- by New Deal democrat
As I've noted several times recently, one sign of economic strength or weakness is shown by comparing YoY consumer prices (blue in the graph below) vs. commodity prices (red, amplitude divided by 2 better to show the comparison). Usually before a recession there will be a rise in inflation, with the more upstream producer and commodity prices spiking higher than consumer prices. As the economy weakens into and through a recession, the more upstream prices fall more than consumer inflation, and their bottom marks the end of the recession. Here's an updated graph from 1998 to the present, showing that pattern for both the 2001 and 2008-09 recessions, as well as the weakness in 2006 (in which one quarter of GDP was just barely positive, and we had one month of job losses plus two of tiny gains):
Another way to give you a better look is to subtract YoY consumer prices from producer prices (blue in the graph below). A negative result shows weakness, a positive result shows strength. Then we compare with monthly job gains or losses (red). Here is an updated graph the period of 2006 to the present:
In 2006 YoY price weakness did not result in actual job losses, except for one small loss in one month. At this point in the cycle in both 2001 and 2008 there were job losses. This year, as in 2006, job gains have remained positive even in the face of YoY price weakness.
I suspect we will have at least two more months of declines in YoY inflation, as the July and August 2011 CPI numbers of +.3% and +.3% are replaced, and hence further economic weakness. After that the 2011 monthly readings were essentially 0, so unless something truly awful happens, I expect the relative weakness to end.
We got another slap in the face earlier this week as real retail sales for June fell -0.5%, meaning almost a 1% decline since March. As I wrote back in 2009 when the recession was bottoming out, real retail sales are the "holy grail" precursor of job growth or losses, consistently changing direction a number of months in advance. Then it was an optimistic sign. Not now. Here's real retail sales (blue, right scale) v. payrolls (red), left scale) since 1998:
That real retail sales have turned south is definitely a bad sign. On the other hand, note that we had deeper declines in both late 2005 and 2006 without job losses (except for one month, mentioned above).
In other words, while growth is lousy, we aren't necessarily tipping into contraction.
6 comments:
Today's economic statistics left most analysts confused. Unemployment claims sharply increased to 386,000, but this rise came the week after a four day week. A common pattern lately has been for unemployment claims to dramatically fall during a four day week, only to dramatically rise the following week, with the second week after a holiday week being a better reflection of long term trends. However, Steve Liesman of CNBC was not so sure. He thought that the numbers were bad because auto companies traditionally shutdown during the Fourth of July week, AND the following week.
Housing dramatically improved during June. But analysts on CNBC were not impressed and said that the increase was mainly due to investors seeking to own rental property, while the number of first time home buyers continue to slump. They concluded that this uptick in housing cannot continue as long as first time home buyers remain out of the market.
Oil prices continue to soar. The question is why oil prices are soaring. Is oil prices soaring because investors are becoming more confident about the economy, or is their some bad economic reason for this to be happening?
Finally, stocks are holding up. Could this be due to the expected doom and gloom on Wall Street not coming true, or what analysts on CNBC said was the MITT ROMNEY stock market ralley. According to analysts on CNBC, stocks are rallying because they sense that Mitt Romney is going to win the election.
I meant to say in the above comment that stocks could be rising because "the gloom and doom on corporate profits are not coming true." Coming into July, many analysts predicted that corporate profits sharply decreased in the second quarter; however, corporate profits seemed to held up during the second quarter.
esong:
I had a chat over the phone with Bonddad about Oil. He says the bounce was partly technical, and partly about Iran.
As far as I am concerned, the demand side fundamentals should have Oil trading under $75. I think this is mainly about Iran and tensions in the Gulf and with Israel.
New Deal Democrat:
Thanks for the info. The rise in oil prices has me worried that this will cause the economy to move into recession. I saw a graph the other day which showed that the average price of oil during the mid 80s to early 2000s was only about $20 per barrel in 2012 dollars. Although greater demand in China and India can explain the $90 per barrel price today, I speculate some of it is due to the inexperience of the emir of Saudi Arabia.
One of my biggest worries was that a couple of weeks ago the Emir of Saudi Arabia said he wanted the price of oil around $100 per barrel. I don't think he has learned that oil prices that high causes recessions and will eventually cause oil revenues in Saudi Arabia to fall. I believe, that he may have to learn the hard way like his father. In 2008, oil prices spiked up to $147.00 per barrel. I believe that higher oil prices was the main cause of the economic slump during the 2007-08 period. It was this economic slump that caused a deregulated financial industry to collapse, which has caused the current depression. Unfortunately, the lesson that the emir learned was that the high oil prices had nothing to do with the current depression because the financial collapse overshadowed other factors that caused the initial downturn in late 2007. I speculate that it will take another oil crisis that touches off another deep world wide recession that will finally allow the emir to learn his lesson. Unfortunately, we may have to go through several cycles before he finally learns the lesson, as the next recession he'll blame the Eurozone crisis.
Of course, I'm only speculating.
Just a word about the previous Emir of Saudi Arabia. In 1973, in response to the Yom Kipur War, he engineered an oil embargo aganist the United States. He probably did not foresee the world economic consequence of this oil embargo which led to a steep recession in 1974. Likewise, he did not foresee that the huge rise in oil prices in 1979 and 1980 would cause a great world wide recession, which finally caused oil prices to collapse. It's these lessons that the new Emir will have to learn.
The Fed will throw the kitchen sink at the economy before it slips into recession. A recession this close to the elections would also not be tolerated by the administration as it would seal the president's fate in November.
Post a Comment