Weekly Leading Indicators
Both data sets for the economy have been in free fall since June. The
declines -- measured peak to trough so far -- are the steepest since
the Great Depression days. Yes, the stock market influences the
declines, but weakness is broad based, with a collapse in sensitive
materials prices and a surge in initial unemployment claims very
notable. Global indicators are also now falling steeply.
My weekly and monthly inflation pressure gauges remain in free fall
as well and are now consistent with the development of modest
deflation measured yr. on yr.
Monthly Leading Indicators
Manufacturing and commercial new orders measures have simply
tanked since Aug. '08, including US export orders. The total index,
a diffusion measure, has fallen from a strong 142.0 in Jan. '04 to
the current paltry 63.3.
Economic Power Index
This measure is improving. The yr/yr real wage has turned positive
as wage growth has so far held up and inflation pressure is abating
rapidly. The change in yr/yr employment has accelerated to the
downside, however at -1.7%. The combined index is a -0.5% yr/yr
and is up from the cycle low to date of -2.5% set in Jul. '08. The
sharp deterioration of this index from the business cycle peak of
+3.9% set in Jan. '07 correctly foreshadowed the sharp pullback in
consumer spending we have seen. Now, spending and production
levels for the consumer market are very weak as householders
strive to build liquidity and control borrowing. A sharp rise in the
unemployment rate is underway, and that could undermine wage
growth going forward. But, if the damage remains slight, then
purchasing power will mend further. I would also note that
with mortgage rates lower and housing prices still trending down
that affordability is rising very quickly.
A fast rising unemployment rate and falling operating rates in the
business sector reflect sharply growing slack. The low level
of short term rates overstates the case for slack in the financial
sector as bank business loan exposure is still high relative to
bank liquid investment levels. But liquidity will improve as the
downturn wears on.
There is more to come here. Troubled home loans are still rising.
Commercial real estate loan losses and C&I loan write offs are
both to rise. On a global level, the bust in commodities prices is
going to add more pressure for countries and companies
dependent on resources, materials and cash crops. Governments
can be expected to inject more funds into the system.
We are on the cusp of danger here. The then neophyte Fed kept
the monetary base flat for a dozen years leading up to the 1929
crash and subsequent depression. It went after the inflation from
WW 1 with a vengeance. The current Fed kept the monetary
base flat in real terms for most of the 2004 - 2008 period to
correct the Greenspan profligacy. The collapse of credit driven
liquidity growth over the past 15 months and the belated turn
to adding monetary liquidity by the Fed leaves us vulnerable.
Maybe we can afford a few more months of deep economic
weakness, but those short term leading indicators for growth
and for inflation do need to begin improving well before winter
is out or else we could slide into a deeper, more pervasive
decline. We are now presuming heavily on the size, stability,
diversity and resiliency of the US economy. Do not underestimate
that power, but watch those short term indicators like hawks.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!