Current Economic Outlook: HF Indicators vs the Business Cycle
Well we've seen a bunch of economic data come out in the last couple of weeks, including revised GDP numbers which showed QtQ growth at 0.9 vs 0.6% growth. Yippee.... We also got income and consumption monthly data which is even more interesting. The only remaining major data set due is Employment...coming this next Friday. The puzzled meme continues to be of course, "where's the recession ?". A point we've waxed on before several times. After the break we dive into the High-Frequency indicator data (our version of a basic monthly economic dashboard) but we want to start by reminding everyone of how the Business Cycle works and where we're at.
So we'll start with this graphic which compares several conceptual version of the business cycle and locates our current status. And, oh btw, answers the original question. Business cycles don't move on the news cycle they occur over several years and take months to show how they're moving. It is after all a $13T economy. Thru the Fed's actions we've likely avoide the catastrophe of the major collapse (red) cycle. On the other hand the sanguine outlook(purple) of the Street for a mild, shallow and short downturn was, IOHO, unlikely from the get-go. So now we're debating between the yellow and black lines, hoping for the yellow but hopefully positioning ourselves for the black.
Consider what the real data tells us overall and by major component. This next chart is drawn from our last post on the GDP numbers and there's been so little change we haven't updated it. Nonetheless it's still current, accurate and translates the conceptual into the factual. We've gone to the trouble of going clear back to 1980 so you can get a clearer picture of timing, patterns and lags. Once that's sunk in notice that the slowmotion slowdown continues but is deteriorating, especially with regard to employment. Now add on the fact that Housing has a long way to go, that the Credit Crisis has morphed back into a Credit Crunch and the surge in Energy is taking 1-2% out of our growth and ask yourself where we might be headed.
There are a couple of bottomlines that pop out of this data and the charts below. First off we're not NOW in a recession but a creeping slowdown. Next ALL the major HF indicators are gradually weakening, rather exactly in-line with where we place ourselves in the Business Cycle graphic. Third all the harbingers of future demand are both weakening, and at what appears to be slightly accelerating rates, but other economic data,e.g. oil/gas prices, housing, credit standards, foreclosure rates, and so forth, indicate that the pressures are continuing to mount. In any case even if everything stayed the same this would be a very weak economy.
And we don't see that reflected in any headlines, MSM discussion, business planning or market pricing. Instead what we see is a retained believe the mild and done outlook. But make up your own minds - 'cause here's the data and charts in as simple a form as we can manage.
Consumption
Let's start with consumption (notice that these charts are much shorter time horizons btw). What you see is the 3MoMA of monthly data on a YoY% basis. Which tends to smooth things out but moderate downshifts more than a bit. But it's how we've been doing it so there it is. Real personal consumption continues its' downtrend and the rate of slowdown has picked up slightly. In fact at 1.6% it's as low as it's been, on the whole, since the real downturn in 1990 ! Meanwhile real retail sales has been in negative terrority since approx. Dec07 ! Not good. And after recovering from catastrophe Auto Sales are headed back over the cliff.
Investment
The accelerator in the economy is investment and falls primarily into business and residential spending. New Home Sales were down ~ 42% YoY though our average shows a lower number. The Economist recently ran an article pointing out that we've seen nothing like this since the Great Depression. Historically every recession is led, associated with and partly caused by downturns in Housing. Given that we're in unprecedented territory here one has to wonder how the various mild and over memes got bred up ? Especially as Housing inventories are approaching 12 months of supply. On the business die - sorry Freudian typo - side of things Industrial Production, after staying relatively flat, has turned down. And worse yet capex indicators (New Goods Orders ex-aircraft) have started dropping again. They had been showing a surprising uptick which we finally figured out was due to the robustness of export sales. Now....well...
Future Demand
Our favorite HF indicator of future demand is the YOY change in Employment plus Real Wages. You'll notice that real wages took a big hit but have flattened off in negative territory while Employment continues to decelerate. Looking back on the long-term chart notice that Employment is a LAGGING variable. If the economy continues to slow we can expect it to start tipping over. And bear in mind that right now much of the supposed mild weakness in Employment, instead of severe weakening, is being sustained by the Birth-Death adjustment model. Looking at the bottom sub-chart we come full-circle and link future demand (W+E) to current demand (Real Sales, Consumption).