The September 2009 Chicago Fed National Activity Index (three month average) rose again last month but remains below the historical marker which confirms a recession is over. In my opinion, this is the best indicator in economics land.

I came across a definition this week from Bank of Tokyo Mitsubishi concerning recovery.

If real GDP grows 3% or more in the first four quarters after the recession, then this is counted as a V-shaped or fast recovery. If it takes two years for real GDP to get up to 3%-plus speed then this slightly slower recovery is called a U-shaped recovery.

Pick the correct answer from the list of true facts:

The preliminary numbers for retail sales for September 2009 show:

Investors need advance economic warning on the economy. There is only one game in town – that is Economic Cycle Research Institute (ECRI) Weekly Leading Indicator (WLI). I publish this index weekly.

Our economy is 80% non-manufacturing.

This week the Institute of Supply Management (ISM) released their September 2009 Non-Manufacturing Report on Business indicating for the first time that this business sector was expanding for the first time since January 2008.

The weekly initial unemployment claims data this week showed a dramatic improvement.

The world is not black and white - especially economics.

With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. – Fed Chairman Ben Bernanke on May 22, 2009

This is an interesting recession.

In the past I have postulated the various possibilities of the type of recovery we would face – L, U, V, or W.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. - The board of directors of the Federal Reserve - Federal Open Market Committee (FOMC) meeting statement this week

This week The Conference Board released their leading and coincident indicators for August 2009. Their Leading Economic Index (LEI) is still rising like a rocket ship, and their Coincident Economic Index (CEI) is strangely flat even though it has been five months since the LEI went ballistic.

I spent the earlier part of this week with shipping executives at the Digital Ship Singapore 2009. The focus of this conference was on broadband satellite interfaces with the worldwide shipping fleets, but during the many breaks and liquid entertainment segments, there was adequate time to talk shop about maritime market conditions.

Fed Chairman Ben Bernanke Saying the recession was probably "technically over" this week has put my imagination into overdrive.

I am keying off of the word “technical”.

The National Bureau of Economic Research (NBER) through its Business Cycle Dating Committee determines when recessions begins and ends. The last recession they dated was from March to November 2001 which is sometimes called the dot-com recession. The rationale of the NBER for choosing these specific dates can be viewed here.

In choosing the dates of business-cycle turning points, the committee follows standard procedures to assure continuity in the chronology. Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs.

Consumer credit is down in July 2009 based on preliminary data. The headline splashed about was that credit contracted over 10% annualized between June and July.

One person who has consistently maintained this will be a “V” recovery is Lakshman Achuthan, Managing Director at Economic Cycle Research Institute (ECRI) who says.

A number of our leading indexes, including the Weekly Leading Index, are pointing to a stronger recovery than most people expect. While anticipating the timing of cyclical turns is the primary strength of ECRI’s approach, the performance of ECRI indicators -- like the WLI -- are suggesting that the early stage of this recovery is likely to be the strongest we’ve seen since the early 1980’s, i.e., stronger than the last two recoveries. In pundit-type language I’ve suggested at least a lower case “v-shaped” recovery.

Last week the government released their first revision to 2Q 2009 Gross Domestic Product (GDP). It was surprising that there was no revision to the initial negative 1.0% numbers. At economic turning points, a lot of wacky things affect the initial sampling and estimates; these are presumably corrected when the actual data is revised.

I have an issue over the way GDP is used to measure our economy. Nothing is wrong with the concept of GDP – but it just does not measure enough economic activity.

What Will Drive Our Recovery?

Wealth destruction has created a major headwind for recovery as it has removed significant private money from the marketplace. But this is not the only headwind:

• Low employment / high unemployment – If you do not have a job, you have little money to spend of non-essential items.
• Huge private debt – Houses mortgages under water. Credit cards maxed. It is hard to qualify for a loan. This limits the ability of an economy to expand through borrowing.
• Government debt growing – the cost of the interest expense of this debt removes money from the economy. As the economy re-expands, normally the cost of borrowing increases.
• Demographic shift – the boomers are getting ready to retire. Some have already taken early retirement. Retired people do not invest or take risks like people with real jobs. And the majority of America’s wealth is with the boomers.
• More money being saved by consumer – Consumers spending on goods and services drives the economy. Less spending means less goods and services will be required.
• Growing banking losses including residential and commercial real estate – this is draining additional wealth.

All of us who analyze economic data spend a lot of hours looking for economic headwinds / weaknesses – as it is these weaknesses which counter the natural tendency of the economy to grow.

Jobs and unemployment will determine how “recovery” will play out. If the data we analyze is garbage, all forecasts will be garbage. Unfortunately, the unemployment and jobs numbers are having so many data anomalies that we must question whether it is possible to have any accurate economic forecast.

A 4Q 2008 Bureau of Labor Statistics report on private employment business dynamics almost slipped below the radar as the material is ancient recession history.

This is not 1975, and Joe Frazier and Muhammad Ali are not in the ring.

But the economic crisis which began in December 2007 has only finished the first round.

The data this week has been the best we have seen since last year. Most of the data is for the month of July 2009. Even before this data came out, the Wall Street Journals poll of economists believed the recession was over. The vast majority believed the recession ended in July or earlier.

It is highly likely, short of a black swan event that this recession is over. By definition a recession ends when the economy no longer is declining. The NBER, who decides when recession begins and ends using inexact formulas and smoky rooms, will wait to call the end of the Great Recession.

Purpose:

To outline steps the government must take to export manufacturing jobs and industries.