Economic Indicators

Leading Indicators
As most all know, the weekly indicator sets I follow declined sharply
from the end of April through mid-July before flattening out. Of note
here were a swift move up in unemployment insurance claims and a
fast move down in sensitive materials prices, both of which have
stabilized for now. The monthly new orders breadth index made a
cycle-to-date peak in May and, although still in positive territory,
has fallen sharply through August. There is a slowdown at hand,
but the indicators do not yet suggest clearly how damaging it will be.

Real Time measures now show the economy has flattened out in
August following a strong July period, when retail sales and
industrial production lead the way. There is no indication yet that
a downturn is underway, but the leading indicators do suggest that
at least transient weakness is ahead.

My long term leading indicators have lost substantial ground
since late 2008 and would suggest a pronounced economic down
turn could occur unless the monetary and financial liquidity
components begin turning up by late in 2010.

The Economic Power Index (yr/yr % changes in the real hourly
wage and civilian employment) has finally turned positive but
remains depressed reflecting a net loss of seven million jobs and
a low real wage rate. The index has not yet progressed enough to
support a decent economic recovery without dependence on
government assistance programs or an upturn in household credit
demand.

The Capital Slack Measure remains well below normal levels
with super low short rates, high unemployment and capacity
utilization more than five full points under "average".

Looking over all the monthly economic series I follow, I would say
that we have recovered only about 40% of the ground lost in the
past, deep recession as low private sector confidence has
engendered a strong sense of caution throughout. And this we
just have to watch. It is fine and dandy to be prudent, but too
much forbearance will produce a dysfunctional economy with
far more on the line than most folks realize.

The foregoing did not make for pleasant reading, but I would be
much more comfortable with the economic situation nonetheless
if financial system liquidity was growing and was not de facto
frozen, as that can be deadly if it proceeds too long.