Economic Indicators

Long Term Indicators
This indicator set started turning negative over the course of 2004
and bottomed in terms of breadth in October, 2007. Since then, it
began to inch along positively, and turned robustly positive over the
summer of 2008. The timing of economic turns is hardly precise, but
the best guess now is that the domestic part of the US economy will
enter recovery mode in the spring of 2009. In turn, I would have to
rate the development of a cyclical bull market in stocks as still a
couple of months away based on long term considerations.

Looking at the key indicators -- short rates, trend of monetary
liquidity and inflation potential -- I have a number of questions about
the strength and durability of a US economic recovery, but I will
hold off on those until we are further on in time.

Shorter Term Lead Indicators
The weekly indicator sets peaked in mid-2007. They fell sharply
into the early spring of 2008, whereupon they bounced up in lieu
of the tax cut stimulus package. The economy held up far better
than the indicators suggested they would in view of strong and
rising export sales, superb inventory management by business and
the aforementioned stimulus package.

The indicators turned down again sharply in June. The stimulus
package proved only a temporary fix, and with real final demand
falling more broadly, supply managers could not keep up, and
wholesaler inventories bumped up. We are also now seeing a
weakening of orders of manufactured goods for export. These
developments plus the emotional shocks stemming from the
financial panic suggest further deepening of the downturn in
the US ahead.

Economic Power Index
This index is deceptively simple. I add the yr/yr % change of
real earnings to the yr/yr% in total employment. Declines of
2.0% or more are consistent with the development of severe
downturns. This index dropped down into the -2.0 to -2.5 %
range during the Sept. quarter, reflecting a negative real wage
and accelerating job loss (1 million jobs lost in 12 months). Now
with inflation receding, I expect some improvement in the real
wage in the months ahead, but the weakness in this index is
sobering. Moreover, with banks tight on lending across the board,
the power index assumes more importance as it cannot easily
be offset by heavier leveraging.

So, the indicators say it could be a hard go for a good several
months. Hence the bearish comments from Fed chair Bernanke
and the speedy 50bp cut in Fed Funds to 1.5%.