Monday, October 6, 2008

If It Walks Like A Recession and Talks Like A Recession ....

I've got jury duty today. I'm guessing they probably won't pick me (I'm a lawyer, I've got a masters degree and I'm extremely opinionated) but you never know. I should be back in time to do the market wrap at the end of the day.

The standard press definition of recession is two consecutive quarters of negative GDP growth. However, the National Bureau of Economic Research -- the organization that officially dates recessions -- uses a broader definition:

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

Let's look at each of these items:

Remember we're looking at the change without transfer payments. That makes the spike in May of this year meaningless. Note the year over year trend line has been dropping since July of 2007. Also note the percentage change is nearing 0% over the last few months. In other words -- personal income isn't looking that good.

Note the year over year percentage change in employment growth has been dropping since April 2006 and is now negative.

Note the unemployment rate has been increasing since January of last year.

Industrial production's year over year rate of change has been dropping all year.

Capacity Utilization has been dropping since the end of the third quarter of 2007, although the last three months have seen incremental increases.

The ISM manufacturing number has been dropping since 2004 and recently took a big drop into recessionary (below 50) territory.

The Chicago NAPM number has shown two strong months although the readings for the rest of the year have been borderline recessionary.

All of these numbers tell the story of an economy in a recession. My guess is the NBER will date it from the beginning of this year.