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Financial Iceberg
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I am an independent trader with over 25 years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes and worked at Pensions Funds, International Banks and Dealers.
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Financial Iceberg
  • US Economy: 7 Critical Indicators Of Potential Recession 0 comments
    May 26, 2013 9:55 PM

    Since the beginning of the financial crisis, the Federal Reserve has been obliged to inject tons of liquidity into the system. Financial assets like the SP500 had a very good performance indeed. But at some point a little bit disconnect to the real economy.

    ​​We will compare the SP500 to the 7 US Economic Indicators. And more specifically :

    1) ​Value of US manufacturers unfilled orders for capital goods (Nondefense capital goods excluding aircraft).
    2) US Federal government current expenditures
    3) US imports of goods and services
    4) Value of total inventories for durable goods industries
    5) US real retail and food services sales (excluding motor vehicles and parts dealers)​
    6) US manufacturing index PMI​
    7) US aggregate hours worked
    ​​
    Let s go through each economic data showed in the charts below (in a year-over-year % change).

    1) ​Value of US manufacturers unfilled orders for capital goods (Nondefense capital goods excluding aircraft).

    (click to enlarge)

    All charts from FRED: http://research.stlouisfed.org/fred2/

    What we can observe from this chart is that when the growth of the value of US manufacturers unfilled orders for capital goods (Nondefense capital goods excluding aircraft) are trending below 0%, we had previously a recession...

    2) US Federal Government Current Expenditures

    (click to enlarge)

    So, in this case, when we had a slowdown in the US Federal Government expenditures, a recession followed...

    3) US Imports of Goods and Services

    (click to enlarge)

    And each time we had a slowdown in the imports of goods and services on a year-over-year basis, the US has been in a recession because it does indicates a pull back from US consumers...

    4) Value of Total Inventories for Durable Goods Industries

    (click to enlarge)

    And when the business sector managed to bring down inventories to a more sustained level, it did creates such a slowdown that put the US economy in a recession...

    5) US Real Retail and Food Services Sales​ (excluding motor vehicles and parts dealers)​

    (click to enlarge)

    Each previous slowdown below 1% in real year-over-year growth has been declared recession zone...

    6) US Manufacturing Index PMI​

    (click to enlarge)

    And most of the time, when we had a year-over-year decline in % of the ISM manufacturing index, a recession followed...

    7) US aggregate hours worked

    (click to enlarge)

    This picture showing the seasonally adjusted month over month change in aggregate hours worked, which I get simply by multiplying the average weekly hours of private employees by total employees. When total hours worked turns negative on a year-over-year basis, usually a major slowdown is in the cards...

    Conclusion

    When we add all those economic indicators by creating only one synthetic indicator, we obtain (in a year-over-year % change)...

    (click to enlarge)

    (click to enlarge)

    and when we put the mighty SP500 index on a year-over-year index as the chart above, we realize that there is a huge disconnect between the economic data and financial market... Is the stock market overvalued; yes indeed !

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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