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Perceptions Are Partly Responsible For Causing Market Slide

The market indices are used by many economists and economic forecasters as a component in their economic forecast. I also see the wisdom in this approach as the market has historically lead GDP. Yet consider in 2007, it missed forecasting a recession was coming.

Whilst not claiming a recession is coming, the recent market uptick is not justified based on any hard data being released - or forecasts of corporate profits. In fact, there are warnings and strange things happening which point to a less robust economy:

  • Manufacturing component of Industrial Production which has a high correlation to the economy declined.
  • Business sales (inflation adjusted) declined (lagging indicator).
  • Sea Container counts have declined significantly and these have a high correlation to the Main Street economy.
  • The rate of growth of the home building sector has declined dramatically in the last two months.

I see no indicator which has a high correlation to the economy which can be described as strong. My concern is that the economic forecasts are not matching the obviously weaker hard data. This is a warning of a bizarro event - the rear view mirrors are not matching the terrain of where we thought we were driving.

Investors always drive in the fog - it is the nature of the beast. But when the rear view mirror starts showing a strange landscape, it is not time to increase speed.

The Econintersect economic forecast for April 2012 improved marginally, and is now in a zone which says the economy is beginning to grow normally. There are some warning signs that our interpretation is not correct - but we will see how these play out in the coming months. Not to end on a negative note, the majority of pulse points are improving.

The ECRI WLI growth index value has been weakly in positive territory for over four months - but in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

Initial unemployment claims increased from 346,000 (reported last week) to 352,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here).

The real gauge - the 4 week moving average - slightly worsened from 358,000 (reported last week) to 361,250. 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.

Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line)

Bankruptcies this Week: none

Data released this week which contained economically intuitive components (forward looking) were:

  • Rail movements remain mixed.
  • Industrial Production manufacturing subindex declined. One month is not a trend, but taken with other unusual data declines demands attention.
  • Container counts dropped unexpectedly - with exports now contracting year-to-date. This tells you the global economy is contracting. Imports, which contracted year-over-year, is still positive year-to-date. Imports are intuitive for main street consumption.

All other data released this week either does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

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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.