Let's start with the basics - the Leading Economic Indicators:
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in June to 115.3 (2004 = 100), following a 0.8 percent increase in May, and a 0.3 percent decline in April. The largest positive contributions came from money supply, the interest rate spread, and building permits.Rates are now incredibly cheap and the money supply is expanding. In short, there is money to lend at very cheap rates.
Second, it's hard to imagine a collapse without a massive drop in real estate. However, the housing market is already in a multi-decade low, meaning a collapse is not in the cards.
The above chart of new housing sales shows a pace of activity which is near the lowest on record; it really can't get much lower.
The existing home sales market has been fluctuating around the 5 million homes/year mark for a little over two years (this is when you count the spike and contraction associated with the new housing credit). While this chart could drop to the 4 million/year level, it's hard to see that drop when interest rates are dropping like a stone.
The housing market has been bumping along the bottom for the better part of two years now. It's hard to see how it could get worse, especially in such a low rate environment which is bound to spur at least some demand.
Manufacturing has taken a hit over the last few months. Some of this is the result of slowing demand and some of this is a natural drop from high levels. However, despite a continued effort to put on the brakes, Asia is still growing smartly. Cheaper oil will lower shipping costs, making US production that much more attractive. The supply chain disruptions caused by the Japanese earthquake are now being solved. It's difficult to see this area of the economy dipping much beyond a shallow contraction for a few months at this point.
Total nonfarm payrolls printed a massive collapse during the last recession. However, this leads to a somewhat morose counter-factual: how much more employment fat could be cut from US payrolls at this point? While it's always possible we could start to see massive lay-offs again, the above chart tells me that US businesses are already staffed to the bone and have very little more to cut while still keeping the doors open.
The 4-week moving average of initial unemployment claims is hovering around 400,000, which does not show a massive spike to imply we're about to see a jump in unemployment. While the indicator has been at the aggravating 400,000 level for most of this year, we haven't seen a big spike up to imply a massive increase in unemployment.
In addition, consider these observations from Capital Observer:
- Credit spreads for corporations are relatively tight now. In 2008 spreads blew out to historic levels.
- In 2008 companies were raising capital every chance they had. Today corporations are buying back stock.
- In 2008 there were systemic issues after Lehman Brothers collapsed. The ECB seems to have Europe under control for the time being. There has yet to be a Lehman Brothers.
- Corporations are wildly profitable right now. In late 2008, when the collapse occurred profits had already imploded.
- There are far fewer over leveraged corporations today.
- While it certainly feels like there are forced liquidations occurring it does not seem like it is on the same scale as 2008.
The bottom line is while the underlying data is weak, it's not crashing and shows no signs of collapse, massive stress or even turning over in a significant way. The numbers are showing an economy fluctuating right around 0% growth, with a slight positive bias. But, again, I think the markets are pricing in a recession or collapse that just isn't in the data right now.
5 comments:
The one caveat I'd put on this is that it can be a matter of self fulfilling prophecy. If people are freaked out and pull back on their spending, then it could become self fulfilling prophecy. Markets, at their core about group psychology as much as they are about economic fundamentals.
That said, my sense is that we will have a little bit of a recession. Like 1-2 quarters of a very slight decline in GDP. It will be nothing like the catastrophe of 2008 because, like you point out, there's really not a lot lower for much of the economy to go.
On the bright side, once we ride that out, I suspect that we'll be in a really good position for some strong growth. There's a ton of money out there looking to be spent, and so once demand actually starts to pick up in a real way we should be doing well.
I think you and Steve S make some good points. The self fulfilling prophecy is what worries me. Stocks surged today, so I hope that freefall of the last two weeks is over, and hopefully, it wasnt enough to push us into a recession.
The drop in oil prices(and the drop in gas prices that will follow) is good news for consumers. That should help growth later this year.
Like Summer 2010, I feel like markets need some piece(s) of data to snap them out of the double dip recession fears. I would have thought the July jobs report would have done it, and maybe it would have, if not for the S&P downgrade.
You're focusing too closely on American data, Hale.
The concern is over Eurozone breakup (or, alternatively, national defaults), an event with potentially massive implications. Not to mention the uprising in Britain, which will have reverberations throughout the continent.
The concern on the US is that if the timbers cave in in Europe, there's no one in charge of the store.
Yes, there is real concern about a market collapse.
--Charles
I'm far more pessimistic. My real 10 year bond rate study does indicate an eventual recession sometime in the next 18 months.
Monthly inflation figures spiked between 4.77% and 6.59% between December and April, slipped in May and turned deflationary in June which is a classic "boom and bust" price cycle. As a result I'm thinking that QE2 might have actually contributed to a downturn.
Salient, yes that is a classic boom and bust, but that has nothing to do with QE2. That reflects the spikes in oil and food prices that were caused by inflationary pressures in China, India, etc. WIth them having put the breaks on and overall concerns about the global economy, the price of oil has backed off.
Core inflation did not show the same spikiness, just the energy/food prices which are notoriously erratic. If QE2 was causing problems you'd see this change in the core rate which we did not.
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