Steven Hansen's  Instablog

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.

This definition and the associated table provoke a series of questions....

Who thinks this recession is over?

I know the economic community believes the recession is over – and based on a mind-numbing set of anal definitions – it is over. Real-world people who may not of taken Econ 101 see the recession still doing damage.

Who says formal education makes you smarter?

I have been giving a set of lectures on the Great Recession to an international group of well-above-middle-class individuals on Princess Cruises (CCL) Tahitian Princess. Not one person thought the Great Recession was over.

All reject the NBER's definition of a recession. It was labeled as stupid. How can you have massive unemployment and think the recession is over?

And because the government and the Fed keep strongly insinuating the recession is over, it is breeding distrust of our leaders.

The reason this recession is over is due to the rise in the G.17 Industrial Production report in mid 2009. This historically is THE signal which says the recession is over when industrial production shows a definite bottom. Of course GDP must also go positive in 3Q 2009, and it is expected to oblige.

The 2001 recession took 4½ years for industrial production to return to its pre-recession level. That really sounds like a depression, but as there is no agreed definition for a depression – it is impossible that a depression occurred.

How many years do you think it will take industrial production to return to its December 2007 levels?

1 year?

4 years?

Never?

And if members of the NBER recession dating committee are reading this, after an economic decline the first bounce up in industrial production is due to inventory equilibrium – not economic improvement. Hopefully the NBER has realized this, but I suspect they will be under political pressure to call an end to the Great Recession as soon as possible.

The NBER waited almost a full year to say we were in a recession, and I suspect sometime later this year or in the 1Q 2010 will say the recession ended in June or July 2009 based on their past methodology.

Based on our 2001 recession experience, it will be a mistake for the NBER to end this recession before an indisputable improvement in economic conditions.

Where is the evidence things are getting better?

When it takes a microscope to understand the economy is improving – then it is not improving. The way the stimulus and Fed's liquidity are targeted on GDP – technical improvements may be both temporary and artificial.

Data released this week is not supporting that a real fundamental recovery is underway.

The greatest doubt was created by the Federal Reserve's October 2009 Beige Book – which measures overall economic activity in the12 Federal Reserve districts. A sentence in their summary:

Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered.

As many of the determinations in each district are qualified, it is impossible to create a meaningful tabulation which would allow readers to draw their own conclusions at a glance. However, I believe the Fed's summary statement quoted above is accurate – and that there are pockets of continuing declines as well as pockets of apparent increases.

There are also a few inconsistencies. Most districts report declining transport. For me, this does not square with slightly improving manufacturing and stable retail sales.

Overall, the Beige Book does not paint a picture of an improving economy. And what is interesting to this author is that the areas of improvements seem to play directly to the elements which increase GDP. The economic areas declining or remaining weak are not elements of GDP.

The NBER uses improving GDP as the primary measure to determine that a recession is over. As GDP is a quarterly release, the exact month a recession ends is normally the month industrial production decline bottoms – and for this recession it is June 2009.

New house permits and completions showed a decline in September 2009 according to adjusted data. You have to be careful with seasonally adjusted data in recession troughs as they anticipate fluctuations which normally happen – but may not be happening.

But in this case, with first time buyer credits in play (and expiring next month) – this data does not look positive from an economic expansion point of view. In addition, YoY comparisons show contractions in the 30% range.

Builder confidence reflected in the Clusterstock chart of the day showed a drop. I assume this means that builders were sold that an economic expansion was underway, and are now realizing it was a mirage. Recovery ≠ economic expansion.

The Producer Price Index (PPI) for September 2009 is not a significant piece of data which anticipates economic direction. However, the continuing lack of direction of the PPI – one month up, one month down – gives you pause. Is it pointing to deflation? Is it telling you that production picked up in anticipation of an economic expansion which did not occur (and now requires discounting to move their product)?

The new unemployment initial claims remained basically unchanged this week. The number of weeks this recession has exceeded 500,000 people applying for unemployment benefits is unparalleled. I refuse to buy into the argument that this continuing destruction in the jobs can be ignored – and is not a harbinger of a very dismal economic future.

Forget jobless recovery. The coincident data is continuing to point to a non-recovery recovery.

Additional Economic Data This Week

The National Association of Realtors (NAR) released their September 2009 existing home sales data claiming “big rebound in existing home sales” of 9.4% due to first time buyers. Analysis by Barry Ritholtz of The Big Picture says the NAR is distorting the seasonal adjustment factors.

I am honestly unsure of whether the folks at the NAR are dumb as lawn furniture and make these misrepresentations honestly — or whether are just another group of disgusting spin doctors, willfully peddling lies because it helps their own agenda.

What Barry Ritholtz is saying is that the first time home buyers credit, coupled with low interest rates which may rise soon – has extended the buying season one month. This makes the seasonal adjustment factors inoperative. He points to the non-seasonally adjusted data as better indicating the real situation.

The rate of new mortgage applications decreased significantly this week and is now below its range it has been oscillating in since April. The four week moving average of all mortgage loan application volume (which includes refinancing) decreased 1% WoW. The average interest rate for 30-year fixed-rate mortgage increased 5 basis points to 5.07%.

Filing for Bankruptcy: Stallion Oilfield Holdings, NTK Holdings, Nortek

Bank failures this week:

Economic Forecasts Published this Past Week

The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index which dipped slightly from its all-time high. Lakshman Achuthan, Managing Director at ECRI added:

Despite a dip, WLI growth remains close to the previous week's record high, suggesting that the U.S. economic recovery will continue to gain strength through the New Year

This week the Conference Board released their Leading Economic Index (LEI) and Coincident Economic Index (CEI) for September 2009. I am fairly critical of the LEI as it is too heavily influenced by the Federal Reserves' quantitative easing programs. In any event, the LEI continued its skyward journey while the CEI remained flat.

Hat tip to Steve at MEMETICS & MARKETING™ for editing support.

Hat tip to Princess Cruises for providing internet access for publishing this article.

Disclosures: long MMF's, GLD, IOO, EWZ, EWY, EWA, EWC, EWM, EWS, THD, FXI, PIN, UUP, Physical Gold - as well as numerous puts and calls which comprise less than 3% of my portfolio.