Still Waiting for Real Economic Growth

by: Steven Hansen

Week after week, I try to explore the same question – is the economy expanding. As an investor, I always hope the answer is yes.

Over the months, while pundits keep pointing to green shoots – I have found little overall evidence the economy is expanding. This week it is the Philly Fed’s monthly coincident index for December 2009 which somewhat disagrees with my assessment:

In the past month, the indexes increased in three states (Nevada, Oklahoma, and Oregon), decreased in 40, and remained unchanged in seven (California, Idaho, Kentucky, Michigan, Texas, Utah, and Virginia) for a one-month diffusion index of -74. Over the past three months, the indexes increased in 10 states (Kentucky, Massachusetts, Michigan, Minnesota, Montana, North Carolina, New Hampshire, Nevada, Oregon, and Virginia), decreased in 37, and remained unchanged in three (Indiana, Kansas, and Oklahoma) for a three-month diffusion index of -54. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index rose 0.1% in December and 0.3% over the past three months.

So the Philly Fed is saying that there is growth over the last three months of 0.1% per month, or a little over 1% per year. As this is the first time I have publicly analyzed this index, the following is background on this index’s construction:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

This is another “things are not as bad index” which makes a negative seem positive. When you look at all the reddish color States, it is hard to see how the overall U.S. index could be improving.

My trusted coincident indicator, the Chicago Fed’s National Activity Index (CFNAI) shows that in December 2009 we are still not free of the recession. This index has been bouncing around in a narrow range in negative territory for the last six months.

The CFNAI is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

Technically, the CFNAI tracts the economy against historical potential. Currently the economy is operating below historical growth levels. But at the end of a recession, this index functions as an indicator of a recession ending expansion. The economy has not yet fully healed, and the CFNAI is indicating the recession ending expansion is not occurring.

Using the CFNAI as a check on equities performance, through end of December, the CFNAI continues to track the market performance. The CFNAI historically has tracked market performance.

Our unelected economic masters – the Federal Open Market Committee (FOMC) – met this week and their statement read in part:

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

The FOMC meeting statement had a dissenter for the first time since the wheels started flying off the economic cart. Thomas M. Hoenig believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate (which was unchanged at 0 to ¼%) for an extended period was no longer warranted.

Still no use of the word “expansion” in describing the economy – however, they did change the phrase “economic activity is likely to remain weak for a time” from the previous statement to read “the pace of economic recovery is likely to be moderate for a time.” There were no changes to the winding down of the Federal Reserves balance sheet programs such as the Mortgage Backed Securities program – but the FOMC statement included the normal caveat that they are monitoring the economy and will do what it takes to keep it moving.

The government released 4Q 2009 (advance) GDP numbers. Their statement in part:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7% in the fourth quarter of 2009. In the third quarter, real GDP increased 2.2 percent.

The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that were partly offset by decelerations in federal government spending and in PCE.

In the wacky world of GDP calculation, when inventories increase or decline – it affects the GDP number. At one time in history during the industrial revolution, this made sense. In 2010, it is simply ignorant. The graph below backs out the inventory effects.

I could produce detailed analysis of sketchy and soon to be revised GDP data, but David A. Rosenberg at Gluskin Sheff summarized 4Q 2009 GDP in easy to understand words which capsulates my sentiment:

… it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter. Normally, inventory adds are at least partly fuelled by purchases of foreign-made inputs. Not this time. Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter. Some recovery. Based on some simulations we ran, demand growth with all the massive doses of fiscal and monetary stimulus should already be running in excess of a 10% annual rate. So, the real question that nobody seems to ask is why it is that underlying demand conditions are still so benign more than two years after the greatest stimulus of all time. The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out.

The use of GDP numbers should be limited to fornication between economists. Joe Sixpack’s world revolves around jobs.

A final note on the subject of GDP. Singapore, which has been undergoing massive construction and infrastructure expansion recently issued their 4Q 2009 GDP numbers of NEGATIVE 6.8%. Guess what the unemployment rate is? 2.1%

GDP does not measure the health of an economy.

Consumer Sentiment

Consumer Confidence survey numbers vary as they use differing methods to quantify emotions. But listening to the words in the press releases make them more consistent.

Here are the words of The Conference Board describing their December 2009 Consumer Confidence Index:

Consumer Confidence rose for the third consecutive month, primarily the result of an improvement in present-day conditions. Consumers' short-term outlook, while moderately more positive, does not suggest any significant pickup in activity in the coming months. Regarding their financial situation, while consumers were less dire about their income prospects than in December, the number of pessimists continues to outnumber the optimists.

And ABC News said in their bi-weekly poll (pdf):

Views of the national economy are the chain around confidence’s ankle; more than nine in 10 Americans continue to say the economy’s in bad shape. The other two components of the index aren’t quite so dire, but hardly good: More than three-quarters rate the buying climate negatively and more than half say the same of their own finances.

And from the University of Michigan we get their January 2010 sentiment survey which says in part:

Consumer confidence rose in January to its highest level in two years due to a more favorable outlook for the national economy. Despite the expected gains in the economy, consumers still anticipate no improvement in their overall personal financial situation.

The Sentiment Index posted a 2.6% gain from last month and was 21.6% above last January’s reading, with the Expectations as well as the Current Conditions components improving by comparable amounts during the past year. Following significant gains in early 2009, the pace of improvement has slowed but still remains positive. The data indicate that total real personal consumption expenditures will increase by about 1.8% during 2010, the slowest exit from a recession in consumer spending in the post WWII period.


I use transport counts to validate private and government data. Container counts expressed as TEU for December 2009 have been released by the Ports of Los Angeles and Long Beach. Because of seasonal variations, it is best to compare shipping counts YoY.

The volume of Imported goods into the USA continues to be weak – but winter historically is not a strong period for imports.

On the other hand, container export volumes are still showing strength – and the count approached an all-time high for the month of December.

Rail transport has been improving over the last few weeks, and is retracing its levels of one year ago. One year ago, the shipping levels reflected the dark days of the recession. Simply retracing last years levels does not indicate improvement. Here are charts from Railfax:

Manufacturing and Business

Last week the data and analysis I provided on the Philly Fed’s manufacturing survey was wrong. My downloader grabbed Jan 2008 data instead of January 2010 data. I can offer no acceptable excuse why I did not catch this error.

My assertion last week was that the Philly Fed’s survey was terrible, and completely inconsistent with the New York Fed’s survey for manufacturers in their area.

The correct data is consistent with the New York Fed manufacturing data – which also showed for the first time in many months an increase in order backlog.

When order backlog stops declining, the business cycle has bottomed. As this is subjective survey, we need to wait a month for quantitative data.

Hat tip to Jennifer at Southhill Partners for bringing this to my attention, and I apologize for not catching that the correct survey was not used.

This week the Chicago Fed’s manufacturing index for the Midwest and the nation was released for December 2009 (pdf). Their story:

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.3% in December, to a seasonally adjusted level of 84.1 (2002 = 100). Revised data show the index increased 1.0% in November to 84.4. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was unchanged in December. Regional output in December declined 6.4% from a year earlier, and national output decreased 1.4%.

The bounce up in the graph is due to some inventory depletion. The effect of inventory depletion is still occurring, but there has been little real expansion so far in manufacturing since the beginning of the Great Recession.

Advance durable goods data for December 2009 was released by the government who said in part:

New orders for manufactured durable goods in December increased $0.5 billion or 0.3% to $167.9 billion. This increase followed two consecutive monthly decreases including a 0.4% November decrease.

Shipments of manufactured durable goods in December, up four consecutive months, increased $5.1 billion or 2.9% to $181.9 billion. This followed a 0.8% November increase.

Unfilled orders for manufactured durable goods in December, down fifteen consecutive months, decreased $8.6 billion or 1.2 percent to $715.5 billion. This was the longest streak of consecutive monthly decreases since the series was first published on a NAICS basis in 1992 and followed a 0.7% November decrease.

Inventories of manufactured durable goods in December, down twelve consecutive months, decreased $0.6 billion or 0.2% to $302.7 billion. This followed a 0.2% decrease in November.

My take is that a 0.3% increase in durable goods new orders is impossible to calculate as the seasonal data is not consistent. You have to pick a year as a base to argue if you want to suggest there is a gain or loss in December 2009.

My take on durable goods unfilled orders is positive. The slow bleed of decline appears to have halted. This is evidence that manufacturing is stabilizing.

Finally, the economists and pundits who continually talk about an inventories being replenished cannot point to the inventory to shipment ratios of durable goods. The “normal” ratio is around 1.4, and we have several more months to go to reach that level.

The January 2010 (pdf) Chicago Purchasing Managers report stated in part:

The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER rose to the highest level since November 2005.


EMPLOYMENT leapt to the highest level in nearly five years;

PRICES PAID expanded at an accelerating rate;

PRODUCTION, NEW ORDERS, and ORDER BACKLOGS continued to strengthen;

This is a subjective survey which needs hard data to validate. My take is this report is consistent with the New York Fed and Philly Fed manufacturing surveys in that backlog has stabilized.


The National Association of Realtors released their December 2009 data on existing home sales. A portion of their statement:

After a rising surge from September through November, existing-home sales fell as expected in December after first-time buyers rushed to complete sales before the original November deadline for the tax credit. However, prices rose from December 2008 and annual sales improved in 2009.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 16.7% to a seasonally adjusted annual rate of 5.45 million units in December from 6.54 million in November, but remain 15.0% above the 4.74 million-unit level in December 2008. [hat tip to The Big Picture / Calculated Risk for the non-seasonally adjusted graphic below]

For all of 2009 there were 5,156,000 existing-home sales, which was 4.9% higher than the 4,913,000 transactions recorded in 2008; it was the first annual sales gain since 2005.

Lawrence Yun, NAR chief economist, said there were no surprises in the data. “It’s significant that home sales remain above year-ago levels, but the market is going through a period of swings driven by the tax credit,” he said. “We’ll likely have another surge in the spring as home buyers take advantage of the extended and expanded tax credit. By early summer the overall market should benefit from more balanced inventory, and sales are on track to rise again in 2010. However, the job market remains a concern and could dampen the housing recovery – job creation is key to a continued recovery in the second half of the year.”

The national median existing-home price for all housing types was $178,300 in December, which is 1.5 percent higher than December 2008. “The median price rose because of an increased number of mid- to upper-priced homes in the sales mix,” Yun said. It was the first year-over-year gain in median price since August 2007.

Total housing inventory at the end of December fell 6.6% to 3.29 million existing homes available for sale, which represents a 7.2-month supply at the current sales pace, up from a 6.5-month supply in November. Raw unsold inventory is 11.1% below a year ago, is at the lowest level since March 2006, and is 28.2% below the record of 4.58 million in July 2008.

Distressed homes, which accounted for 32% of sales last month, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes in the same area. For all of 2009, the median price was $173,500, down 12.4% from $198,100 in 2008; distressed homes accounted for 36% of total sales last year.

Also this week, S&P/Case Shiller home prices weighed in with November 2009 data. Their story:

S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the annual rates of decline of the 10-City and 20-City Composites continue to improve, in spite of price declines being measured across many markets during November. This marks approximately 10 months of improved readings in the annual statistics, beginning in early 2009, and is the third consecutive month these statistics have registered single digit declines, after 20 consecutive months of double digit declines.

The English translation for the Case Shiller statement is that the YoY declines are less bad. I believe this month’s new emphasis on YoY values is in expectation that YoY values will soon be positive. Sneaky….

However, the real story this month is that there is a MoM home price decline – and Case Shiller adjusted last months data so there was a decline last month MoM also.

So the bottom line is that the unadjusted S&P / Case Shiller Home Prices have fallen for the last two months. Based on mortgage originations and NAR data showing a drop in pending home sales, I expect further deterioration of home values until well into 2Q 2010.

If the Fed removes its sticky fingers from the MBS market as advertised, then mortgage interest rates will float skyward further chilling home sales and values. I have doubts that the Fed will be able to simply walk away cold turkey from the mortgage market.

Here is a comparison between the National Association of Realtors and S&P/Case Shiller – all comparisons use a 3 month rolling average and unadjusted data.

The question is why the NAR home value data has turned up. I have no reason to believe the data is manipulated, but it is most likely due to a shift again to a higher value home segment. As a reminder, Case Shiller only uses data where they can match previous home sales so they can precisely determine the change in value. NAR simply averages all home sales. Neither method provides a perfect picture of what is happening to home sales values.

New home sales declined in December 2009. The government’s statement:

Sales of new one-family houses in December 2009 were at a seasonally adjusted annual rate of 342,000. This is 7.6% (±14.6%) below the revised November rate of 370,000 and is 8.6% (±15.2%) below the December 2008 estimate of 374,000. The median sales price of new houses sold in December 2009 was $221,300; the average sales price was $290,600. The seasonally adjusted estimate of new houses for sale at the end of December was 231,000. This represents a supply of 8.1 months at the current sales rate. An estimated 374,000 new homes were sold in 2009. This is 22.9% (±2.9%) below the 2008 figure of 485,000.

A check on the unadjusted monthly sales numbers reveals the worst month since the housing crisis hit.

Other Economic News this Week

Initial unemployment claims for the week ending 23Jan2010 again increased slightly. As the un-averaged seasonally adjusted numbers and the non-seasonally adjusted claims numbers both declined, I will assume that this upward spike in the seasonally adjusted 4 week rolling average is transitory.

The weekly Mortgage Bankers Association new mortgage application data for the week ending 22 Jan 2010 improved slightly but remains about half of the level of earlier this year using seasonally adjusted data. The 30 year fixed mortgage rate increased 2 basis points to 5.02%. The press release included an interesting quote:

Refinance activity fell substantially last week. Although rates remain low, there appears to be a smaller pool of borrowers who are willing and able to refinance at today’s rates.

Bankruptcies this week: Affiliated Media, Firstgold

Failed Banks This Week:

Economic Forecasts Published this Past Week

The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index marking the lowest yearly growth reading since the gauge reached a record high in October. The graph included is showing the rate of growth of the WLI – the WLI is growing, but its rate of growth is slowing. Lakshman Achuthan, Managing Director at ECRI added:

Still, with WLI levels continuing to rise, the recovery will continue to gain ground in the months ahead.

The IMF revised their world economic growth projections. According to Bank of Tokyo-Mitsubishi UFJ:

They are saying that much of the revision is due to emerging market countries growing more quickly based on their own internal demand as opposed to seeing the benefit from export-driven growth that relies on demand from developing country markets. This is an interesting development, but the forecast seems to be downplaying the marked improvement in Europe and the United States, who together account for almost half of the world economy. The U.S. growth forecast was revised up 1.2 percentage points in 2010 to 2.7% and Euro Area growth was revised up 0.7 percentage point to 1.0%. While these growth rates in Europe and the U.S. are not back to normal, the upward revisions to the forecasts are substantial and there may be more such revisions to come in the future.

Disclosure: GLD, XPH, XLB, XLV, FTR, IOO, HYG, KSWS, PIN, XHB, WMT, GDX, Physical Gold - as well as numerous puts and calls which comprise less than 3% of my portfolio.

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