Measures which coincide with the level of economic activity showed
that the US economy declined for the 12th consecutive month
through May 2009. Measured yr/yr, the two sets of indicators I
use were down about 6.5%. The big declines are in retail sales and
production which were down 11.1% and 13.4% respectively. The
lone positive has been the real wage which is up 4.4% yr/yr.
Inventories were still likeley being run off through May, and
productivity -- by any sensible measure -- is down as output has
been falling more sharply than employment and hours worked.
My profits indicators for nonfinancials show yr/yr weakness. This
reflects both lower sales and profit margins in the US as well as
abroad. Net revenues for financials have been holding up, but
loan and securities losses likely continue large.
A broad array of indicators suggest that the US economy may hit
bottom in July '09. A very rough guess at this point suggests the
economy could be up by 2.5% by year's end or early 2010.
Viewed historically, consumer spending should already be running
much stronger given the very large yr/yr growth of the real wage.
Householders are obviously continuing to build a savings cushion
and trim their debt. This development should keep everyone
hoping for recovery edgy.
With output down sharply yr/yr, the velocity or turn over of money
has fallen, providing excess liquidity relative to the real needs of the
economy. This is quite a development given that my broad measure
of financial liquidity is running flat yr/yr. Traditionally, excess
liquidity of this sort provides a strong tailwind for the stock market,
although this is not always the case.
I am watching the production data carefully. It has been badly
punished not only by the downturns in autos, other durables and
housing, but by a large decline in export sales as well. Should there
be further significant weakness in production, I would be willing
to call this downturn an economic depression given how far the
production composite has fallen below trend and how long it will
take to recover to new high levels.
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