The BIG news for me this past week was the passing into positive territory of ECRI's Weekly Leading Indicator. This index looks forward six months - so is now indicating the economy will be marginally better 6 months from now.
The overall issue is what should one believe? No one is able to "prove" what will happen in the future.
The amount of economic data and analysis in cyberspace is overwhelming. One must pre-decide what is important, and not important. Even with automation, where human minds do not touch the data, weighting factors or algorithms are used when sifting through the data. With all the data out there, I could make strong cases the economy was recessing, muddling or expanding.
On occasion, some pundits mine the data to prove a point. But the economy is not a single dynamic or grouping of data points but millions of dynamics interacting. While many parts of the economy will be expanding at different rates, it is also true that many will be contracting at different rates.
The governing groups of dynamics are constantly in a state of flux. One must always question if this time is different, and also question if that particular model is correctly forecasting. Using several economic models, which have different views of the governing dynamics, provides a broad perspective. Generally, all economic models are forecasting economic expansion with the major exception being ECRI's Weekly Leading Indicator until now.
GDP and Consumer Spending
GDP is a rear view economic mirror, and to consider it a forecasting tool is ignorant.
This past week, the second estimate of second quarter GDP revised upward economic growth to 1.7% based on more detailed information. Generally, if the second half of a quarter is stronger than the first half, GDP will tend to strengthen with each subsequent estimate, and the carry forward to the next quarter is often positive.
GDP is telling us the economy may have been growing more strongly going into the third quarter. GDP is not my favorite tool to understand economic history, as it tells only part of the story of the consumer - namely spending. Yet, while the consumer appears to have hunkered down compared to 1Q2012, the consumer also appears to have been spending more in the second half of the second quarter than the first half.
My theory is the uncertainty on the economy and their jobs going forward has caused the consumer to be a more conservative. There is no indication (yet?) of a spending contraction, while there are glimpses consumer spending is improving.
And those who believe we are currently in a recession would have to ignore the Personal Consumption Expenditures (PCE) for July 2012 released Thursday. It shows a strong spending growth in the first month of 3Q2012. It is interesting that the backward revisions have almost removed the contractions originally shown in the PCE data for 2Q2012. It is the backward revisions which make real time analysis of consumer spending literally impossible.
In doing the Econintersect Forecast for September, the Main Street economic drivers appear to be gradually strengthening through 2012 - unfortunately, the growth takes a microscope to see, and has been very turbulent (up one month, down the next). I warned when the September forecast was published:
Before you break out the champagne, this is a relative index - it shows that tomorrow will be better than today, but does not quantify the amount of the improvement. It appears the downward trends have at least temporarily abated.
Econintersect Economic Index (EEI) with a 3 Month Moving Average (red line)
Chicago Fed Economic Model
The Chicago Fed has a dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting. I bring this up because this model is predicting short-term weakness in GDP and the return of the consumer.
It is very easy (although intellectually lazy) to add up only the negative data, and believe the economy is headed into darkness. However, overall the U.S. economy appears to be muddling along with a subtle (unnoticeable to some segments) improvement. With all the negative trend lines earlier this year, I was concerned the economy was headed for contraction. It still might, but for now, trends are improving.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.