Like most analysts, we are on high alert for recessionary signs as the economy runs at stall speed. To date, we have raised two potential recessionary flags: (1) inflation adjusted imports [imports contract during recessions] and (2) equities markets.
There is a lot of weakness out there. Some indicators are near a recession flag. Others remain positive but weak.
- Government spending remains up year-over-year – but this will not continue beginning in October 2011 when the new 2012 budget begins.
- BLS nonfarm employment did not grow last month. Although I have certain reservations on the use of their data in real time (due to backward revisions), it is hard to suggest that the continued degeneration of jobs growth is not ominous.
- Unadjusted Industrial Production, although showing no month-over-month growth, remains up year-over-year
- Retail sales remains surprisingly strong in a weak economy – people gotta eat and get to work.
click to enlarge images
The most important indicator of recession is the consumer and, depending how you derive the number, the consumer is about two-thirds of the economy. From the chart above, retail sales are running at levels suggesting strong economic growth.
But all retail sales do not trickle into GDP, and retail sales are not 100% of consumer spending. Even though I might think that GDP metrics are mismatched to a service economy – GDP remains the primary recession measurement. A good example is that consumer spending on average grew during the 2001 recession.
This coming week we have two pieces of significant data, durable goods sales and PCE (personal consumption expenditures).
Durable goods is a component of GDP. Here is where last month’s data left us:
Durable goods (inflation adjusted) is lethargic and bouncing around the no growth area. It will not take much “less good” elements in August 2011 data to pull durable goods negative.
Personal consumption expenditures (PCE) for August 2011 is also on tap for release next week. PCE – aka consumer spending – too has been dancing at recessions door – but received a growth spurt last month.
As the saw-tooth pattern indicates, an up month is often followed by a down month.
It is likely a recession at this point would be technical (think December 2007 through April 2008 – or the entire 2001 recession). The consumer (based on sentiment surveys) is already acting like they are in a recession – therefore it is unlikely that there would be any major contraction from already hunkered down consumers.
However, Federal Government spending will begin to contract later this year and, with contracting asset prices (spelled equities and real estate) coupled with a very weak economy, could collectively be the next pothole in our Great Depression 2.0.
Economic News This Week:
The Econintersect economic forecast for September 2011 predicted the economy will contract – but there is an indication that the economy may begin slight growth in the coming months. The majority of the weighted elements were negative, but some key elements were showing positive growth.
This week the Weekly Leading Index (WLI) from ECRI series was revised – it remains in a negative trend but negative values were revised from last week to less bad. 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. Please note that a similar downward trend occurred one year ago and did not result in a recession.
This week, ECRI’s Lakshman Achuthan warned of recession risks (click on image to view video):
Initial unemployment claims fell 9,000 (from 432,000 which was revised up from a preliminary 417,000 last week) to 423,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge – the 4 week moving average – rose 500 to 421,000 because of the backward revision. Because of the noise (week-to-week movements), the 4-week average remains the reliable gauge.
The primary data point this week was the equities markets correction. This makes the richer half of the population poorer, and poorer people think twice when ordering their next yacht.
Weekly Economic Release Scorecard:
|Recession Flag: US Equities Markets|
|Fact Check: Does Buffett Really Pay Less Taxes than his secretary?|
|August Leading Economic Indicator: Now Going Up Half as Fast|
|U.S. Macro View: Are We There Yet?|
|August Existing Home Sales: Are We Beginning to see Price Capitulation?|
|Italy: Is Demographics running In their Economic Favor?|
|New Home Construction: Finally Demonstrating a bottom|
|US Economy: A Lost Decade Into The Great Middle Class Poverty|
|Economic Theory: Credit, Demand and Unemployment|
|Consumer Metrics: Consumer is Growing Stronger|
|Government: Should a Country Be Run Like a Business?|
|Unemployment: Supply Side Solutions|
|Europe: The Crisis is Getting Ugly|
|Global Financial Assets: Implosion Coming Soon|
|USA Wages: Change the Way Union Labor Negotiates Wages|
|China: Ways to rebalance the Economy|
|Housing Market: Risk factors and dynamics have changed|
|China Markets: Headed towards the Moon?|
|Germany: Tying Euro value to the DAX|
|Investing Relief: Getting better acquainted with wine and garlic|
|Coppock Curve: A bad omen which just may have hit our investments?|
Bankruptcies this Week: SulphCo, Local Insight Media Holdings (LIMI)
Failed Banks this Week:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.