Can you really have a recession if housing, cars, layoffs and stocks won't play?

- by New Deal democrat

In assessing the economy, it's dangerous to rely upon any one data series. None are infallible, and there will always be an exception to any rule. Last week's durable goods orders were just awful, and certainly looked like I would expect to see in a recession, but while most manufacturing-related series are flat to declining, the rest of the economy doesn't seem to want to cooperate. There are a whole bunch of important facets of the economy that simply aren't playing along.

We all know that housing is one of the most important - and most leading - slices of economic activity. There has never been a recession without housing declining at least to a small degree months in advance. Well, here's the entire series for housing permits:



Not only is there no decline, but these have been in a steady rebound for almost two years.

Yesterday it was reported that more cars were sold in September - 15 million on an annualized basis - than at any month in the last 4 years. Here's car sales on a quarterly basis to smooth out noise, for the duration of the series:



The graph doesn't include the July-September quarter for this year, which averaged 14.5 million annualized. The strong rebound from the 2009 lows continues. At no point has a recession started with car slaes increasing like this.

In recession, increasing numbers of people get laid off. Well, here's the graph of initial jobless claims, averaged monthly to decrease noise, since the inception of the series half a century ago:



These have almost always increased by about 10% going in to a recession. They are only about 3% off their recovery lows through last month.

Finally, as I pointed out last week, the stock market almost always peaks before the economy does. Here's a log scale graph of that, split over two time periods(1957-80, left log scale, 1980- present, right log scale) to better show the peaks, for over 50 years:



In 1980 and 1990, the market peaked about a month or so after the economy did. Otherwise, from the 1950's on, the stock market has always peaked first. It just made a new peak about 3 weeks ago.

There's no doubt that the crucial coincident indicators of recession hit something of an air pocket in August and a looking flattish for the year. But we have whole swaths of economic activity that simply aren't cooperating with the recession thesis. So, while manufacturing may be contracting as a whole, and while real wages have declined for going on two years now, it's hard to buy the recession thesis while so many aspects of the economy which ought to have rolled over first, simply haven't rolled over at all. The expansion may just barely have a pulse, but housing and cars - typically the most crucial lifebloods of that pulse - are pumping.

Morning Market Analysis

After breaking trend, oil has fallen below the 200 day EMA.  Notice that EMAs are now providing upside resistance.  Also note the shorter EMAs are below the 200 day EMA -- as are prices.  Momentum is declining, prices are relatively strong and volatility is increasing. The upsides here are geo-political while the downsides are economic.

After spiking in July, agricultural prices consolidated sideways -- above the 200 day EMA and with declining momentum.  Over the last few weeks, prices have moved to test the 200 day EMA and bounced higher from it.  Also note the shorter EAMs are beginning to move lower.

The Australian Central Bank lowered interest rates earlier this week.  Let's take a look at the Australian currency and equity markets to see the impact.

After breaking trend, the Australian dollar has moved sideways in a consolidation are between the 102 and the 105.5/106 level.  Prices took a decidedly downward turn after the announcement and are now heading for the 200 day EMA.  The big test will be the 200 day EMA/previous lows.

 
The top chart shows that the Australian equity market is in the middle of a decent, multi-month rally.  However, notice the declining MACD over the last two months, indicating the momentum is stalling.  And while the weekly chart (bottom chart) shows that prices have broken trough resistance, the weekly moves since the break-out have been week.  A lack of follow-through is always a concern when we see a decent break-out.

The Bump In the Latest ISM Report and the Manufacturing Recession

Manufacturing has been hit by the global slowdown.  Over the last few months, the national ISM index has printed below 50, indicating the sector is in a contraction.  However, the latest report showed an expansion:

"The PMI™ registered 51.5 percent, an increase of 1.9 percentage points from August's reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months. The New Orders Index registered 52.3 percent, an increase of 5.2 percentage points from August, indicating growth in new orders after three consecutive months of contraction. The Production Index registered 49.5 percent, an increase of 2.3 percentage points and indicating contraction in production for the second time since May 2009. The Employment Index increased by 3.1 percentage points, registering 54.7 percent. The Prices Index increased 4 percentage points from its August reading to 58 percent. Comments from the panel reflect a mix of optimism over new orders beginning to pick up, and continued concern over soft global business conditions and an unsettled political environment."

Also of importance is the anecdotal information contained in the report, which I think is added to show what a fairly wide swath of people in various sub-industries are thinking:

    "Appears that our so-called 'slowdown' was a summer thing. September brings with it increasing requirements and business." (Paper Products)
    "Business improved through Q3, but is beginning to show signs of slowing down in Q4; this has been a typical trend over the last few years." (Wood Products)
    "Business has picked up going into the last quarter." (Plastics & Rubber Products)
    "We are sticking to our manufacturing plan, but have slowed production down considerably. Haven't added any new units to the 2012 plan, and still have no forecast for 2013 released." (Computer & Electronic Products)
    "Sales have tanked over the last two months, bringing a very concerned and stressed management team. Not very optimistic for the near-term future." (Apparel, Leather & Allied Products)
    "Uncertainty in the healthcare legislation (reform) continues to be the underlying force keeping our sales revenue below its full potential." (Miscellaneous Manufacturing)
    "Steel and aluminum prices still dropping, and auto production orders are up." (Transportation Equipment)
    "Domestic business is up; international is down." (Electrical Equipment, Appliances & Components)
    "Demand seems to have stabilized from August. New orders are appearing this month without advanced notice from our customers." (Chemical Products)

The sum total that I read in the above data is that things are getting better.  But, don't get carried away with that analysis.  Things are barely better.  We've moved over the expansion line, but not with a big, consistent or strong move higher.  Instead, this is more of a movement withing the margins.  Think of it as statistical noise rather than a game changing economic development.

This data must be viewed in the light of the latest durable goods report, which was not pretty as noted last week by NDD.  About the only good thing to come out of the report was that the drop ex-transports was -1.3%.  Overall, we've got a manufacturing recession on our hands.



UPDATE: I previously had a graph here, but used the wrong graph.  This is what you get when blogging on medication.  Sorry.

The "Whistling past Dixie" realignment

- by New Deal democrat

Last week Bonddad posted his thoughts on the election. In the same vein, I wanted to address an important long term change of trend in the American electorate. While my politics should be evident from my nom du blog, in the tradition of this blog's "just the facts, ma'am" orientation, my argument should make sense regardless of your political views.

In 2006, Thomas F. Schaller wrote "Whistling past Dixie: how democrats can win without the South." He argued that, among working class whites, the South stands out as different on issue after issue. Southern conservatives' attitudes towards other races, homosexuality, abortion, premarital sex, school prayer, and women in the workforce, are far more deeply entrenched and pervasive than those of conservatives in any other part of the country. Further, these moral attitudes are "gateway" issues. A candidate's views on economic issues will not be considered until he has passed this moral test. Therefore, Schaller argued, democrats needed to finally let go of dreams of the old New Deal coalition, and target the inner (mountain) West instead.

The validity of Schaller's argument as to the uniqueness of Southern working class attitudes was evident in polling results published just several weeks ago. While Obama is losing to Romney among the white working class as a whole nationwide, this is because the white working class in the rest of the country is about evenly split between Romney and Obama. The white working class in the South favors Romney by a 40 point margin!

Obama won in 2008, and is very likely to win again next month, because of the emergence of a modified version of Schaller's "Whistling past Dixie" realignment. Several trends have contributed to this realignment.

Former republican enclaves in the northeast, like suburban Philadelphia, have been so offended by the GOP's reactionary social policies, that they have flipped democratic. The last northeastern GOP senators are being defeated, retiring, or dying. It took a generation, but a "solid North" has emerged to oppose the Southern dominated GOP.

Beyond that, the California diaspora in the mountain West, and the increasingly powerful Lation vote, have combined to enable Schaller's strategy of targeting the inner West. Nevada, New Mexico, and Colorado voted for Obama in 2008 and are likely to do so again this year. In another cycle or two, Arizona and Montana are likely to be in play. (Even though both Nixon and Reagan hailed from California, Reagan's re-election campaign of 1984 is the last time that state voted GOP).

Put the "solid North" and the mountain West together with the traditional democratic stronghold in the upper midwest, and you are on the cusp of victory.

The realignment is a modified version of Schaller's strategy, however. Perhaps you've heard of the humorous acronym used by natives to describe the affluent Raleigh suburb of Cary, North Carolina -- "Contaminated Area: Relocated Yankees." The migration of northern, socially and economically liberal whites to more southern climes has reached critical mass in several eastern states. For all intents and purposes, on a national level Virginia seceded from Dixie beginning with Jim Webb's victory over "macaca" George Allen in 2006. Virginia was a blue state in 2008 and has been solidly blue all this year. It looks set to hand Allen another Senatorial loss, to Tim Kaine as well. Florida has already become a notorious battleground state. And North Carolina, which flipped blue in 2008 and is just slightly pink for 2012 as I write this, is close behind in the queue.

Put this together and you have the makings of a durable realignment. Let's face it, if a black man can win election and then re-election with this coalition, it is unlikely that an equivalent white, Asian, or Latino candidate is going to do worse!

I have always maintained that 2008 was not a mirror of 1980 or 1932, which was a defining "wave" election. The 2010 midterms proved that. Rather, 2008 was like 1968, in which a new regional realignment - Nixon's Southern Strategy -- first manifested itself. Contrary to the fantasies of Andrew Sullivan and a few on the left, Obama is no progressive Ronald Reagan. Rather, like Nixon, who signed legislation creating OSHA and the EPA, Obama is the first manifestation of that realignment, who nevertheless governs firmly in the tradition of the past consensus ("Grand Bargain", anyone?).

From 1865 to 1932, the South was a defeated, downtrodden, resentful region. Since 1932, it has been a strong and then dominant player in first the New Deal coalition, and then the GOP Southern - Wall Street coalition. It will not react well to being the reactionary vanguard of a rump that includes the Mormon West and the high plains. Today's GOP spurns the legitimacy of elections that they do not win. It has become, as Thomas E. Mann and Norman J. Ornstein have written, an insurgency. Just imagine what will happen if, e.g., 74 year old Justice Scalia retires or dies, and a re-elected Obama nominates even a moderate to replace him.

Even if you disagree strongly with my political views, I submit that the evidence for the emergence of this realignment is compelling.

Morning Market Analysis

The British Pound has rebounded to late April levels, but has sold-off in a downward sloping pennant pattern.  This is a common sell-off development after a rally into a major resistance line.  The pound has rallied as part of the safety bid from the EU situation.  However, notice that momentum has given a sell-signal.

The euro started to rally in late July/early August as it appeared that the EU area was pulling itself together.  That rally has continued.  Now that euro is at the 200 day EMA.  The sell-off is standard.

The weekly euro chart shows that prices have rallied to the 61.8% Fib line of the multi-year decline and then retreated -- again, another standard trading move.

The Indian market is at a six month high,  The market consolidated losses in an ascending triangle formation from late May until mid-September.  Now prices have moved sharply through several important resistance levels.  Also note the strong underlying technical environment: the EMAs are rising, as is the MACD and CMF.  The volume spike over the last few trading sessions is also encouraging.

Gas prices and the 2nd half economy

- by New Deal democrat

The $.50+ hike in the grice of gas during the third quarter is beating the tar out of my second half 2012 forecast. Back in January, looking at the progress of the Long Leading indicators, and taking into account the normal seasonal rise and fall of gas prices (and therefore the tightening and loosening of the energy choke collar), I figured that the economy would slow to about a stall at some point in the first half. Noting the recent downward revisions in 2nd quarter GDP, and the punk payroll numbers since March, that seems to have been about right.

But I also figured that the slowdown would case a downturn in the price of gas up until the holiday season, and with no debt ceiling debacle prior to election day, the second half of 2012 would see the economy strengthening.

With wage pressures minimal at best, the economic weakness should play out like an old fashioned deflationary bust. Those typically bottom coincident with the YoY rate of inflation bottoming as well. Sure enough, as gas prices declined beginning in May, I figured we would see an inflation rate of only about 1% or less by the end of summer. This would be less than the rate of wage growth. Consumer spending would pick up, and the economy would strengthen again.

Except Oil prices turned right back around and headed to $100 a barrel. I don't profess to know why - speculation? Iran troubles? Refinery closures? - but the result is that I do not believe the period of weakness is over.

Let me flesh this out with a few graphs. First of all, as I have pointed out many times, the issue of US wage stagnation is a crucial long term determinant of the economy. If wages stagnate or decline, then consumer spending must come out of savings, out of asset appreciation (stocks or houses), or refinancing of debt at lower rates. Here is the most recent update, through August, of real wages (i.e., wages minus inflation, both measured YoY):



The way to read this graph is to note that a positive number means that YoY wage growth exceeds YoY inflation. A negative number means wages haven't kept up with inflation. During most of the 1980s and early 1990s, wages failed to keep up with inflation -- but with women continuing to enter the workforce, household buying power continued to increase, aided and abetted by a rising stock market and decreasing mortgage rates (meaning, with the exception of just before the 1990 recession, the continual ability to refinance debt at lower monthly payments). Similarly, in the mid 2000s, rising house prices and decreasing mortgage rates meant that purchasing power could be extracted from home equity and from refinancing. That all fell apart in 2006 and 2007.

Note also that generally speaking at the onset of each recession, prices did not keep up with wages. By the end of each recession, wages supported substantially more consumer spending that at the start of the downturn.

Since the beginning of 2011, wages have failed once again to keep up with inflation. As middle class assets have been depreciating during most of that time, the only avenues available for increased spending have been refinancing of debt, and digging into savings (as to which a huge sum was accumulated during the last recession). Notice also that unlike each and every recession shown in the graph, real wages have failed to break above zero. So long as that is the case, weakness - or worse - will continue.

So why hasn't inflation declined further? I blame the recent surge in gas. Here's a graph of inflation ex-energy for the last 24 months. The blue bars are the monthly percentage changes for the first 12 months. The green (red) bars show an increase (decrease) in the monthly prices compared with the same month 1 year earlier.



You can see that ex-energy, the rate of inflation has declined each and every month except for one this year.

Now here is the same graph, including energy as well.



The YoY rate of inflation began to decline last October, but then spiked again in August of this year. I expect the spike to continue when September CPI is reported as well.

So what does this mean? It means that the economy will continue to be weak, or even contract, until sufficient demand for gasoline is destoryed so as to cause YoY inflation to turn and to remain significantly under YoY wage growth (which is becoming ever more non-existent) long enough for consumers to be able to spend more safely.

A Word on Private Equity from Mitt Romney

Although he usually posts at the Big Picture Blog, Invictus is helping me out this week with this post.

Mother Jones released another video of Mitt Romney, this one from his Bain Capital days, circa 1985.

Here's an interesting excerpt (emphasis mine):

Bain Capital is an investment partnership which was formed to invest in startup companies and ongoing companies, then to take an active hand in managing them and hopefully, five to eight years later, to harvest them at a significant profit.

There are two aspects of the new video that I think are noteworthy:

1. Romney asserts that it takes "five to eight years" to manage a company (either a startup, ongoing venture, or a turnaround) to the point where Bain could "harvest" it at a significant profit. Five to eight years. As David Corn points out: "Romney mentioned that it would routinely take up to eight years to turn around a firm—though he now slams the president for failing to revive the entire US economy in half that time." Enough said.
2. The Romney excerpt above is essentially a mission statement for private equity firms. This is what they do. In fact, I don't fault Romney for making that comment. It is the job of private equity firms to make (often outsized) returns for their investors. Romney clearly had a very good grasp of that fact. What neither Romney nor any other private equity player will likely ever name as an objective is "job creation." It is, simply, not on their radar. And to the extent it happens (see: Staples), it's always secondary and incidental to the primary objective of doing what it takes to achieve the highest possible return on investment (ROI, otherwise known as "harvest"). Hence, for Romney to tout his private sector experience at Bain as somehow translating into an ability to create jobs is just so much gibberish. It probably more often the case that private equity improves its ROI by cutting jobs, not creating/adding them.

Romney's comments undercut two of his central arguments - 1) That Obama should have the economy 100 percent turned around by now and 2) That his experience at Bain translates into skill as a "job creator." 

Morning Market Anlaysis

Hey all -- this is Bonddad.  First, a quick update.  Last Thursday I had my right hip resurfaced -- which is essentially hip replacement light. The doctor was very pleased with the surgery, so I have high hopes for a 100% recovery when this is all over.  This is where being nutty about exercise really pays off.  But, it will take awhile for the swelling to come down.  This week I'm working at about half speed, so the postings from me will be a bit lighter than usual, probably focusing on charts and some economic news as it comes in.  In addition, I'm going into the busy season for my job, so that's taking a ton of time as well.

That being said, let's take a look at some charts.

For me, the weekly Chinese market chart is really the key to a lot of what is happening in the world right now.  The EU is in recession and the US is clearly slowing, so China is (once again) where global growth will come from.  However, the weekly chart shows that prices are still consolidating, as traders try and discern if the Chinese authorities are going to step up and bring some stimulus into the market or now.  The point I'm trying to make is that until we get some strong equity growth from China, we're not going to see strong growth from anywhere else.

Although the SPYs have recently broken through resistance, they are now selling off a bit.  This is a standard move after breaking resistance, as traders take some profits and also reevaluate the reasons for the move higher.  I would expect a sell-off to either the 10 week EMA or the price level established earlier this year.

 

Ever since the loosening standards of three central banks (the US, EU and BOJ), gold has rallied.  After breaking through resistance, it has rallied to the top Bollinger Band and has stalled.  Again - this is to be expected after a quick move higher.

 

 On gold's daily chart, notice that after rallying, prices really haven't sold-off in a major way, but instead are moving sideways, consolidating gains.  Prices are using the 10 and 20 day EMAs for technical support.  Also note the sell-signal given by the MACD.

After falling to a 6-month low, the dollar rebounded over the last few weeks, and has now met upside resistance at the 20 day EMA.  This move is primarily technical, as traders are either covering short positions or some thought the dollar was under-valued.  But the Fed is now engaged in further monetary loosening, meaning there is tremendous downward pressure on the dollar. 

Weekly Indicators: surprising strong September rebound edition

  - by New Deal democrat

In the rear view mirror, 2nd Quarter GDP was revised down to a miserable +1.3% annualised, and households deleveraged substantially in that quarter as well. Industrial production and durable goods orders for August plummeted, and manufacturing in the Chicago region contracted in September. Spending rose, but was competely consumed by inflation. Income failed to keep up. Housing prices rose, new home sales went sideways, and consumer confidence rose or fell depending on what index you used.

Watching high frequency weekly indicators should show turns or continuations in before they show up in monthly or quarterly data. The message this week is that they do not confirm a continuation in the punk trend established by the August monthly data.

Let's start this week with Employment related indicators, which surprisingly were all strongly positive this week.

The Department of Labor reported that Initial jobless claims at 359,000 declined -23,000 from the prior week's unrevised figure.   The four week average fell another 4,000 to 374,000, about 3% above its post-recession low.

The American Staffing Association Index rose by two to 95. This is a typical seasonal bump, but does return the index to its high reading for the year. It has generally been flat at 93 +/- 1 since March. This week's increase is enough to at least temporarily remove the red flag from this indicator.

The Daily Treasury Statement showed that 18 days into September, $125.0 B was collected vs. $118.4 B a year ago, a $6.6 B or a 5.5% increase. For the last 20 days ending on Thursday, $133.2 B was collected vs. $126.7 B for the comparable period in 2011, a gain of $6.6 B or +6.7%.

Same Store Sales and Gallup consumer spending were all solidly positive:

The ICSC reported that same store sales for the week ending September 8 were up0.6% w/w and were also up +2.9% YoY.  Johnson Redbook reported another solid 2.0% YoY gain. The 14 day average of Gallup daily consumer spending as of September 27 was $76, compared with $65 last year for this period. Gallup's YoY comparison has been strongly positive for 8 of the last 10 weeks.

Bond yields were mixed and credit spreads narrowed:

Weekly BAA commercial bond rates fell .06% to 4.88%. Yields on 10 year treasury bonds rose .05% to 1.81%.  The credit spread between the two remained at 3.07%, which is close to its 52 week minimum. This is an excellent move.

Housing reports were all positive:

The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index rose about 7% from the prior week, and is up 8.6% YoY. Generally these remain in the middle part of their 2+ year range. The Refinance Index also fell about -9.9% for the week, with higher mortgage rates.

The Federal Reserve Bank's weekly H8 report of real estate loans this week fell 7 to 3548. The YoY comparison also decreased slightly to +2.0%, which was also the seasonally adjusted bottom. This is just slightly off of last week's mulit-year best numbers.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up +2.2% from a year ago.  YoY asking prices have been positive for 10 months.

Money supply remains quite positive:

M1 declined -2.1% for the week! But it was up +2.5% month over month.  Its YoY growth rate fell from last week's +14.3% to 13.0%. As a result, Real M1 also rose to +11.3% YoY.  M2 increased +0.1% for the week, and was up 0.7% month over month.  Its YoY growth rate also rose again to +7.1%, so Real M2 rose to +5.4%. The growth rate for real money supply is still quite positive, despite the summer 2011 incoming tsunami of Euro-cash having disappeared from the comparison.

Rail traffic was negative YoY for the first time in a long time, but still due primarily to coal:

The American Association of Railroads  reported that total rail traffic was down -0.9% YoY.  Non-intermodal rail carloads were again off a huge -4.1% YoY or -12,500, once again entirely due to coal hauling which was off -16,500.  Negative comparisons declined from 12 to 11 types of carloads.  Intermodal traffic was up a miniscule 1,800 or +0.7% YoY.

Finallym the price of oil declined slightly last week, but gasoline prices and usage still show the choke collar engaged:

Gasoline prices finally fell last week, down $.05 from $3.80 to $3.84. Gas prices had risen $0.53 since their early July bottom.Oil prices per barrel fell slightly from $92.89 to $92.17. Gasoline usage remained negative on a YoY basis. For one week, it was 8770 M gallons vs. 8964 M a year ago, down -2.3%. The 4 week average at 8819 M vs. 8907 M one year ago, was down -1.0%.

Turning now to the high frequency indicators for the global economy:

The TED spread held steady at its new 52 week low of 0.27. The one month LIBOR  declined again to 0.2142, setting another new 52 week low. Both are well below their 2010 peaks and in the middle (TED) or low end (LIBOR) of their respective 3 year ranges.

The Baltic Dry Index fell slightly from 774 down 8 to 766, still well above its recent 52 week low of 662. The declining trend in shipping rates for the last 3 years remains fully intact. The Harpex Shipping Index fell yet again, down 8 from 386, and is now only 3 above its February 52 week low.

Finally, the JoC ECRI industrial commodities index declined 0.22 for the week to 124.4. It is still down slightly YoY. This number has improved sharply over the last month.

Almost all of the high frequency data this week was positive, much of it strongly so. Only the three transportation-related metrics were negative: rail traffic, shipping rates, and gasoline usage. All of these suggest considerable coincident weakness in the economy. But the positives were legion: gas prices declined, credit spreads narrowed, corporate bond prices increased, money supply remains strongly positive, overnight rates have sunk into a deep sleep, the recovery in housing continues, employment tax withholding has rebounded, temporary staffing has bounced, and the US consumer continues to spend like a champ! These positives suggest that the coincident weakness will pass rather than deepen. As always, energy prices are a wild card and bear close watching.

Have a nice weekend.

Weekend golden retriever

- by New Deal democrat

This is the time of week when Bonddad normally posts photos of his doggies. Since at the moment he is medicated and probably smiling and singing "la la la la la la la" somewhere, here is a photo of a golden retriever instead, doing what it loves to do the most: play with children:



This was mine's favorite time of year because of Halloween. He thought it was a holiday made just for him, because all the kids in the neighborhood would come pay a visit. Of course, when the little kids' "trick or treat!" was answered with an 85 pound lunk bounding out the door, sometimes there was a little extra shreiking!

I'll have Weekly Indicators tomorrow. Bonddad will be back next week.

ECRI's recession call 1 year anniversary: pending revisions, still wrong

- by New Deal democrat

One year ago this Sunday Lakshman Achuthan of ECRI appeared on WSJ television and announced that the US was "tipping into recession."



At the 30 second mark, one of the hosts asks, "When?" and Achuthan responds "Now."

At the 50 second mark, he gets more specific: "It might have started last month. It might start next month. But sometime I think it's going to wind up in the 3rd or 4th quarter."

Unless someone thinks a recession started 11 to 13 months ago, Achuthan's boast at about the 20 second mark that "On recessions we have never made a false alarm" is completely busted.

Subsequently in December ECRI revised its call to "by mid-year" 2012. While it is certainly possible that the data for a number of series could get revised down significantly for the second quarter, as of now that call remains wrong as well.

With real personal income declining in August (as reported this morning), industrial production down sharply, and real retail sales not making a new high, it is certainly possible that August could mark the beginning of a new downturn. Nevertheless, one thing that should be clear is that "Now" is not "11 months from now."

On a related note, there has been some consternation about the readings of ECRI's Weekly Leading Index, which recently has turned significantly positive no matter how it is measured. In fact, the index has never been at its current 6 month growth or YoY levels during a recession, but only after coming out of recession into recovery.

ECRI's founder, Prof. Geoffrey Moore, proposed three separate indexes: a Long Leading Index, a Short Leading Index, and a Weekly Leading Index. The Weekly index would be somewhat less reliable than the other two, but would have the virtue of being updated in very timely fashion. For example, the Weekly index includes mortgage applications, but these are not thought to be as reliable as housing permits - but permits are only reported monthly, so some of the data is close to two months old. Similarly, initial jobless claims are somewhat less reliable than unemployment from zero to 5 weeks. But the 0 - 5 weeks metric is only reported monthly in the employment report.

So the WLI should be taken with a few grains of salt. ECRI used to share its Long Leading Index as well, but that has been taken behind a wall for nearly three years. Three of its likely components, however - housing permits, real money supply, and corporate bond interest rates (inverted)- have generally been strengthening for the last 18 months. Only the fourth - corporate profits - is faltering.

So while I am willing to agree that manufacturing may be in a recession (sparked mainly by the global downturn), unless the consumer is further beaten down by declining real wages and spiking gasoline prices, and is unable to refinance debt at lower rates, I don't yet see more than a "recessionette" a la the first half of 2001.

New stock market highs = unlikely new recession has started

- by New Deal democrat

Yesterday I said it appeared likely that manufacturing - but not necessarily the economy as a whole - had slipped into recession. One reason is that the stock market continues to make new highs.

While it has happened that stocks have made new highs after a recession has begun, it is unusual, and the lag time has been brief. Here are two graphs showing the S&P 500 in log scale, first from 1957 to 1982:



And here it is from 1988 to the present:



In case you can't tell from the graphs themselves, of the 9 recessions that have happened during that period, the stock market has peaked first 7 times. In both cases where it did not, 1980 and 1990, the market made its final high within 45 days of the recession starting. Although it does not involve the S&P, in 1929 the DJIA made its final high 3 months into the recession.

The bottom line is , while it is possible that a recession may have already started, it is unlikely by this metric, and it is almost certainly the case that any such downturn did not start in June or before.

OUCH! Did durable goods just jump off the fiscal cliff?

- by New Deal democrat

There's no getting arouind the ugly durable goods numbers this morning, shown below in blue, and "core" capital goods ex-military and transportation (mainly Boeing plane orders) in red:



It looks nearly certain at this point that manufacturing is in a recession.

But note the difference between 2000-01 and 2007-08. The "great recession" was a consumer-led recession, brought about by as energy spike together with a collapse in housing construction, and too much consumer debt. Durable goods did not meaningfully decline until well into that recession. By contrast, in the business investment led recession (internet bubble, anyone?) of 2001, durable goods spending declined well before a recession started.

The four week average of unemployment claims as of this morning is only about 3% above its March low, an unlikely event if a recession had already begun. Meanwhile the stock market just made new highs within the last couple of weeks, also not typical after a recession has already begun (more on that in another post).

So I am not convinced that, even if we have entered a manufacturing recession, it has bled over into the general economy enough to be consistent with a consumer recession as well. As I noted a few days ago, sadly it appears that the terrorist attacks of 9/11 were what pushed the economy in 2001 into enough of a tailspin to qualify as a recession. In the present case, one potential culprit is the "fiscal cliff," which must be factored into business decisions as to ordering and building early next year. Do we really have confidence that this Congress and this President will not repeat the debt ceiling debacle of July and August 2011? If we don't, should businesses?

A look at employment since the recession, measured 2 ways

- by New Deal democrat

A few months ago, Karl Smith of Modeled Behavior showed that there has been a stark bifurcation in the recovery of private sector service employment vs. the complete non-recovery of goods producing and government employment. Even with the generally poor employment reports of the last half a year, that stark difference remains.

First, here is the update of the comparison as of the most recent payrolls report. Blue is private sector service employment, red is manufacturing, construction, and government:



Private sector service employment has almost completely recovered since the recession. While there is no certainty that the trend will continue, if it does the recovery will be complete by early next year. Meanwhile, there has been no recovery at all in goods producing jobs and public sector jobs.
UPDATE: The above graph does not take into account the preliminary benchmark provisions announced by the BLS this morning. Once we take those into account, instead of still being down -770,000 jobs, the private services sector is down only -378,000 jobs, so the entire decline could be reversed by the end of this year.

Unfortunately, even the good news about service sector private jobs doesn't look nearly so good when we adjust for population:



Adjusted for population, there has only been a modest improvement in private sector service jobs, and the hemorrhaging in goods producing and public sector employment has continued relentlessly.

EVERY house price index has now turned positive

- by New Deal democrat

Last month I wrote that It isn't just Case Shiller: almost every house price index has bottomed, specifically noting that in addition to the Case Shiller index, 9 of the 11 other indexes had also turned positive YoY.

The remaining two with negative YoY comparisons were the Census Bureau's new home sales report, and the FNC repeat sales index.

Not any more. This morning the Census Bureau report on new home sales also showed that both median and mean prices for new home sales in August 2012 were positive YoY.

Further, last week FNC reported that:

Nationwide, July home prices – based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas – were up at a seasonally unadjusted rate of 0.9% from the previous month. They were up 0.7% from a year ago in July 2011. Year to date, home prices rose more than 4.6% since January.

So that's it. EVERY house price index has now turned positive YoY. Of course, these are nominal and not real, inflation-adjusted prices (although housing itself is about 1/3 of the entire measure of inflation, so I'm not sure how instructive that is). And yes, of course foreclosures blah blah blah shadow inventory blah blah blah. I've heard all about it for two years and it hasn't stopped the trend yet during all that time. Those who continue to advocate for that position need to explain, Why hasn't it already happened?

A look at sales, measured 3 ways

- by New Deal democrat

The NBER defines a recession as a pronounced downturn in production, sales, employment, and income. Although the last three years have by no means been good times for Joe and Jane Sixpack, the fact remains that employment and real income did turn up, and made new post-recession highs as of their last report.

Although, as per the weekly reports of same store sales and Gallup's conumser spending I post each Saturday, the YoY percentage increase in sales has remained positive, the fact remains that YoY data must be used with consideration that it will lag turning points as compared with seasonally adjusted monthly data. And the seasonally adjusted monthly sales data has generally been flat this year.

Monthly sales can be measured three ways: real retail sales, personal consumption expenditures, and manufacturing and trade sales. ECRI focused several defenses of its recession call one year ago on a downturn in the last of these. So let's look at where each stands as of the last report. The graph below shows real retail sales (red), PCE's (blue), and manufacturing and trade sales (green, right scale):



Note that only real PCE's have continued to make new highs. Real retail sales peaked in March and declined significantly until rebounding - but not to a new high - last month (they are still -0.3% below that peak). The comparison here is actually positive, since PCE's tend to decline faster going into a recession than retail sales.

Lakshman Achuthan has indicated that manufacturing and trade sales are ECRI's preferred metric. In the graph above, you can see that they appeared to peak in December of last year, but then made a slightly higher peak in May. They are -0.2% off that peak as of now.

The lack of growth in sales in the last half year is not such a downturn that necessarily means recession. At the same time, it is definitely a concern, since sales lead employment, and more particularly real retail sales (blue below, left scale) are a very good leading indicator for payrolls (red, right scale), as to which here is the most recent comparison:



Note that the blue line (real retail sales) always changes direction before the red line (nonfarm payrolls). An actual negative print in one of the two payrolls reports before the November election is a distinct possibility, and is one of the few things that could change the dynamic of that election profoundly.

Bonddad Linkfest and Bonddad's Mini-Vacation

1. Swiss national bank's bond buying lowers core yields (FT)
2. Gold hits euro record high (FT)
3. EU junk bond prices start to sag (FT)
4. Econo trolls (Noah Pinion)
5. Coulda Been Worse (Krugman)
6. The Conservative Mind (Brooks/NYT)

To all -- Bonddad is taking a mini-vacation.  I'll be back early next week.  NDD will be posting some stories.  Until then, consider this from Facebook:

Howdy, strangers

- by New Deal democrat

Hi. allow me to introduce myself. I used to blog here.... Well, at least it seems that way. It's been a few weeks since I posted anything substantial besides my weekly column. Anyway, there are times I have to choose between real life and blogging, and occasionally, blogging has to lose!

Since I haven't had the chance to throw up a bunch of charts and graphs, let me at least give a sense of where I think we are in view of the most recent economic releases.

First of all, on the downside, all of the recent manufacturing data has been negative. I don't think it would be inaccurate to say that we are in a manufacturing recession, at least as of August. Twenty or thirty years ago, that probably would mean that the entire US economy were entering recession. Hundreds of thousands if not more manufacturing laborers would be losing their jobs.

That isn't the case now. Between offshoring and robots, how many more production workers can seriously be laid off? In other words, a manufacturing contraction might not be enough to lead to a downturn in general employment or income.

Second, whether measured as broad sales including industry, PCE's, or real retail sales, sales have gone generally sideways this year. Broad sales and real retail sales are slightly below their recent peaks. That's not good, and it certainly lends credence to the manufacturing recession story, but at the same time with the exception of a few periods during the summer, consumers are continuing to spend on houses, on cars, and general stuff.

Which brings me back to two themes I have mentioned frequently here: real wages and gasoline prices. Real wages have gone nowhere in the last year and a half - in fact they have decreased slightly. Mortgage refinancing and laser-like focus on curtailing energy use seem to be holding up consumer spending. Whether consumers cave in or not is very much up to gasoline prices, it seems to me. The recent suprise $.50 spike certainly hasn't helped the rest of the economy. If we go back down to $3.30 a gallon this autumn, I anticipate consumer spending will pick up. If on the other hand we go back over $4 before spring, I suspect consumers will finally throw in the towel, and a generalized recession is much more likely.

At the beginning of this year, I thought that the second half would show strong growth fueled by retreating gas prices. I think we can throw that prediction in the trash can. I'm much more concerned about the direction of the economy than I have been at any point in the last 3 years. But I remain very cautiously optimistic that the worst we will see in the immediate future is a "recessionette," that is neither long enough nor deep enough to cross the crucial threshhold of a tailspin - like 2001 except ending on September 10 and without all the factory layoffs.

Thoughts On the Election

While we usually try to steer clear of political discussion here ("just the facts,  Mam"), it's hard to completely avoid what is perhaps the biggest story of the year: the presidential election.  While the outcome obviously has implications for the economy, the way in which the overall events have unfolded is absolutely fascinating.  Frankly, I'm very surprised by the turn of events and am beginning to think we will look back on this election as a watershed election.

When the election season started, I was of the opinion that it was Romney's to lose.  The economy has performing weakly; unemployment was still above 8%, and growth was moderate.  Among economic circles, we've seen discussion about the permanently unemployed for at least a year if not longer.  The deficit had topped $1 trillion for four years running.  In short, the economic backdrop against which the candidates were running was perfect for the challenger.

Romney also had a tremendous monetary advantage.  Thanks to the Citizens United decision, people and companies could donate unlimited amounts of money to a cause.  This led to the creation of the super-pac and limitless amounts of money being spent on campaigns.  Given the Republicans advantage with the upper class, this added to Romney's advantage.

At this point, let me interject what I think the Romney platform was supposed to be.  I have no proof of this; it's simply how I think he should have run the campaign given what I know about his history.  Central to this was Romney's health care plan in Massachusetts.  When he passed that, I really wasn't aware of him.  But I remember reading the story and thinking, "that is something that an aspiring presidential candidate would do."

So, my thought was his platform would be the following: "I was a successful businessman, I retired and devoted myself to public office and I passed a bi-partisan health care bill as governor of Massachusets (I worked across the aisles).  I also successfully turned the Olympic games around in 2002.  I'm a moderate Republican who has the ability to get things done, and who has the experience to get things done."   

The above is someone I could easily vote for.  In fact, the above is someone who I would like to vote for.  There's just one problem: the Republican base has become bat-shit insane.  Think about this: in order to be a Republican presidential candidate, you have to publicly state that you do not believe in evolution.  At one of the debates, a questioner asked if they all believed in creationism or didn't believe in evolution (I forget which).  They all raised their hands.  And one of them (Ron Paul) was a doctor!  That, of course, begs the question: what doctors do these people go to?  Do they use leeches to cure headaches?

And then there is the entire Obamacare argument.  First, let's start with a basic fact: the US health care delivery system is a poorly put together (and that's being charitable).  There is a wide swath of the population that does not have access to health insurance, which obviously lowers their preventative options.  In addition, half of all bankruptcies are caused by medical bills, and over 70% of those had insurance.  I've seen the counter-argument that people can just go to the emergency room for treatment (which is literally the least efficient and most expensive way to deliver primary and preventative care) and that the study has a "liberal bias" (which of course is the standard allegation made to any idea which counters a Republican idea).  Put another way, the counter-arguments are at best factually challenged and at worse, intellectual garbage devoid of fact.

But, the only way to solve the health care problem is to increase the pool of risk to a large enough sample to make it possible to insure everybody.  There are only two options available here: mandatory purchasing of insurance or single-payer.  That's it.  And, the Republican platform included the mandatory purchase of insurance for about 15 years, which is why Romney implemented that idea in Massachusetts.  So, Obama adopted the Republican idea, thinking that in doing so, he'll get Republican support largely because it was their idea.  We know how that went.  The Republicans were more interested in, well, being dicks, then solving the problem.

The moderate Romney (the successful businessman who saved the Olympics and then became the Massachusetts governor with the history of working with people to solve problems) had no chance of appealing to a Republican base that is now to the political right of the Czar's of Russia.  And that's where the problem really started.  The base of the Republican party is nuts and won't accept a moderate, so the moderate had to pretend he was conservative.  And in pretending that he's a "real conservative" he completely alienates half the country at the start.

In addition, I can't think of a time when I have seen a candidate or campaign operation that is this poorly organized and run. Peggy Noonan recently called it a "rolling calamity" and I think she is right.  Frankly, at this point I'm wondering how Romney even made it to the top of Bain Capital; he seems that inept to me.  The level of sheer incompetence is mind-numbing.

And then there is Romney himself.  I don't think I have ever seen a presidential candidate who really seems so ill-at-ease with both himself and other people.  Compare him to Clinton; Clinton -- regardless of whether you liked him or hated him -- is great with people.  He connected on an emotional level and made you feel part of the conversation.  Romney has literally no personal charm and no warmth at all.  This, in and of itself, really makes me wonder why is he really running for the presidency?  An inherent part of the job is shaking hands and meeting people.   Romney just doesn't seem to like people at all.

And finally, consider this: Romney was the best candidate the Republicans had to offer.  Consider the alternatives:

• Michelle Bachman is a pure loon (vaccines cause autism?  Really?); 
• Rick Santorum isn't comfortable with anything that has happened since roughly 1950; 
• Newt Gingrich somehow claims a family values mantra while continually trading older wives in for younger models; 
• Herman Caine, well, anyone who's presidential slogan is too close to a Pizza commercial isn't a serious contender; 
• Rick Perry (ah.... ooops);
• Ron Paul; at least he's consistent.  Now, he's also a start-raving, Austrian economics loving nut ball, but at least he's always been that way.

Not one of the people mentioned is anywhere near close to presidential caliber.  Romney was the best choice.  The Republican field literally fell out of a clown car and the audience decided that Romney had the least comical shoes to display to the public as a whole.

To get back to my central thesis: this election was the Republicans to lose.  Now, they could still pull a victory out.  There are, after all, about 6 weeks left in the campaign, during which anything could happen.   But the election has already shown how completely dysfunctional the modern Republican party has become.  They have no serious candidates who have the gravitas to be president -- people like Dick Lugar who have been driven out and made to feel completely unwelcome.  Their presidential field included conspiracy theorists, people who are woefully and willingly blind to scientific knowledge,  crank economists who espouse theories that were abandoned (with good reason) after the 1920s, inarticulate figureheads and one of the most wooden and inept presidential candidates in modern history.  This isn't a political party; it's a support group for badly damaged people with a tremendous amount of misplaced anger  and rage.




 

Morning Market Analysis

Today, let's start with oil, taking a look at the charts along multiple time frames.

On the monthly chart, we see the spike to over 140 that led to the last recession and the subsequent sell-off.  However, for the last two years, oil has traded between the 38.2% and 61.8% Fib lines of those price extremes.  In addition, notice the relative drop in volatility over the lats two years as expressed by the narrowing Bollinger Bands.

The weekly chart also shows that prices are trading between the 115 price level established in early 2011 and the 75 price level established later that year.  Additionally, prices are trading more sideways than trend wise.

The daily chart shows that prices have broken lower, moving through the trend line started at the beginning of August.  Prices are not below the 200 day EMA, along with all the shorter EMAs.  Momentum is dropping and money is flowing out of the market.  The most likely move from here is lower.

The weekly chart of three Asian markets -- Hong Kong, Taiwan and South Korea -- all broke about four weeks ago and have consolidated those gains.  Consolidation after a move higher is a good sign; it indicates that traders are consolidating positions.  The lack of a strong sell-off in any of these markets also bodes well for the future.

However, Malaysia and Singapore have rallied but fallen to support. 

The mixed picture in the Asian markets is a bit concerning, as the weakness in the Malaysian and Singapore markets detracts from the strong gains we've seen elsewhere. 

Bonddad Linkfest

1. Romney, GOP stuck in old America (Politico)
2. 60 Minutes interviews with current candidates (CBS)
3. Romney won't lower taxes (BB)
4. Markit EU composite manufacturing index drops (Markit)
5. UK retail sales up 2.7% (NSO)
6. Brazilian unemployment at 5.3% (Brazil Statistics)
7. EU consumer confidence drops (Europa)
8. Philly Fed increases but still negative (Philly Fed)
9. Housing update (Alphaville)
10. QE's compared (Alphaville)

Stagnating LEIs, Weak Employment and Moderating Manufacturing Are Really Concerning

Consider the following from the Conference Board's latest LEI press release:

Note that the series have been stuck at a reading of 95 point something for the last seven months.  We've sen one good increase -- the '5 in July -- but that only returned the series to the levels from May.  In addition, we've seen three negative readings in the last seven months.
 
Let's look at the primary drivers of this slowdown:

 I've circled the big contributors to the slowdown.  There are two big problems.

1.) Employment: weekly initial unemployment claims are still at weak levels.  Consider this chart:

I've drawn a black rectangle around the current level of claims and a red circle around levels we're used to seeing in a recovery.  Notice that claims usually move down closer to the 300,000 level when the economy is healthy -- at least that's the level we saw in the 1980s, 1990s and early 2000s.  However, now we're seeing claims above 350,000 -- not a health sign.

In addition, we're seeing a weaker manufacturing level.  First, this is something both NDD and I have been highlighting pretty frequently over the last few months (see here, here, here, here, here and here).  In addition, consider the following charts:

The top chart shows that new orders for machinery are weakening.  The middle charts shows that industrial production has stalled, which the bottom chart shows that ISM new orders are showing a contraction.

A lot of the reason for this manufacturing weakness is the EU's recession bleeding over into the US market.  But, regardless of the cause, it's not something we need to see right now.

Morning Market Analysis

All of the major averages have broken through resistance established at the end of the summer and all consolidated gains last week.  We see a strong EMA picture -- the shorter EMAs are above the longer and all are rising; prices are using the EMAs for technical support.  However, note the weak MACD QQQ picture; it is moving sideways has has been moving sideways for about a month.  Also note the rise in potential volatility as evidenced by the rising Bollinger Band width.

 

On the weekly charts, the SPYs and QQQs have moved through resistance, but the IWMs have retreated to levels established in the spring of 2011.  All three markets have strong, underlying technicals; we see rising MACDs and CMFs and strong EMA trends.  However, after breaking through resistance, it's standard practice for markets to at least fall back on some profit-taking and turn previous resistance into support going forward.

In addition to the rising stock market, remember that the weekly treasury charts are showing several markets that have broken through long-term support.  The most striking example is the long-end of the market (bottom chart), when fell to the 50 week EMA two weeks ago.  However, the 5-7 part of the curve (top chart) broke trend nearly two months ago, leading the charge.  Also note the declining momentum and CMF readings. 

Liveblogging World War 2: an appreciation

- by New Deal democrat

On of my very favorite reads on the entire internet is Prof. Brad DeLong's continuing series, Liveblogging World War 2. The series is a day-by-day description of the war in the present tense from a variety of contemporaneous sources on all sides of the war.

While we know the outcome of the hostilities, those who wrote in the moment obviously did not, and so we get to experience the war as they did: chronologically, without knowing what is to come next - in other words, as close as we could possibly come to experiencing the war without living through it.

For the last 3 years, there has been an almost unrelenting series of victories and conquests by the Axis powers, as they invaded or scored smashing victories against China, Poland, the Benelux countries, France, Indochina, north Africa, Russia, Pearl Harbor, the Phillipines, Burma and Malaysia, Singapore, Indonesia, and New Guinea. The victories of the Allies have only been in blunting Axis advances: Britain saved itself from invasion in 1940, Russia has defended Moscow and Leningrad, and in June of this year the US prevented the Japanese from taking over the mid-Pacific in the Battle of Midway, in which they sank 4 Japanese aircraft carriers.

By now Germany and Japan have agreed to split Asia along a line roughly on the border of present day Iran and Pakistan. Germany is advancing east through the Sahara and intends to capture and cross the Suez canal and then conquer Arabia. They have also conquered the entirety of the Ukraine and are virtually at the shores of the Caspian sea, stopping along the way to the critical Caucasus oilfields to advance on Stalingrad on the Volga River. Japan is at the doorstep of India, and has continued to advance south to threaten Australia, the northernmost of which has seen at least one Japanese bombing raid.

In response, during the last month the British have established a defensive line in Egypt at a place called El Alamein. The Russians have launched a fierce and desparate counterattack to cling to Stalingrad. The US has sought to stop the Japanese and launch a counterattack at a nondescript island in the Solomons about 1000 miles northeast of Australia called Guadalcanal. The Japanese navy still has the advantage as the US has just lost the aircraft carrier Wasp, and now has exactly one carrier, the Enterprise, left in the entire Pacific. At each of the three locations, the enemies are pouring more and more resources into the battle.

There is no knowledge as to how any of these battles will turn out. Neither the Axis powers nor the Allies have reason to know that the long line of Axis victories are about to end, almost simultaneously, at each of the three obscure locations - El Alamein, Stalingrad, Guadalcanal.

We must stay tuned to find out.