Tuesday, September 18, 2012

Recession Watch

Last week, in addition to my post on the ISM manufacturing index's latest anecdotal data, NDD posted on the weak industrial production number.  He also mentioned the work "recession," which got me thinking about where we are in the business cycle.

So, let's turn to the NBER's recession information webpage to see what they look for.

The NBER's Business Cycle Dating Committee maintains a chronology of the U.S. business cycle. The chronology comprises alternating dates of peaks and troughs in economic activity. A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.

In both recessions and expansions, brief reversals in economic activity may occur-a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction. The most recent example of such a judgment that was less than obvious was in 1980-1982, when the Committee determined that the contraction that began in 1981 was not a continuation of the one that began in 1980, but rather a separate full recession.

The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production (IP). The Committee's use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.

The same webpage also has an Excel spreadsheet of data which contains GDP, employment, real income less transfer payments and manufacturing sales.

First, let's look at what caused concern on NDDs part -- the chart of industrial production.

While the number rebounded from it's recession lows, the number has been near a fairly constant level for the last 8 months.  We've seen some moderate increases, but the data series has clearly lost upside momentum.

Let's look at some of the other data the NBER uses to date recessions.

After leveling off for most of 2011, real personal income less transfer payments has been increase smartly over the last few months.

The top chart shows the percentage change from the previous year in real GDP.  Notice the rate of growth is right around 2%.  This is not a great rate of growth, but at least it's positive.  The bottom chart shows total GDP which is now higher than recession levels.

The top chart shows total civilian employment as expressed in the household survey.  Notice that it has been steady (right around 142,000) for the last seven months.  The lower chart shows the establishment survey, which has been inching higher. 

The NBER also likes to look at "real manufacturing and trade sales."  Unfortunately, there isn't a good, single statistic for this.  The top chart shows new orders for machine orders, which has been at a steady level for awhile (at least a year, if not longer).  The second chart shows the ISM new orders index, which has printed below 50 for the last three months.  However, real investment in equipment and software as expressed in the quarterly GDP reports shows a continual increase.  I don't like total durable goods orders as they are way too volatile thanks to transportation orders.

The above data shows there is weakness, primarily in the manufacturing area.  This is largely due to the weakening situation in the EU and Asia.  Additionally, there are mixed signals in the employment reports.  The household survey shows a stagnating employment picture while the establishment survey shows growth, albeit at a slow rate.  These two areas of weakness line-up with the overall weak GDP growth rate of about 2% Y/O/Y.  The good news above is in the income less transfer payments category, which is increasing. 

Put another way, the US economy is barely growing and is susceptible to shocks.