Tuesday, November 16, 2010

K.I.S.S. says ... the Boring Recovery

- by New Deal democrat

For the last few years, predicting the economy has been like predicting an out of control roller coaster on quantum eleven dimensional tracks -- in the twilight zone! Now, with the housing bubble busted, the Wall Street financial bubble exploded, nearly 8 million jobs lost in one year alone, followed by a stimulus fueled V-shaped GDP recovery with almost all other indicators sooner or later coming along for the ride (except, most conspicuously, for income), followed by the double dip of doom that disappointed .... for the last couple of months the economy has seemed to be in a real lull.

Let's just do a basic check of the K.I.S.S. method of looking into the near economic future, the boring ol' Leading Economic Indicators. Here's what they looked like through last month:

Predictions for the release this Thursday for October have been slightly raised from +.5 to +.6. Those numbers may not be exactly correct, but it is hard to argue with a significant positive number being released:

The yield curve in bonds remains reasonably strongly positive
Real M1 and M2 should both show solid gains
The stock market in the last 3 months has rallied about 10%
New jobless claims have decreased
Durable goods have increased
Nondurable goods have increased
Hours worked in manufacturing went up last month
Consumer confidence about the future went up

On the other hand, vendor deliveries in the ISM manufacturing survey have gone down, confirming the ample signs that manufacturing is slowing down.

Permits are not yet known, but are not expected to show a big shift

In short, we should get our fourth positive reading in a row, and the highest 3 month average in about half a year.

Since the LEI are meant to predict 3 to 6 months into the future, the slowdown of spring, with a zero reading in May and a negative reading in July, should either have passed maximum impact already, or be close to maximum effect now. Yet the economy, as of the last GDP reading, has increased about 3% in real terms in the last 12 months -- approximately long term trend growth. Payrolls last month increased just enough to absorb population growth. Retail sales, needless to say, have been doing quite well for the last 4 months. Construction is bouncing along the bottom.

The LEI tell us to expect more or less the same over the next 3 to 6 months. Boring, positive, growth, either at trend or a little under trend.

Put another way, good -- just not good enough, coming out of the worst recession since the 1930's.

P.S. For the reasons discussed above, I am not terribly worried by this morning's Industrial Production and Capacity Utilization reports. They are the coincident reflections of the LEI's convergeance towards zero at midyear. IP in particular seems to follow retail sales with a short delay, and it is now correcting for its overshoot of retail sales during the summer -- in short, a classic inventory correction that was telegraphed by the declining ISM vendor deliveries series which is a component of the LEI.

P.P.S. Via Prof. Mark Thoma, his U. of Oregon colleague Prof. Tim Duy makes the same point I am making in this post, using retail sales as a proxy.