Tuesday, June 8, 2010

The Data Does Not Support A Double Dip Conclusion

There has been increased discussion of a possible double dip recession. As of now, the data does not support that conclusion.

First, Professor Hamilton over at EconBroswer has a nice summation of a few statistics: ISM manufacturing, industrial production, the CFNAI, all of which show expansion.

Let's add some other data points.

The non-manufacturing sector (services) is also in strong shape.

Real retail sales have been increasing for the last 9 months. The talk of a blip would be one month of data as compared to the trend we see.

Real PCEs have been increasing for the last year as well.

Now -- let's look at a few points that are causing concern -- but point to a slowdown and not a double dip.


The deflation we are seeing in the commodities market is the result of several issues. First, the dollar has rallied:

As most commodities are priced in dollars, this increase translates into a natural decrease in commodity prices. In addition, there are events in China that indicate they are trying to slow down their economy. But that is from a pace of over 10% to around 8%. In other words; the combined issues don't indicate demand destruction; they indicate a slowdown and a repricing of assets. Also bolstering this lack of demand destruction are the manufacturing indexes from the US (see the ISM Manufacturing index and the various regional Fed indexes) which show a strong a strong appetite for raw materials. See also this rise in British Manufacturing and German manufacturing -- both reports from the last few days.

In the past I have noted that a little inflation is good as it indicates that demand is pulling prices slightly higher. Conversely, a little deflation is bad, but only if it indicates a drop in demand. Given the rise in retail sales PCEs, the strong US manufacturing numbers and China's still strong growth, I don't see a huge hit to demand for raw materials.

As for the dollar, the dollar has rallied 14.29% this year from it's absolute low to it's current price level. That's a big increase in the base currency for commodities.


As I noted, the last unemployment report was terrible. However, let's look at the trend:

Friday's report would send the last data point lower if we take out census workers. But even with that, notice the pace of job destruction reached its nadir at the end of last year and the beginning of this year. In other words, things are moving in the right direction. Friday was one data point in an otherwise good data series. We need a few more terrible reports before we slice our collective wrists.

And while the initial unemployment claims are still high, they have returned to just above 450,000 where they were after a nasty jump to 471,000. I do agree that we need to see these numbers start to move lower soon, however.

Money Supply

Of the indicators that are negative, this one I find most concerning.

While the year over year percentage change in M2 is low, it is still positive. In addition,

M2's YOY percentage change reached similar levels after the early 1990s recession without having the economy fall into a recession.

The month to month change shows an injection of liquidity over the last month or so which should help.

MZM's YOY percentage change is just below 0%. However, this same situation occurred in early 1995 and 2005 without immediately leading to a recession.

Leading Indicators:

Last month the LEIs dropped .1%.

The reasons were four of the indicators were lower.

However, this is after a long series of increases. In addition, the drop of .1% does not mean the US economy is going into a recession anytime soon. It does mean the pace of expansion will probably slow.

The point is clear: There are more than enough indicators which say the underlying expansion remains. Multiple indicators from manufacturing and the service sector show expansion. As for the areas of concern:

1.) The employment figures are still moving in the right direction. However, we do need to see improvement in initial unemployment claims soon.

2.) Commodity deflation is not caused by demand destruction, but instead by a rise in the dollar and China stepping on the brakes.

3.) Money supply is a concern; we need to see an increase in this number.

4.) The drop in the LEIs indicates growth will slow: it does not mean we'll see a contraction.