up 4%
Likely up less than 2%, but this sector continues to expand.
Initial Weekly Unemployment Claims

John Lounsbury expands on the importance of the 400,000 WIUC level for employment.
July New Home Sales
Down 0.7%
We say sales are up, showing a bottoming process.
Hapless Indian Households

Ajay Shaw discusses the financial choices for the rural Indian poor.
July CFNAI
Economic activity improved
This super economic coincident index continues to show the economy is sick, but not dying.
Japanese Monetary Policy

John Muellbauer and Keiko Murata explain why some US/Europe/Japanese dynamics are not comparable.
Singapore

John Lounsbury pens Christopher Magee’s view of the Singapore “miracle”.
Global Economic Downturn

George Friedman gives elements of the economic downturn in different countries.
Japanese Credit Downgrade

Dirk Ehnts explores when Japan will face the music.
Free Markets?

Derryl Hermanutz takes on the notion of free markets, and then takes a swipe at Libertarian “theology”.
Rating Agencies

Michael Hudson rips notion that rating agencies are a positive force in judging sovereign debt.
Euro crisis

Warren Mosler pushes his euro solution – but says time is running out
Deregulation and Vigilance

Harlan Russell Green writes about the real world of financial deregulation
New Bear Market

Macrotides tells how to ride out the Bear Market he believes started earlier this month.
Bank of America

John Lounsbury discusses BAC’s financial woes and detractors.
Jackson Hole

Jeff Miller has his own idea what will have gone down in Wyoming.
Bank Stocks

Martin Hutchinson argues it's time to bail on bank stocks.
USA Deficit

Andrew Butter serves up some deficit solutions – and shows a correlation low bonds rate vs. GDP growth
Investing in a Volatile Market

David Grandey: how low will market go?
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Bankruptcies this Week: ShengdaTech, Iron Mining Group

Failed Banks this Week: None

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.