Greece continues to screw up the economic landscape.
The unanswerable question remains how Greece will default. Greece (as well as its weak sisters) cannot survive without an overhaul of the basic structure of the eurozone. No talks are underway to reform the basic eurozone structure - only continuing efforts to slash budgets which will intensify the death spiral. It amazes me at the market continuing to react to "good" eurozone news. There is no good news - only bad news in various degrees.
How Greece defaults will effect the global and USA economy in varying degrees. Picture that there is a balance in global economy, and that any disruption in the balance works negatively until a new balance is gained. The smaller the disruption, the quicker a new balance can occur.
The least disruptive situation would be a controlled default - but still leaves Greece with an economy out-of-sync with the rest of the eurozone (which is a can kicked down the road to be dealt with later). One would assume a controlled default is being worked on in the backrooms of Europe. A controlled default would present moderate economic headwinds to the USA economy - and not recessionary as long as the economy was expanding faster than the headwinds.
Prior to the 2007 recession, the USA economy was consumer driven - and consumers lead the charge for recovery. Feast your eyes on the inflation adjusted FRED chart for retail sales which show retail still remains in a depression.
click to enlarge images
Four years after the end of a recession - the consumer is still not gorging at the consumption trough, and the consumer remains at least 2/3rds of the USA economy. Taking the above graph to the second derivative, it appears the economy is well above historical recession levels - but the rate of growth continues to decline.
Most pundits (including yours truly) have pointed this current "recovery" has been driven by business. However, the business sales and inventory release this week offered a rude awakening. Business sales are a combined manufacturing plus wholesale plus retail.
The red line in the business sales graph is inflation adjusted and is comparable to the retail sales graph above. In December 2011, the year-over-year improvement is only 3.3%, and the lowest improvement year-over-year since February 2010. Your takeaway is that the rate of growth of all sectors of the economy are now equalizing.
It is illogical that any sector of the economy could indefinitely continue to outperform the rest. In our current situation, manufacturing and wholesale growth rates are falling to retail growth rates.
Our current economic forecast is a strengthening of the economy in February. Unfortunately, there is no way to quantify how the uncertainty over Greece is currently playing into the economy, and how it is distorting historical economic relationships which are used to forecast.
Economic News This Week:
The Econintersect economic forecast for February 2012 continues to indicate a strengthening of economic fundamentals. This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction. Several of this index's components draw on transport industry movements.
ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession was to hit before the end of 1Q2012. At this point, the chance of a recession based solely on the coincident data is becoming unlikely.
This week ECRI's WLI index value was -3.7 - a negative value but the best index value since August 2011. This is the fifth week of index value improvement. This index is indicating the economy six months from today will be weaker - but increasingly marginally.
Initial unemployment claims fell 13,000 to 348,000. 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 - fell slightly to 365,250. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
The data released this week which contains economically intuitive components (forward looking) were positive - and are industrial production and rail car movements. Special attention should be given to Econintersect's review of the "new" Leading Economic Index - which is forecasting an improving economy in the coming months.
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Bankruptcies This Week: LSP Energy Limited Partnership, CDEX, Energy Conversion Devices (ECD)
Failed Banks This Week: None