Oil Prices Already Causing Recession In Energy Portions Of The Economy

Includes: DIA, OIL, QQQ, SPY, USO, XLE
by: Steven Hansen

Last week's article suggested that determining the tipping point where rising energy increases would push the USA into a recession was difficult to determine. One line of thought is that the consumer would be soon be overburdened from direct energy cost rises causing a recession, while the complementary line of thought was the increase in energy related inputs into the the supply chain would trigger a recession from rising prices.

Some have pointed to deteriorating growth trend lines on industrial production and consumer spending being signs of a growing economic stress - and possibly an impending recession.

Consider that the deterioration in these major coincident indicators a energy recession already underway - except this recession is limited to the energy segments of the economy. Take industrial production, which is comprised of:

  • manufacturing
  • mining
  • utilities

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Industrial production's year-over-year growth rate is flat with a slight downward bias. But if the energy portion of industrial production is measured, it is contracting - while the other two components (manufacturing and mining) are growing.

Seems demand for energy products is already recessing. One would think that demand was down because the consumer was at their limit in energy spending causing this contraction.

The above graph breaks down consumer spending year-over-year growth. Note that the consumer is actually spending less year-over-year on energy. This trend will likely moderate in February 2012 as higher prices continue to bite - but note this downward trend started in mid-2010.

Let us review - energy prices up, energy production down, spending down. This pattern is not what one would expect from Econ 101 text books. Yet there is little evidence to support a general recession call based on a contraction in consumer energy spending or industrial production utilities - these contractions appear outside of recessions and can be persistent in duration.

If energy is removed from consumer spending, the growth trend lines are slightly positive over the last three months. In industrial production, the growth trend lines without utilities are positive.

Could it be the new normal economy is currently adjusting / re-balancing to changing energy inputs - and the degradation in the year-over-year growth is not a recession warning as the non-energy components appear relatively strong?

Economic News This Week:

The Econintersect economic forecast for March 2012 continues to indicate a growing economy. 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 start has been revised to hit around mid-year 2012.

This week ECRI's WLI index value continues to be less bad at -2.6 - a negative value but the best index value since August 2011. This is the eighth week of index value improvement. This index is indicating the economy six months from today will be weaker - but increasingly marginally.

Initial unemployment claims essentially rose from 354,000 to 362,000. 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 - was statically unchanged at 355,000. 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.

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The data released this week which contain economically intuitive components (forward looking) was negative - rail movements. Rail traffic year-over-year contraction reported for the third week in a row is troubling.

Click here for the Scorecard table below with active hyperlinks.

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Bankruptcies This Week: United Western Bancorp

Bank Failures This Week:

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