A Recession Is On My Mind

by: Steven Hansen


We witnessed very poor advance estimate of GDP growth this week for 4Q2015.

Does this mean that a recession did not start in 4Q2015?

The advance estimate for 4Q2007 was similar to 4Q2015.

I must confess that a recession is on my mind. It is the decline in the markets coupled with the recession currently occurring in the goods producing sector. It is entirely possible that a recession would be marked in 4Q2015.

As we know 4Q2015 advance estimate of GDP was released on Friday showing growth at 0.7%. Let us look at 4Q2007 advance GDP estimate:

Real gross domestic product - the output of goods and services produced by labor and property located in the United States - increased at an annual rate of 0.6 percent in the fourth quarter of 2007, according to advance estimates released by the Bureau of Economic Analysis.

Anyone getting deja vu? Advance estimates of GDP historically seem to be nothing more than a wild guess.

I have no love on the way the economy is measured. In business, your organization is no stronger than your weakest link. The links in the economy are people. The measurements therefore should be on the median to lowest people in the economy. The 0.1% do not need monitoring. The tools to measure would be employment and income. Employment is still recovering and is providing more and more of the population jobs - slowly but surely. Even though I have attacked the way employment is monitored, there is no argument that employment is improving (improving but at a slower pace than the rate the headlines show).

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Employment growth, however, is driven by dynamics which occur months earlier - and therefore does not drive the future economy. It's an old canard that employment is a lagging indicator. So the Federal Reserve's concentration on employment as a guide when to raise the federal funds rate is misguided. As predicted, the economy was declining as the Fed adjusted the rates in December 2015. In the recent meeting statement, the Federal Open Market Committee (FOMC) did NOT continue their adjustment of the federal funds rate because "....economic growth slowed late last year." Gee, what a surprise to most except for the Federal Reserve. (Sarcasm.)

Also median inflation adjusted family income continues a slow recovery process - and is currently back to pre-Great Recession levels and within about 1% of the January 2000 level.

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Yet, the average person likely was better off in the past.

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In the USA, recessions are marked by the National Bureau of Economic Research (NBER). Sticking to the current technical recession criteria used by the NBER:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

….. The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

Below is a graph looking at the month-over-month change (note that multipliers have been used to make changes more obvious).

Month-over-Month Growth Personal Income less transfer payments (blue line), Employment (red line), Industrial Production (green line), Business Sales (orange line)

In the above graph, if a line falls below the 0 (black line) - that sector is contracting from the previous month. At this point, much of the data is soft - with business sales and industrial production in the warning zone. Again, this is a rear view mirror, subject to revision, and is not predictive of where the economy is going. Another way to look at the same data sets is in the graph below which uses indexed real values from the trough of the Great Recession.

Indexed Growth Personal Income less transfer payments (red line), Employment (green line), Industrial Production (blue line), Business Sales (orange line)

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To repeat: The data sets used by the NBER to mark a recession are relatively weak with industrial production and business sales in the warning zone.

You hear economists arguing against trickle down economics. Yet, close examination of the health of the economy centers on the stock markets, total personal income (throw in the 0.1% income which distorts income measurements), industrial production, and business sales (retail plus wholesale plus industrial). This is a "rising tide lifts all ships" economic measurement - and may or may not measure the situation of the majority of the population.

Currently the majority of the population is seeing marginal economic improvements. Those old enough to remember KNOW the good 'ole days were better.

My usual weekly wrap is in my instablog.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.