|
Today's Market WrapUp 12.02.2008 Mon Tue Wed Thu Fri Barbera Archive Tracking the "OFFICIAL" Recession So it’s official. Big Surprise! The US Economy is in recession. Did we really need the National Bureau of Economic Research (NBER) to help us out on that one? Going back to April 2007 and June 2007 with our articles, “Several Gauges of Recession” and “Signs of a Gathering Storm” it was clear that the economy was starting to roll over into a period of contraction and recession. However, while many believe that the NBER was politically compromised in not wanting to acknowledge an official recession during an election year, the organization has otherwise done a good job over the years in tracking the relative start and end points of economic contractions, even if their calls have come somewhat after the fact. From their latest press release entitled, “Determination of the December 2007 Peak in Economic Activity” the NBER Committee identified Q4 2007 as the official beginning of the current contraction. They stated: “The committee identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession.Payroll employment, the number of filled jobs in the economy based on the Bureau of Labor Statistics’ large survey of employers, reached a peak in December 2007 and has declined in every month since then. The committee determined that the peak quarter of economic activity was the fourth quarter of 2007. When the monthly peak occurs in the last month of a quarter, the NBER’s long-standing procedures dates the quarterly peak either in the quarter containing the monthly peak or in the subsequent quarter. Thus, the committee could have dated the quarterly peak in 2008Q1 if it had determined that economic activity was higher in that quarter than in 2007Q4. However, the committee determined that this was not the case. Most notably, both payroll employment and the income-side estimate of domestic production were lower in 2008Q1 than in 2007Q4, and the product-side estimate of domestic production was only slightly higher. The committee found that the peak quarter was the one containing the peak month, 2007 Q4”
Looking at the NBER Table of Historical Cycles (see above), the average ‘garden variety’ recession has lasted some 17 months. By this standard, one could come to the conclusion that, measuring from December 2007 that perhaps by April of 2009, some kind of recession low might be at hand. However, since absolutely nothing about the current economic contraction even remotely resembles the kind of much moderate contractions seen during the “typical” recession (this one is far, far worse), we strongly believe that the present contraction will extend well beyond 2009. In fact, looking at the two prior deepest contractions in the last 100 years, we see that the Great Depression lasted 43 months from August 1929 to March 1933, and that the 1980-1981 “Double Dip” recession really embodied a combined period of 36 months, starting in January 1980 and really not ending until November 1982. In my view, a more accurate forecast might suggest that a “35 to 40” month economic contraction makes more sense, implying that the present period of great financial turmult may not end until early 2011. Yet, in contemplating these figures, a repeat of the 1980 to 1982 scenario in my view is starting to make the most sense. This is the so called “Double-Dip” recession outcome, where we may see an important economic “statistical low” in the early portion of 2009 (say April, May 2009), followed by a lengthy statistical rebound (perhaps 12 months – i.e. May 2010), followed in turn by a second, even more strongly declining contraction phase beginning in the latter half of 2010. It would not surprise me to see that second phase last a good 20 months in its own right implying that the final contraction bottom may not be seen before early 2012. That’s three years from now. Yet, like the 1980 outcome, we may see a kind of 'Off and On’ economy over the next few years, with the current period of steep economic contraction giving rise to a period of ‘statistical’ recovery, which could then be followed by another period of deep economic contraction. Note that we talk of ‘statistical’ recovery because where the average individual is concerned, the intervening period of ‘improvement’ may not be much of an improvement at all in real world terms, but more of a leveling off (in other words, things not getting any worse). For those who can remember 1980-1982, the 12 month period between July of 1980 and July 1981 was no bed of roses. Yes, the economic data experienced a ‘techncial bounce’ from very low levels, but from the standpoint of trying to find a job, or getting a raise in pay, the whole time period between 1980 to 1982 was one big period of misery; high inflation and high unemployment. In my view, I am watching a number of economic indicators very closely, as gauges like Consumer Confidence, The Housing Market Index, and most of all, the ISM Manufacturing Survey (which has a very long history) are at mega historical extremes.
One of the more interesting gauges I have followed over the years has been The Conference Board's Survey of Consumer Sentiment. In the past, readings below 70 on this gauge (the thick horizontal line) have been indicative of an economy slowing into recession. Readings near or below 50 on the headline gauge have been ‘all out’ recession, with deep recession values seen in 1980 and then again in 1990-1992. This year is clearly off the charts on the downside with all three months of May thru July posting readings below 50.00. Yet what makes the Conference Board Survey most interesting in my view is the break out of two sub-components, the Present Situation Component and the Forward Expectations.
In the past, at major turns the Forward Expectations Index has always bottomed well before the absolute trough of a recession. Typically, Forward Expectations manage to come off the lows well in advance of a turn by making one or two higher lows. Present Situation is always very coincidental and actually tends to lag just a bit at the turns.
Above: top – Present Situation, middle – Forward Expectations, lower – Ratio of Forward Expectations to Present Situation. In the next chart, we show the Ratio of Forward Expectations relative to Present Situation. This gauge tends to be an excellent “recession identifier” and we use the 20 month moving average as a signal. Once the Ratio crosses above the moving average on a sustained basis, it is a sign that a potential recession could be getting underway. When the Ratio moves above 1.00 (the horizontal dashed line), it is confirmation that a recession is underway. Note that on the far left hand I have drawn in two arrows highlighting the dip in the Ratio from 1.71 in August of 1980 to the reaction low of 1.34 in September 1980. That was the ‘so-called’ recovery which separated the Double-Dip recession. In reality, it was a ‘technical bounce’ in the economic gauges, and was followed by a second leg of the recession which pushed the ratio all the way over 5.00 in late 1982 and early 1983. With the Ratio crossing over the moving average to the downside in June 1983, the gauge signalled an official end to the contraction/recession phase. Nevertheless, at the moment the action in Forward Expectations is encouraging and I am going to be watching closely if that figure can actually improve a bit with the forthcoming December reading released at the end of this month. In my view, any move back above 50 on the Forward Expectations gauge (Last value: 46.70) would be a very good sign and possibly a very early indication that the second half of 2009 may show a moderately improving trend.
To illustrate this same point with another example, I have detrended the ISM Survey around 50. In the most recent report the reading of 36.20 on this gauge represented a 26 year low. Subtracting 36.20 from 50, we arrive at an oscillator reading of –13.80. As can be seen in the chart above, the lowest dashed line is drawn in at –15.00. Looking back there have been four, and only four movements below –15.00 going back to the 1940’s. Between December 1948 and June 1949 the gauge was solidly below –15 for a period of 7 months. Between December 1974 and March 1975 we saw a string of four consecutive months below –15.00. There was a single month reading of –16.60 in January 1958, and then a string of 3 months below –15.00 between May 1980 and July 1980. So, we had one string of 7 months, 1 string of 4 months, 1 string of 3 months and one solo reading all by itself. The point here is that the December reading for 2008 is very likely to move below –15.00, which if it happens, will be month Number 1. Assuming that the entire first quarter is below –15.00, and possibly April (heading into tax season—always a slow time of year) we could see this gauge residing below –15.00 in May, possibly even June of 2008. However, it is most unlikely that it will reside below –15.00 much longer then May/June 2008 which would match the longest ‘sub –15.00’ readings on record. That means that a “recovery” of some sort is very likely to begin taking shape during the second half of 2009, and that recovery will probably last at least 12 months on a statistical basis, as way too many economic gauges are at the stock market equivalent of “deeply oversold.” For the equity market, which tends to look forward by 6 months, an economic trough of importance in May 2008 to June 2008 should be coming into view, implying that the stock market should gradually begin to stabilize. In my view, if the equity market can consolidate the recent gains and then extend the rally, the odds will be growing that the bear market damage may be containable in this time period at the 730 to 800 zone. Mind you, none of this suggests that the market may not have another serious sell off early next year, or that the economy will not end up “netting out” to a further drawdown in jobs in 2009, as any second half recovery is likely to be a very weak affair. Nevertheless, from where things stand right now, any sign of future stability would be welcome news, as no contraction since the Great Depression has gathered force at anything like the speed seen in the last few months. Stocks ended the day sharply higher with the DJIA finishing up 270 points or 3.31% to close at 8419.09, while the S&P 500 ended with a gain of 32.60 to finish at 848.81, up 3.99%. For the NASDAQ, the index gained 51.73 or 3.70% to finish at 1449.80. The 10 Year Bond Yield ended at 2.69%, down .03 basis points. That’s all for now, Frank Barbera Copyright © 2008 All rights reserved. CONTACT
INFORMATION |
||||||||||||||||||||||||||||||||||||||||||||||||
