Steven Hansen's  Instablog

Much to consider this week, and it all adds up to uncertainty. Reading the tea leaves - I see a weak economy, but nada showing the USA is close to recessing. I continue to ponder recession flags (warning signs that the economy MAY soon be entering a recession.

Being real here, I do not want to get into an argument of what is a recession as I do NOT agree with the current system including how economic activity is measured. Sticking to the current technical recession criteria used by the NBER:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

..... The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

Here is a one graph says it all looking at the month-over-month change (I played with multipliers to make change more obvious).

(click to enlarge)

If the line is staying above zero (e.g. blue line = personal income, red line = employment, green line = industrial production) - no recession is indicated. It is the orange line = manufacturing and retail sales which is ugly, and could be indicating the economy is near recessionary conditions. However, this orange line is missing wholesale sales which is missing from the FRED database - and its growth is very positive.

(click to enlarge)

The Econintersect economic forecast for July 2012 shows continues to show moderate growth. Overall, trend lines seem to be stable even with the fireworks in Europe, and emotionally cannot help thinking this is the calm before the storm. There are no recession flags showing in any of the indicators Econintersect follows which have been shown to be economically intuitive. There is no whiff of recession in the hard data - even though certain surveys are at recession levels.

ECRI stated in September 2011 a recession was coming, and now says a recession is already underway. The size and depth is unknown. A positive result is this pronouncement has caused much debate in economic cyberspace.

The ECRI WLI index value remains in negative territory - but this week is again "less bad". The index is indicating the economy six month from today will be slightly worse than it is today. As shown on the graph below, this is not the first time since the end of the Great Recession that the WLI has been in negative territory, however the improvement from the troughs has been growing less good.

(click to enlarge)

Initial unemployment claims increased from 350,000 (reported last week) to 386,000 this week. Last week's decline appears to have been an anomaly as some pundits suggested. 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 - declined from 376,500 (reported last week) to 375,500. 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.

(click to enlarge)

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

• Rail movements (where the economic intuitive components continue to be indicating a moderately expanding economy);
• Retail Sales (less good but still strong and away from recession levels);
• Manufacturing portion of Industrial Production (continuing to improve and well away from historical levels associated with recessions);
• Leading Economic Indicator (weakening, showing less good growth coming).

All other data released this week does not have enough historical correlation to the economy to be considered intuitive.

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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.