Recent Readings from Five Different Economic and Financial Indicators Suggest No Signs of Recession
From the Philadelphia Federal Reserve:
"The Aruoba-Diebold-Scotti (ADS) business conditions index is designed to
track real business conditions at high frequency. Its underlying
(seasonally adjusted) economic indicators (weekly initial jobless
claims; monthly payroll employment, industrial production, personal
income less transfer payments, manufacturing and trade sales; and
quarterly real GDP) blend high- and low-frequency information and stock
and flow data.
The average value of the ADS index is zero. Progressively bigger
positive values indicate progressively better-than-average conditions,
whereas progressively more negative values indicate progressively
worse-than-average conditions. The ADS index may be used to compare
business conditions at different times. A value of -3.0, for example,
would indicate business conditions significantly worse than at any time
in either the 1990-91 or the 2001 recession, during which the ADS index
never dropped below -2.0."
MP: The chart above displays the daily ADS index from the beginning of 2000 through the end of July. Recent values of the ADS business index are close to zero and have gradually been increasing from the recent lows in March. This real-time measurement of business conditions is indicating no statistical evidence of a recession, and is in fact providing support for business conditions that are close to average.
Recent readings from other financial and economic indicators are also showing no evidence of recessionary conditions in the U.S. economy including:
1. Bloomberg's "U.S. Financial Conditions Index" has been rising for the last year, indicating a gradual and ongoing improvement for the underlying conditions in the U.S. financial markets.
2. The Chicago Fed National Financial Conditions Risk Subindex is at the lowest (best) level in more than a year, and has been declining (improving) since the beginning of the year.
3. The St. Louis Financial Stress Index has been trending downward (improving) since last October and is back to pre-recession 2007 levels.
4. The Kansas City Financial Stress Index has been below zero for the last five months (a sign of low stress), and this measure of financial stress is also now back to pre-recession 2007 levels.
Bottom Line: Where's the recession? Surely there would be indications from at least one of these five measures of economic and financial conditions if the economy was weakening to the point that a recession was underway or pending? All five indicators accurately signaled the last recession in 2007-2009, so they can't all be wrong this time, can they?
4. The Kansas City Financial Stress Index has been below zero for the last five months (a sign of low stress), and this measure of financial stress is also now back to pre-recession 2007 levels.
Bottom Line: Where's the recession? Surely there would be indications from at least one of these five measures of economic and financial conditions if the economy was weakening to the point that a recession was underway or pending? All five indicators accurately signaled the last recession in 2007-2009, so they can't all be wrong this time, can they?
80 Comments:
My betting is that, in the event that Obama is re-elected, he'll be willing to mitigate the severity of the "fiscal cliff".
But if he doesn't, and if we do go over the cliff as it now stands, I do think that a recession (at least a mild one) would be likely next year.
I think, David Wessel of the Wall Street Journal has an idea where's the recession:
When Even Pessimism May Be Too Optimistic
July 25, 2012
"We know growth is painfully slow, and slowing...Retail sales have fallen for three months in a row. Consumer confidence is sinking. Manufacturing, which had been vigorous, shows signs of weakening. Government belt-tightening is restraining growth.
Europe, which still buys about one-fifth of U.S. exports, is in recession, and the rest of the world is slowing. Drought is sure to push up food prices, pinching consumer spending on other things.
State and local governments are squeezing spending and raising taxes as federal stimulus aid wears off. Washington is on track to do the same, abruptly if Congress fails to avoid spending cuts and tax increases...to avoid this "fiscal cliff."
Because of Washington's partisan fiscal paralysis, no matter how much worse the near-term outlook gets, Congress is unlikely to come to the rescue soon with another dollop of tax cuts or spending increases."
My comment: Moreover, the Fed is constrained and Obamacare is a tax hike.
The ISM index isn't looking great
http://research.stlouisfed.org/fred2/series/NAPM/
If the Fed does not do another QE operation or figure out some other way to add liquidity the system will crash so calling for no recession seems to depend on more manipulation. That is not exactly the position of someone who claims to support free markets.
George W Bush (2008) - "I’ve abandoned free market principles to save the free market system."
Where's the recession? There isn't one. Neither was there one (yet) if you'd asked the question about this graph five years ago.
"George W Bush (2008) - "I’ve abandoned free market principles to save the free market system."
One of the stupidest statements ever by a President of the US. And there have been plenty of contenders for that honor before and since.
Where's the recession? Surely there would be indications from at least one of these five measures of economic and financial conditions if the economy was weakening to the point that a recession was underway or pending?
In order for a recession to be currently happening, every single leading and coincident economic indicator would have to be wrong.
0. "The Aruoba-Diebold-Scotti (ADS) business conditions index is designed to track real business conditions at high frequency....
1. Bloomberg's "U.S. Financial Conditions Index" has been rising for the last year, indicating a gradual and ongoing improvement for the underlying conditions in the U.S. financial markets.
2. The Chicago Fed National Financial Conditions Risk Subindex is at the lowest (best) level in more than a year, and has been declining (improving) since the beginning of the year.
3. The St. Louis Financial Stress Index has been trending downward (improving) since last October and is back to pre-recession 2007 levels.
4. The Kansas City Financial Stress Index has been below zero for the last five months (a sign of low stress), and this measure of financial stress is also now back to pre-recession 2007 levels.
0. The ADS index level is currently at levels very close to the levels right before the last recession. The ADS also very substantially lagged the beginning of the last recession.
1. Bloomberg's Confidence index is at recession levels. The Citi Surprise Index hasd been dowbn trebnding for almost a year and is at "danger" levels.
2. The CFNAI is quite close to the average start of recession levels of the last 30 years.
3. The StL Index has a poor track record of forecasting recessions significantly ahead of time.
4. The Kansas City Index has a poor track record of forecasting recessions significantly ahead of time.
Recession watch chart, showing some of the less than bright indicators, including ISM PMI and actual total number of unemployed
Total money supply growth rate is also anemic to non existent. If Federal debt was growing, total money supply growth would be below zero YoY.
The Philly Fed index is at beginning of recession levels, and the CFNAI usually lags recession starts
George W Bush (2008) - "I’ve abandoned free market principles to save the free market system."
To abandon those principles you must have them in the first place. Bush never did.
Where's the recession? There isn't one. Neither was there one (yet) if you'd asked the question about this graph five years ago.
I suggest that you get out more. Look at people close to retirement who have no savings but lots of debt. Look at families that can only keep spending because of the availability of cheap credit. Look at more than 20% of the workforce that has given up or can't find a job. Look at recent university graduates who can't find any jobs. The only thing that is keeping the US economy afloat is cheap credit and the monetization of debt by central banks.
mark-
i know you love to rail against those you feel to be "perma bears" but have you considered that you might be a perma bull?
it seems to me that you were saying things very similar to what you are saying now in 2008.
http://mjperry.blogspot.com/2008/05/what-recession-what-credit-crunch.html
http://mjperry.blogspot.com/2008/07/no-recession.html
along with predicting that detroit would have the top real estate appreciation in the us for 2009.
now, i freely grant that this does not say anything about your being right or wrong now and that we need to address the issue on it's merits and using current data, but it's also worth examining our own biases and attempt to limit them.
this reads a great deal like what you were saying in the summer of 2008.
i think you may be trying to use a whole set of financial indicies here as thought they were independent.
have you cross checked them for correlation?
i suspect many are driven by interest rate spreads and equity prices.
the former is currently useless as an indicator as twist, zirp, and qe have distorted that market and removed any valid signal from it.
equity prices are similarly affected due to a lack of yield in fixed income etc.
take the impacts of those 2 manipulations out of those indexes, and you get a different picture.
it seems to me to be a sort of cargo cult thinking to presume that manipulating yields is the same as having a market price.
as you have written on it in the past, i know you understand the perils of price controls. so why, when applied to bonds, are they suddenly a source of safety? because that is essentially the claim you are making when pointing to the financial stress indexes.
how is using today's bond yields to demonstrate financial stability any different than nixon using price controls to argue that there was no inflationary pressure?
a thought:
a possible reason that the current economic conditions are so hotly argued may be quite simple: the definitions have changed.
were it 1988, the conditions we are currently experiencing would have very definitively been called a recession.
avoiding the issue of which inflation measurement methodology is the correct one (as that never goes anywhere) let's look at what we can say is objectively true:
the cpi measure was changed and now reads a great deal lower than the old one would have for any given set of underlying price moves. the variance is in the neighborhood of 3-4 percentage points.
while cpi is bls and gdp-d is bea, it is clear that gdp-d was altered to stay in line with cpi as well (as the 2 series did not diverge post boskin) as it is equally clear that gdp-d has been running far, far below cpi over most of the last year.
even just using cpi to deflate gdp, we get gdp growth of under 65bp in 3 of the last 4 q's.
that is pretty much stall speed.
if we use the old deflator, it's recession.
this does not feel like the same growth folks remember from the 80's because it isn't.
gdp (even as reported) is very weak for this stage of a recovery, but compares to the 80's using a normalized inflation figure, it's woeful.
either the 80's were growing at around 7% and we are at 1.5% now, or the 80's were 4-5% and we are currently contracting.
a lot of these historical measures ignore this fact. the underlying numbers changed.
what would have been 2% real growth then is called 5% now and what is 1.5% now would have been -1.5% then.
this may be having a very real effect on perceptions about recession.
when we look at measures that are not inflation derived, like jobs, we see a very anemic economy. even indexes like indpro and real personal income are lagging way behind reported real gdp. deflators are a major reason why.
the philly fed coincident index is showing levels rarely seen outside a recession:
http://www.calculatedriskblog.com/2012/07/philly-fed-state-coincident-indexes.html
if this "recovery" in gdp figures feels fishy to so many, that may be because it is and the divergence from indexes that do not use deflators has been so pronounced.
Question Morganovich:
If the only thing keeping this from being a "recession" is a change in the deflator, then why are the measures of real (that is, physical output) rising? Unless the definition of recession changed from "decline" to "slower-than-we'd-like growth" (which is possible, I am old school), then the relevant measures of production show no current recession. US Industrial Production, the PMI Production component, freight levels, all are rising year-over-year. When we look at the actual Production data, it is rising. How can we have a recession when there is (albeit moderate) rise in the economy? Even Housing Starts are rising (the rate of growth is good, but coming off deep lows). There has never been a recession when Housing is rising.
I may disagree with your deflation bit, but at least it's a good argument. I just don;t understand how we can possibly have a recession when actual production is rising.
this does not feel like the same growth folks remember from the 80's because it isn't.
gdp (even as reported) is very weak for this stage of a recovery, but compares to the 80's using a normalized inflation figure, it's woeful.
either the 80's were growing at around 7% and we are at 1.5% now, or the 80's were 4-5% and we are currently contracting.
a lot of these historical measures ignore this fact. the underlying numbers changed.
I agree. The underlying methodology has changed but the numbers were never recalculated to do a fair comparison. It seems to me that academics have no incentive to look at reality but get the most benefit by accepting the official numbers without question. They are all Larry Kudlow now and cannot see any bad times because they refuse to look at anything other than the distorted rear view mirror.
If you want to understand why most economists missed the tech and housing bubbles look no further.
"I may disagree with your deflation bit, but at least it's a good argument. I just don;t understand how we can possibly have a recession when actual production is rising."
what are you using as a measure of "actual production"?
If the only thing keeping this from being a "recession" is a change in the deflator, then why are the measures of real (that is, physical output) rising? Unless the definition of recession changed from "decline" to "slower-than-we'd-like growth" (which is possible, I am old school), then the relevant measures of production show no current recession. US Industrial Production, the PMI Production component, freight levels, all are rising year-over-year. When we look at the actual Production data, it is rising. How can we have a recession when there is (albeit moderate) rise in the economy? Even Housing Starts are rising (the rate of growth is good, but coming off deep lows). There has never been a recession when Housing is rising.
Because saying that you are measuring 'real' changes does not make it true. That was the point being made and yet you missed it. If we look at other measures, where the pre-Boskin methodology is applied, we see no material growth since 2000. Which explains why the 99% are so pissed off at the mountebanks who are trying to ignore the real world experience of most American families.
jon-
i have some real doubts about indexs like indpro being as "real" as claimed.
people think in nominal terms. they may try to think in units, but mostly, they do not, especially in services.
ism manufacturing is actually in contraction anyhow and has been for 2 months.
services are still positive, but i am not terribly convinced that that number is not more affected by inflation that is purported.
http://www.cassinfo.com/Transportation-Expense-Management/Supply-Chain-Analysis/~/media/Files/Transportation_Files/Freight%20Index/2012/Cass%20Freight%20Index%20Report%20-%20June%202012.ashx
the cass freight index dropped 1.3% yoy while expenditures increased.
that sounds like stagflation, which, as we saw in the 70's, is what you get from loose money and repeated temporary stimulus.
what are you using as a measure of "actual production"?
US Industrial Production as a measure of manufacturing output. US Light Vehicle Production (measured by Wards Auto, measured in millions of units) as a measure of light vehicle production. US Freight Weights as a measure of trade activity. Mall traffic and retail store traffic as a measurement of retail activity. These are all physical items being produced. Nothing to be deflated here.
If we look at other measures, where the pre-Boskin methodology is applied, we see no material growth since 2000.
But that's my question. How can we account for the increases in production if the pre-Boskin measures indicate no-to-negative growth? What are these things doing? Just sitting on shelves? If we were to use the pre-Boskin measurements at face value, it would seem that all of our Production is being shipped overseas. Well, that may account for some of it, but not nearly all of it. This is why I have come to conclusion that the pre-Boskin method is, in fact, incorrect. Given the measures of physical output, the statistical conclusions drawn by the pre-Boskin measures make no logical sense.
Maybe I am wrong, but how can the fact that physical output is increasing be reconciled with no-to-negative growth when 88.5% of stuff produced here is consumed here?
ism manufacturing is actually in contraction anyhow and has been for 2 months.
No, it's not. The total PMI is virtually even (to call it a contraction at this point is to ignore statistical rounding). The PMI Production component registered 51.3 in July, the 38th consecutive month of expansion.
I may disagree with your deflation bit, but at least it's a good argument. I just don;t understand how we can possibly have a recession when actual production is rising.
Is it? You forget that much of what is shown as growth includes government spending financed by borrowing from abroad. The fact that the price of healthcare went up does not mean that more doctors are treating more patients more effectively. And the fact that the government pays billions for weapons systems that are used up on foreign battlefields does not mean that there is more production for domestic consumption. Governments spoil the process not just by manipulating the data and methodology but also by glossing over the very important differences between production that satisfies legitimate consumer demands and non-market production that is driven by government edict. To try to figure out why that is important think back on Samuelson's optimism regarding the Soviet economy.
Samuelson and other Keynesians used the fact that borrowing adds to GDP to divert attention from the fact that it does not add to productivity, wealth, and capital formation. Since the GDP accounts were designed by Keynesians who have no interest in balance sheets they did not see the problem that faced all governments that followed their policies. They would look at the bump in GDP and ignore the fact that it came from a growing balance sheet that would eventually collapse. Some time around 2000 the tide turned and Americans were badly hurt by the tech bubble collapse. As the Fed tried to prevent a correction it blew another bubble in housing. When that collapsed even more capital was destroyed and the Fed and Treasury have been trying to prevent a correction by borrowing and spending as much as they could get away with. Now we have Japan, the EU, and the US stuck with balance sheet recessions that cannot be saved by borrowing more unless everyone is willing to live with kicking the can down the road and living with a major collapse later on. The cracks are evident in Japan and the EU. While the fear has helped add support to the biggest bubble of all, USTs, anyone who is not living life by looking through the rear view mirror can see the obvious problems down the road.
Vangel-
I am not talking about price. I am not talking about GDP. I am talking about physical output. Actual houses being built, actual cars being assembled. Actual goods being shipped. All in the private sector (no government spending). There is nothing to deflate here. There are no prices here. I am talking about actual, physical output. Stuff you can hold in your hand being used by the private sector.
jon-
i feel as though you are trying to get me to defend a position i did not quite lay out.
my personal view is that the us economy is at stall speed.
calling units up seems a bit of a stretch. ism manufacturing is contracting slightly (or, at best, flat). freight just dropped 1.3% in june yoy.
on what are you basing this notion of unit growth in the face of that?
those do not seem like expansionary indicators.
we are seeing some ism reported growth in services, but, as i said, i have doubts about just how "real" that index is as it relies on respondents separating nominal from real, which is harder is services.
personally, i think the economy is at about stall speed and sputtering in and out of negative territory.
q1 was strong due to a very favorable seasonal comparison driven by weather, but q2 shows every sign of reversion to stagnation.
us corporate earnings for q3 are now estimated to be negative based on guidance this earnings season.
revenue growth for the S+P 500 was 1.2% yoy for q2.
that's a nominal number.
use cpi as a delfator and it was a real contraction and if estimates prove accurate, q3 will follow suit and earnings will contract in nominal terms.
negative real revenue growth for the S+P is a pretty grim signal.
i know you have some doubts about the economy next year, but i fear the hit may come earlier than you suspect.
this just feels all wrong to me and the july jobs figure (the first NSA drop in jun to july jobs in a decade) was another warning sign.
Even in a Recession some industries will continue to grow. If I'm not mistaken, auto production grew throughout the 1930's.
All I know is, out here in "hillbillyland" we're getting killed. Incomes are falling, unemployment is rising, and gasoline is eating us alive.
ism manufacturing is contracting slightly (or, at best, flat).
I don't understand where you are getting this. When I look at the ISM PMI release, I see the Production component is up 38 months. Are we talking about two different things here?
calling units up seems a bit of a stretch.
US Industrial Production in June is up 4.7% from last year. On an annual basis, it is up 4.1%.
On a year-over-year monthly basis, US Industrial Production has risen every month since January 2010.
On a month-to-month basis, US Industrial Production has risen all but 5 months since July 2009. The 5 months where a decline did occur were well within normal parameters.
On a year-over-year basis, Production is growing an average of 4.7%. The historical growth rate is 3.9%. I'd like it to be faster, sure, but it is still doing ok.
This is what I am calling growth.
jon-
we may be talking about different things.
i was looking at this:
http://www.ism.ws/ismreport/mfgrob.cfm
"The PMI registered 49.8 percent, an increase of 0.1 percentage point from June's reading of 49.7 percent, indicating contraction in the manufacturing sector for the second consecutive month"
i see what you are talking about on production, which is up as a component. i was just looking at the headline.
new orders look fairly soft though which bodes poorly for the future and backlogs are very weak.
deliveries and inventories are soft as well. that production figure seems a bit dissonant with the rest of the manufacturing report, but, you are correct, it is positive.
i have found "backlog of orders" to often by the canary in the manufacturing coal mine. (though it does give false signals)
it is contracting faster and has been neg for 4 months, actual orders are now following suit (confirming the signal) and have been down for 2 months.
unless orders turn around (and soon) it's difficult to see how production stays up.
q2 was already a real decline in S+P 500 revs and q3 will be a sharper one according to estimates.
h2 2012 is shaping up to be pretty nasty.
i suspect there was real growth in q1, but q2 was questionable and i think q3 is showing some deeply worrying signs.
Vangel-
I am not talking about price. I am not talking about GDP. I am talking about physical output. Actual houses being built, actual cars being assembled. Actual goods being shipped. All in the private sector (no government spending). There is nothing to deflate here. There are no prices here. I am talking about actual, physical output. Stuff you can hold in your hand being used by the private sector.
I am talking about actual physical output too.
If you look at housing you see very little activity that would lead anyone to believe that the sector is out of its deep recession. In fact, if you look at all the data you can see the possibility of another leg down that takes prices, and house building activity down another 20% or more.
Actual cars built is a good indicator but only if you look at if they are reflecting demand. From what I can see GM is busy stuffing the inventory channel to make its owner, the US government, look better. There are months of inventory sitting on dealer lots hoping that the Cash for Clunkers effect will finally produce much needed profits and that people who are sitting on very old vehicles will have to replace them. But when easy credit terms and deep discounts can't get the sales levels anywhere near the pre-contraction highs I doubt that you can effectively argue that the recession is over.
Let us not forget the much greater production of military equipment. That is about as useful as building pyramids when it comes to increased capital formation and benefits for consumers. When times are tough governments always resort to borrowing and using some of the funds to prop up industrial activity. But debt financed non-consumer goods are of no benefits to future taxpayers or current consumers.
And as someone pointed out on one of the threads a while ago, one way to verify increased activity is to look at electricity use and the rail shipments of scarp/waste. On both of those fronts the US economy shows weakness. The railroad companies are reporting lower waste shipment as real consumption declines. And if you look at the earnings being reported by S&P companies you find that revenues are down over the same quarter last year.
Of course, we can look at employment. When the recession supposedly 'ended' the percentage of working age Americans was down to 59% from the pre-contraction level of 63%. You would think that the end of the recession would mean that the percentage of working age Americans would increase. But it didn't. It has dropped below 58% and has stayed below 58% for the past 35 months. I am sorry but how can that be if there is no recession?
we may be talking about different things.
Ok, I see what you are talking about now.
I have some thoughts on PMI I do want to share, but simply do not have the time to do so now. I'll try to post later tonight (or, if you shoot me an email at jmurphy8289@gmail.com, I'll be happy to email you my thoughts tonight).
Here's the reader's digest version of this, though. New Orders are contracting, but not near the recession level (42.6) yet. PMI typically leads the economy by 12 months; the weakness in the indicator now would be reflective of weakness come 2H 2013.
Moving on:
In fact, if you look at all the data you can see the possibility of another leg down that takes prices, and house building activity down another 20% or more.
Where do you see this?
From what I can see GM is busy stuffing the inventory channel to make its owner, the US government, look better.
GM represents about 15% of the US auto market. Their gain in inventory has not been spectacular. Their current inventory level is less than half of what it was in 2008. They cannot possibly be the only reason why annual Automobile Production is up 16.9% year over year, and at 2008 levels (14.5 million units).
Also, annual Light Vehicle Retail Sales are up 12.1% in July. Annual Sales are at 2008 levels. Sales for all types of vehicles, from hybrids to pick-up trucks are up year-over year. The demand is there.
Cash for Clunkers ended nearly three years ago. We can't give it any credit for what is going on now.
Automobile interest rates have doubled since the depths of the recession, and are up nearly 100bps since this time last year. In fact, the last time auto interest rates were this high is January 2009 (when rates were 8.2%). They are even with the 10-year average.
Let us not forget the much greater production of military equipment.
Defense Capital Goods Production is down 26.6% from this time last year. Annual Production is at the lowest level in nearly 6 years.
And as someone pointed out on one of the threads a while ago, one way to verify increased activity is to look at electricity use and the rail shipments of scarp/waste.
I will grant you this, but it is not without precedence that the US economy grew while electricity and rail transportation fell. 1995-96 was one period. 91-92 was another.
Of course, we can look at employment. When the recession supposedly 'ended' the percentage of working age Americans was down to 59% from the pre-contraction level of 63%. You would think that the end of the recession would mean that the percentage of working age Americans would increase. But it didn't. It has dropped below 58% and has stayed below 58% for the past 35 months. I am sorry but how can that be if there is no recession?
First, employment is a lagging economic indicator. It does not provide any indication of what will happen or what is happening. It tells us what has happened.
Secondly, in some industries, we are seeing massive shortages of workers. Much of the long-term unemployment has been in low- to no- skill workers. That is to be expected when we have a structural shift in an economy, like this. Firms have been striving to do more with less and we have seen massive increases in efficiencies in the production process.
Third, seeing as NSA employment numbers are in vogue now, let's look at some statistics:
The bottom of the recession in jobs occurred in August 2010. Since then, the US has added an average of 139,000 jobs per month. The historical average is 112,000 jobs per month. In 2012, the US has added an average of 349,000 jobs a month, an astonishing 2.5 million jobs!
Over the past 12 months, jobs have grown at a rate of 1.4%. That is even with the historical average. Now, this number should be much more robust. In previous recessions, coming out of the recession jobs were added closer to 2.0%. However, there has been a number of barriers placed in the way of hiring: payroll tax debates, new and often unwritten business regulations, health insurance overhaul, etc. Given these barriers, the 1.4% growth rate is not terrible.
This recession was always going to be a jobless recovery. This should come as no surprise. But the number of jobs being added are not terrible by any stretch.
The percentage of working age Americans is rather discouraging. But there are a number of factors to consider: people taking early retirement, people going back to (or staying in) school until the job market improves, people joining the military. All these things subtract people from the "working age" population. Are they the sole reasons? No. But they do explain some.
Finally, to address a point by Rufus:
Even in a Recession some industries will continue to grow. If I'm not mistaken, auto production grew throughout the 1930's.
You are absolutely correct. Some industries grow during recessions (or, at least not decline). Just like some will shrink and die during expansions. Some industries lead the general economy, some lag it.
Wow...that post was so big I had to break it into two! Apparently, this thing has a character limit.
Sorry for the War and Peace I just wrote everyone.
I said I didn't have time to address new orders, but i just wrote an essay, so I might as well:
Annual Manufacturing New Orders are 8.0% above this time last year. They are at the highest level since October 2008. Looking at the market conditions, it looks like we will likely see ongoing but slower growth in New Orders in the near term. This is likely reflected in the PMI New Order number. Weaker international demand is also keeping this down.
That being said, there is some signs of renewed rise starting to sprout in China and Southeast Asia. If this holds, we could see increased exports and demand for our manufactured products. Except in Europe. Europe is flat/declining. No demand from there (which is also bad news for us hoping to get rid of some of the natural gas oversupply and boost prices there).
jon-
so how do you fit the real revenues of the S+P 500 contracting in q2 into that along with a projected further real contraction in q3 with a drop in nominal earnings as well?
i'm going to drill into the data a bit, but off the top of my head, i cannot remember a period of multiple quarters of real revenue contraction that was not associated with a gdp contraction.
check page 2 here:
http://www.yardeni.com/pub/PEACOCKSP500.pdf
it only goes trough q1 2012.
q2 was 1.2% (nominal) and q3 looks poised to go negative in nominal terms. the only time we have seen neg nominal revs in the last 20 years without a recession was 1998 and that was the nasty russian debt crisis that drove that.
i'll dig a little deeper into it, by my sense is that contraction in S+P 500 revenues is a pretty dire sign.
the drop from q1 to q2 was also a worrying signal, as drops that sharp are rare with 2000 and 2008 being the ones that look like what just happened.
jon-
"Annual Manufacturing New Orders are 8.0% above this time last year"
what series are you using to get hat figure?
i just pulled the NEWORDER series from fred and do not see that.
i see 6/12 at 64321 and 6/11 at 64782 indicating a 70bp drop. (though may was up, but july will be down as well)
are you using a TTM avg?
according to the series, orders peaked in 12/11 and have never even come close to recovering to pre recession highs.
it is looking increasingly like june may have been an inflection point (though it's still a little early to try to be definitive).
a 12mo ma will be slow to see that, but after a strong 2011 in terms of yoy growth, this year really struggled and the growth rate has been dropping now for 5 months in a row and has been negative for 2. (including july) jan and particularly feb were strong, but it's been all downhill since then for orders.
durable goods orders seem to be humming along though, which is a divergence i do not really have a great explanation for.
is that being heavily affected by aircraft or something? it's a curious dichotomy.
morganovich said...
jon-
i have some real doubts about indexs like indpro being as "real" as claimed.
The main problem with INDPRO is that it's much more a trailng indictaor than not.
Very bad indicator for a recession starting, quite consistent for decades too
Big hat tip to Hussman
bart-
i see what you mean. sometimes you get some warning from indpro and other times none at all.
indicators that are sometimes predictive and other times trailing are dangerous. having a canary that dies before you do half the time is worse than no canary at all.
jon gave us his e-mail above. ping him and get my contact info. perhaps the 3 of us can get into some more detailed conversations using a medium where it's easier to share data.
bart-
i see what you mean. sometimes you get some warning from indpro and other times none at all.
indicators that are sometimes predictive and other times trailing are dangerous. having a canary that dies before you do half the time is worse than no canary at all.
jon gave us his e-mail above. ping him and get my contact info. perhaps the 3 of us can get into some more detailed conversations using a medium where it's easier to share data.
Tom Blumer has a different take:
http://pjmedia.com/blog/the-incredible-shrunken-economy/
morganovich said...
i see what you mean. sometimes you get some warning from indpro and other times none at all.
indicators that are sometimes predictive and other times trailing are dangerous. having a canary that dies before you do half the time is worse than no canary at all.
jon gave us his e-mail above. ping him and get my contact info. perhaps the 3 of us can get into some more detailed conversations using a medium where it's easier to share data.
Yep, we're basically in sync and you see what I'm seeing on INDPRO and recessions.
Another item on INDPRO is the possibility of a data revision in x months.
Jon already has my email address from a conversation we had on my CPPI. Hopefully when he gets a chance, he'll fire off an email to both of us... and then we can get him in a crossfire (joking).
Jon, thanks for showing the inflationists a new way.
They don't seem to understand that labor productivity changes, technology changes, the speed of innovation changes, investment in capital goods changes, etc.
It's more likely inflation has been overstated than understated over the past 30 years, because appropriate adjustments have been too little and too late.
Perhaps, they're confused, because income inequality increased.
US Industrial Production in June is up 4.7% from last year. On an annual basis, it is up 4.1%.
That is price, not units. And not using the correct deflator.
PeakTrader said...
They don't seem to understand that labor productivity changes, technology changes, the speed of innovation changes, investment in capital goods changes, etc.
PT, your ignorance is showing again.
Productivity *is* reflected in price (and therefore CPI and CPPI), same with innovation and investment.
One of the ways is via hedonics... and of course there's no offset in reverse hedonics due to tha many vested interest of the BLS.
Bart, the tail doesn't wag the dog.
The Cass North American freight index volumes are only up an average of .3% YoY for the last 5 months.
rt, the tail doesn't wag the dog.
And again, you ignore the proven facts and continue the narrative.
*yawn*
Bart, ignoring changes that influence inflation is, well, ignorant.
You get the prize of the day for awesome irony.
Where do you see this?
I see it in FHA loans, which allow 4% down mortgages on homes that go up to $700K. A healthy market does not require such assistance. I see it in the shadow inventory numbers, the short sales, and the fact that you have ten million homes that are less than the mortgages on them. I see it in the employment numbers, which do not support a recovery in home prices.
GM represents about 15% of the US auto market. Their gain in inventory has not been spectacular. Their current inventory level is less than half of what it was in 2008. They cannot possibly be the only reason why annual Automobile Production is up 16.9% year over year, and at 2008 levels (14.5 million units).
First, total auto sales peaked at 17 million units. I don't see too many forecasts that would put 2012 sales anywhere near that level. And that is after the government destroyed perfectly good vehicles via its idiotic Cash for Clunkers program and the car companies have gone back to incentives and big loans to people with bad credit.
Cash for Clunkers ended nearly three years ago. We can't give it any credit for what is going on now.
Of course we can. Vehicles that would still have been viable now have to be replaced with new units. And let us not forget that the population is larger today than it was five years ago, which means that there should be more units sold even if everything remained as it was.
Automobile interest rates have doubled since the depths of the recession, and are up nearly 100bps since this time last year. In fact, the last time auto interest rates were this high is January 2009 (when rates were 8.2%). They are even with the 10-year average.
If you think that rates are anywhere near 8.2% you are not looking very hard. During my trip to New York in March I was looking at 3% for a 48 month new car loan. That was from the banks, not the automobile companies . The dealers were offering 0% to 1% on 60 month loans. And the incentives were pretty big. I figured that the same vehicle in Canada would cost me around $5K more.
I will grant you this, but it is not without precedence that the US economy grew while electricity and rail transportation fell. 1995-96 was one period. 91-92 was another.
As I pointed out before, things that we would expect to happen during an expansion are not happening. You are still seeing a very low percentage of the population in the workforce. Electricity use and scrap shipments are down. Miles driven have not gone up as expected. Housing construction is down. Sorry but from where I stand things are not as you seem to think that they are. Of course, you accept the reported numbers without question while I have trouble doing that given the obvious changes in methodology and the divergence from reality.
GM Ramps Up Risky Subprime Auto Loans To Drive Sales
http://news.investors.com/article/620090/201207271807/gm-risky-subprime-auto-loans-fuel-sales.htm
"Productivity *is* reflected in price (and therefore CPI and CPPI), same with innovation and investment."
what's more, productivity is calculated USING cpi.
trying to use productivity figures from the bea/bls to demonstrate anything about cpi is circular.
"Output: Business sector output is a chain-type, current-weighted index
constructed after excluding from gross domestic product (GDP) the
following outputs: general government, nonprofit institutions, and private
households (including owner-occupied housing). Corresponding exclusions
also are made in labor inputs. Business output accounted for about 75
percent of the value of GDP in 2011. Nonfarm business, which excludes
farming, accounted for about 74 percent of GDP in 2011.
Annual indexes for manufacturing and its durable and nondurable goods
components are constructed by deflating current-dollar industry value of
production data from the U.S. Bureau of the Census with deflators from the
BLS"
http://www.bls.gov/news.release/prod2.tn.htm
it was the drop in deflator that drove the jump in productivity, not a jump in productivity that dropped inflation.
Labor economists refer to the 35-54 age group as "prime-age." The second most productive group is the 55-64 age group (based on education, experience, and training).
The 80 million Baby-Boomers born between 1946-64 began to enter prime-age around 1982, which coincides with the acceleration of the Information Revolution.
Also note, the structural bull stock market was from 1982-00.
Assembly Lines, the "oil-transport" revolution, and mechanized farming were terribly disruptive forces in the early part of the Twentieth Century - contributing to some extent to the prolonged economic crisis we call "The Great Depression."
We're going through a similar paradigm shift, today, as a result of computrization, robotization, and the coming "end of the oil age."
This is an on-going story; there will be recessions, and rumors of recessions. Be patient. This won't be over, "tomorrow."
peak-
are you claiming that demographics caused the information revolution?
i can see the argument for economic growth and for a large group in peak savings years driving market performance, but what does any of that have to do with the information revolution?
the info revolution was not a particularly big productivity booster in comparison to others.
imagine the effects of electrification or railroads. they dwarf the info revolution as did the industrial revolution, the invention of the assembly line, and others.
people speak of the information revolution as if if were magic. it was just another technical jump and had fewer tangible impacts than many others.
computers help, but not compared to the steam engine or getting electric power for to run machines for the first time.
growth in real potential gdp was lower in the 90's and 2000's than in the 70's and 80's and all were lower than the 60's.
this is a great paper on the topic:
http://www.frbsf.org/csip/research/200811_Gordon.pdf
"Potential real GDP has experienced an average annual growth rate since 1875 of
3.4 percent, and in many long periods of U. S. history in excess of 3.7 percent. Only a
few years ago, several of the more optimistic business economists assumed that future
potential output would grow at a rate of 4 percent (Glassman, 2002). But in 2008
potential output was growing at only 2.5 percent per year, and only slightly faster at
2.7 percent per year on average during the decade 1998-2008.1"
fwiw the average in the 90's was only 3.06%, well under the us average.
"While potential GDP growth has long been expected to slow as a result of the
retirement of the baby-boom cohort of the labor force, the surprisingly low recent
growth rates surprisingly do not reflect population growth, which has not exhibited a
reduced growth rate, at least not yet. Rather, the culprits are slowdowns in the
growth rates of productivity, hours per employee, and the labor force participation rate
since the previous business cycle peak in early 2001"
Secondly, in some industries, we are seeing massive shortages of workers. Much of the long-term unemployment has been in low- to no- skill workers. That is to be expected when we have a structural shift in an economy, like this. Firms have been striving to do more with less and we have seen massive increases in efficiencies in the production process.
You have always had shortages of skilled workers. But I see no 'structural shift' in the economy that provides a narrative to explain the declines during periods that were showing reported increases in production. Yours is mainly a service based economy where most jobs are not hard to fill. The fact that there is no growth in employment tells us that things may not be as you think that they are.
The bottom of the recession in jobs occurred in August 2010. Since then, the US has added an average of 139,000 jobs per month. The historical average is 112,000 jobs per month. In 2012, the US has added an average of 349,000 jobs a month, an astonishing 2.5 million jobs!
Why would be believe the crap that is being reported again? Let us look over the last moth's report. The headline Non-Farm Payrolls number was showing 163,000 new workers added to payrolls. But the rest of the report showed 195,000 fewer people were working than on the previous month. Clearly both statements can't be true and there has to be a reconciliation. And let us not forget that the jobs number is 'adjusted' by the birth/death model which can be manipulated to come up with any number without any justification.
This recession was always going to be a jobless recovery. This should come as no surprise. But the number of jobs being added are not terrible by any stretch.
What jobs added? The biggest job creation is coming from the healthcare field. If you look at the participation rate you will find a smaller percentage of the population working and that the reduction in unemployment since late 2009 has come about because a significant percentage of adults participating in the labor force gave up looking for work. GIven that the last report showed that 348,000 workers quit looking for work and were no longer counted in the official jobless count there is no way to talk about job creation and be taken seriously.
The percentage of working age Americans is rather discouraging. But there are a number of factors to consider: people taking early retirement, people going back to (or staying in) school until the job market improves, people joining the military. All these things subtract people from the "working age" population. Are they the sole reasons? No. But they do explain some.
Here you do what Mark always does. You can't really deal with the facts logically so you make up a narrative. If you guys got out a little and opened your eyes you would find that there are plenty of people who want jobs but can't find them. Because they want income they have taken the opportunity to go on the disability lists, settle for part time work when they can get it, or hiding in school because the government will give them the loans that make it possible to live without begging.
People want to work. They can't find it because the non-financial economy is not doing very well. If we counted everyone who stopped looking and the underemployed we would find that unemployment has remained above 20% for a long time. That is evidence that you are still in a recession, not that things are getting better because employment does not lag for years and can be meaningful when other factors point to the same conclusions.
Morganovich, there was a "structural break" after 1982, which increased productive capacity and caused disinflationary growth.
Per capita real GDP averaged 2.22% from 1982-2007 compared to 1.56% at the height of the Industrial Revolution from 1871-1914.
Also, monetary and fiscal policies continued to improve in smoothing-out business cycles, which moved the economy towards optimal growth and raised per capita real GDP.
Hmmm: But a book by Robert Hetzel, a senior economist at Federal Reserve Bank of Richmond, says it wasn’t Bushonomics or greedy bankers or broken markets that caused the Great Recession. In The Great Recession: Market Failure or Policy Failure, Hetzel pins the blame squarely on the Federal Reserve and Team Bernanke...
Moreover, the much stronger per capita growth after 1982 is understated, because the U.S. was able to consume more than produce in the global economy, and in the long-run, since around 1980.
Trade deficits, which subtract from GDP, reached $800 billion a year by the mid-2000s or 6% of GDP.
Juandos, I stated before, restrictive monetary policy in 2007 was the initial cause of the recession (perhaps, Bernanke wanted to prove he wasn't an inflation dove).
The Bush tax cut in early '08 gave the Fed time to catch-up easing the money supply.
The U.S. was on a path to a mild recession until Lehman failed in Sep '08.
Greenspan, on the other hand, believed the economy could expand faster without fueling inflation in the '90s and allowed accommodative monetary policy. He was correct.
Juandos, perhaps, you didn't see my prior comment:
Resources are deployed inefficiently in boom-bust cycles, both in the boom and bust phases, because of economic strain and slack.
List of recessions in the United States - Wikipedia
Recessions in the Industrial Revolution - 1871-1914
Period - Percent Decline of Business Activity
1873-79 - 33.6%
1882-85 - 32.8%
1887-88 - 14.6%
1890-91 - 22.1%
1893-94 - 37.3%
1895-97 - 25.2%
1899-00 - 15.5%
1902-04 - 16.2%
1907-08 - 29.2%
1910-12 - 14.7%
1913-14 - 25.9%
Recessions in the Information Revolution - 1982-2007
Period - Percent of Contraction
1990-91 - 1.4%
2001 - 0.3%
pt says: "Juandos, I stated before, restrictive monetary policy in 2007 was the initial cause of the recession (perhaps, Bernanke wanted to prove he wasn't an inflation dove)"...
Hmmm, it seems you were right at least according to Hetzel: “Restrictive monetary policy rather than the deleveraging in financial markets that had begun in August 2007 offers a more direct explanation of the intensification of the recession that began in the summer of 2008. Irony abounds.”...
Well pt I had read it and as you restated this: "Resources are deployed inefficiently in boom-bust cycles, both in the boom and bust phases, because of economic strain and slack", it was something I was trying to figure out just exactly what that meant within the most recent recession...
The light bulb has since gone on and my understanding now is I think quite a bit better...
Thanks...
Per capita real GDP averaged 2.22% from 1982-2007 compared to 1.56% at the height of the Industrial Revolution from 1871-1914.
Even if we ignore the fact that you started your modern period at the end of a contraction and ended it before another contraction began the statement is not true. Use the pre-Boskin methodology on the latter half of the period and you have next to no real per capita growth.
Moreover, the much stronger per capita growth after 1982 is understated, because the U.S. was able to consume more than produce in the global economy, and in the long-run, since around 1980.
If you are consuming more than you are producing because you can borrow to pay for it the results are overstated, not understated. I hate to break it to you but the balance sheet counts. Just ask Japan.
Juandos, I stated before, restrictive monetary policy in 2007 was the initial cause of the recession (perhaps, Bernanke wanted to prove he wasn't an inflation dove).
The Bush tax cut in early '08 gave the Fed time to catch-up easing the money supply.
The U.S. was on a path to a mild recession until Lehman failed in Sep '08.
Greenspan, on the other hand, believed the economy could expand faster without fueling inflation in the '90s and allowed accommodative monetary policy. He was correct.
History will judge Greenspan as one of the worst Fed chairs in history. But for some reason you ignore his crimes against savers and producers.
Hmmm, it seems you were right at least according to Hetzel: “Restrictive monetary policy rather than the deleveraging in financial markets that had begun in August 2007 offers a more direct explanation of the intensification of the recession that began in the summer of 2008. Irony abounds.”...
LOL...Leave it to Fed revisionists to ignore the Fed's role in creating a bubble in the late 1990s and a bigger bubble in housing during the early 2000s.
The light bulb has since gone on and my understanding now is I think quite a bit better...
A rational person would think you are being ironic. Somehow I think that is not the case and have taken a trip down the wrong path.
peak-
"Morganovich, there was a "structural break" after 1982, which increased productive capacity and caused disinflationary growth. "
no, there wasn't.
that's a total myth and contradicted by the facts.
pull the gdppot series (real potential gdp)
it averaged 4.24%/year in the 60's, 3.39% in the 70's, 2.96% in the 80's, 3.0% in the 90's, and 2.65% in the '00's.
there is ZERO evidence of this magic structural change you speak of.
apart from the 60's, all those decades were below the average since 1875.
if you want a big jump in productivity, look to things like railroads, steam engines, and electrification.
i know you believe computers are magic, but they aren't and the pgdp numbers make that clear.
if you want a big jump in productivity, look to things like railroads, steam engines, and electrification.
And air conditioning. It opened up areas that were hot and humid to activities that could not be done effectively before. One of my favourite developments was the introduction of the standard shipping containers, which revolutionized the transport of goods over long distances.
vangeIV says: "A rational person would think you are being ironic. Somehow I think that is not the case and have taken a trip down the wrong path"...
I've taken the wrong path only in the eyes of someone who has yet back up his blanket statements with anything credible...
Some great back and forth economic discussions above -- with limited exceptions. Thanks; gave me some food for thought.
Morganovich, you only need to look as far as your computer screen to begin to realize how valuable the Information Revolution has been.
You give the false impression that U.S. economic growth slowed when it actually accelerated, which is remarkable given small economies tend to grow faster than large economies.
Obviously, the U.S. economy became increasingly more efficient, including through the "knowledge economy."
Here's what Dr Perry wrote:
Capitalism and Markets Fuel Economic Growth
January 28, 2009
"Between 1800 and 1904, real GDP per capita grew in the U.S. at 1.5% per year.
The 1.5% annual growth translated into almost a 5 times increase in per capita real GDP between 1800 and 1904, from $1,069 to $5,202.
As impressive as the 1.5% real annual growth was in the 19th Century, the average growth rate in the 20th Century increased by more than a third, to above 2% per year from 1904-2008.
Because of the higher growth rate, real (per capita) GDP increased more than 8 times between 1904 and 2008, from $5,202 in 1904 to $42,675 in 2008.
If annual growth had continued at 1.5%, real GDP per capita today would be only $24,475...instead it's actually 74% higher at $42,675."
I've taken the wrong path only in the eyes of someone who has yet back up his blanket statements with anything credible...
Let me get this straight. You do not blame the Fed for blowing up bubbles by manipulating rates lower. You blame them for not going all the way and adopting the Zimbabwe model instead? According to you and your pal there is nothing that easy money policies can't cure and there is no trouble with adding massive amounts of debt to balance sheets. On what planet would this type of reasoning be considered credible again?
And let me point out that while the naive optimists and the Fed officials that you are citing didn't see any trouble coming people like me were calling for a housing crash because lending money to unemployed men to buy homes was not a sustainable business model. There were plenty of us pointing out the obvious but the analysts and false prophets could not see reality as it was.
VangelV, you're blaming the wrong people and supporting "broken clocks," who are right only twice a day.
Here are some average per capita real GDP growth rates over selected periods:
1813-1910 +1.36% (Before Fed)
1913-2010 +2.00% (After Fed)
1920-1929 +2.43% (The "Roaring 20s")
1929-38 -0.54% (The "Great Depression")
1946-73 +2.26% (Europe and Japan Rebuild)
1973-82 +0.96% (Long-Wave Bust Cycle)
1982-07 +2.22% (Information Revolution)
2008-10 -1.13% ("Great Recession")
How the per capita real GDP growth series (above) is constructed:
"This uniform growth rate is not obtained by averaging the year-to-year percentage changes in the observed value of the series.
It is the hypothetical constant year-to-year growth rate necessary to take the beginning-year value of a series to its ending-year value."
VangelV, you're blaming the wrong people and supporting "broken clocks," who are right only twice a day.
Not at all. I am telling you that your Keynesian cult has lost credibility and that you obviously did not get the memo. The bubbles were noted and explained long before they popped but the Fed economists, MSM, and most individuals missed them because they were more happy believing than observing and thinking.
This is anecdotal but here in the Civil Engineering world which is something of a leading indicator industry I can tell you that yes, things are better than where they were at the bottom but are a loooooong way away from anything resembling a recovery. Except for certain sectors (energy/fracking for instance) hiring is flat. Real wages are flat. Backlog is thin and Marketing still has a whif of desperation in a lot of proposals. Show me all the charts you care to but I saw the decline happen 4 months before most folks and I expect to see the recovery coming at about the same clip.
2 cents..
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