sâmbătă, 1 octombrie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call?

Posted: 30 Sep 2011 04:52 PM PDT

A number of people have asked me to comment on the ECRI's recession calls.



Link if video does not play: Economist Says U.S. Recession Is `Inescapable'


Tom Keen: "Single Sentence, why recession now"
ECRI's Lakshman Achuthan: "Contagion in Forward-Looking Indicators"

Select Quotes from the Video

  • "We are looking at forward looking indicators, over a dozen leading indicators on different aspects of the US economy, and it's wildfire"
  • "Anyone who is looking for a job has a right to call this a depression"
  • "It's going to get worse"
  • "Spain never left recession, I don't care what the GDP numbers say. Italy's on the verge, and the [European] core is not looking so good."
  • "Dr. Copper is a short-term leading indicator. This thing has room to run. Global industrial growth is not turning up anytime soon"
  • "Government bond yields can go even lower. Look at Japan"
  • "Future inflation gauge for Europe is heading down"


Superb Interview

I have to give Achuthan credit. I think that was a superb interview. However, I still do not appreciate the half-truths and hype in today's ECRI report U.S. Economy Tipping into Recession
Last year, amid the double-dip hysteria, we definitively ruled out an imminent recession based on leading indexes that began to turn up before QE2 was announced. Today, the key is that cyclical weakness is spreading widely from economic indicator to indicator in a telltale recessionary fashion.

Why should ECRI's recession call be heeded? Perhaps because, as The Economist has noted, we've correctly called three recessions without any false alarms in-between. In contrast, most of those who've accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987.
A Look at ECRI's Recession Predicting Track Record

The ECRI does not call recessions in advance. Perhaps they caught this one, but we will have to wait and see. I suspect the NBER will date this recession back to June or July and if so the ECRI will be about a quarter late.

More importantly the ECRI totally blew the the recession that began in 2007, as well as the strength of it.

As long as the ECRI persists in its false claims, I will persist that people take a look at ECRI's recession predicting track record.

Flashback November 2007 ECRI Vol. XII, No. 11: Weakness In Leading Indicators Not Yet Recessionary

Please consider the following image snip. Highlighting is mine.



ECRI: "The difference this time is that, even though the shocks have arrived, good leading indicators like the USLLI are not showing recessionary weakness ... This is a key reason why the economy is not yet in a recession. .... weakness is not pronounced, pervasive and persistent enough to be recessionary. .... leading indexes are still holding up sufficiently for a recession to be averted."

Window of Opportunity

Friday, January 25, 2008
ECRI Says There Is A Window of Opportunity for the US Economy

The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI's Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession. ....

This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.

ECRI Denial

The ECRI laid it on pretty thick, openly mocking the "best advertised [recession] in history" while claiming "This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet."

The irony is the recession was about 2 months old at the time.

Recession of Choice

Friday, March 28, 2008
ECRI Calls it "A Recession of Choice"

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted. In January, given the plunge in the Weekly Leading Index, we declared that the economy had entered a clear window of vulnerability. Yet we emphasized the brief window of opportunity within that window of vulnerability for timely policy stimulus to head off a recession.

It is a somewhat different story with regard to GDP, because the cyclically volatile manufacturing sector still accounts for 36% of GDP. A mild downturn in that sector should limit the decline in GDP in this recession.

Marketing Spin

In contrast note the spin from The Great Recession and Recovery.



Accompanying that slide the ECRI said "And we issued a clear Recession Warning noting that: "The magnitude of oil and interest rate shocks are near recessionary readings." A month later, as we now know, the recession began.

Compare that slide, with the above image snip above.

The ECRI was clearly bragging not only about besting the yield curve, but also said "The Difference this time is that, even though the shocks have arrived, good leading indexes like USLLI are not showing recessionary weakness. ... as Chart 1 shows, the level of the USLLI is already a little lower now than it was three months earlier. However, this weakness is not pronounced, pervasive and persistent enough to be recessionary"

It's Different This Time!

After the fact, the ECRI took one statement out of context, a statement they went to great lengths to refute, then has the blatant gall to claim they issued a "recession warning".

Recessions Predicted in Arrears

Once again, I think Lakshman Achuthan did an excellent job in the interview. He stated the recession case well.

However, the ECRI has a history of waiting until a recession is baked in the cake, then proclaiming it before the NBER and calling it a success.

The revisionist history in regards to "no misses" is plain to see. The ECRI totally blew the call in 2007 and early 2008. That is not the galling part. Calls are easy to miss. The galling part is the ECRI's revisionist history related to the blown call.

The ECRI's integrity will remain in question as long as it continues to perpetuate the myth of a perfect record. The simple fact of the matter is no one has a perfect track record at calling recessions, interest rates, the stock market or anything else.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Real Disposable Personal Income Drops Second Consecutive Month; Drop is Highly Deflationary

Posted: 30 Sep 2011 10:57 AM PDT

Inquiring minds are digging into the just released Personal Income and Outlays Report for August 2011.
Personal Income

Personal income decreased $7.3 billion, or 0.1 percent, and disposable personal income (DPI) decreased $5.0 billion, or less than 0.1 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.7 billion, or 0.2 percent. In July, personal income increased $17.1 billion, or 0.1 percent, DPI increased $14.4 billion, or 0.1 percent, and PCE increased $76.6 billion, or 0.7 percent, based on revised estimates.

Real disposable income decreased 0.3 percent in August, compared with a decrease of 0.2 percent in July. Real PCE decreased less than 0.1 percent, in contrast to an increase of 0.4 percent.

Wages and Salaries

Private wage and salary disbursements decreased $12.2 billion in August, in contrast to an increase of $23.8 billion in July. Goods-producing industries' payrolls decreased $1.3 billion, in contrast to an increase of $6.3 billion; manufacturing payrolls decreased $2.9 billion, in contrast to an increase of $5.8 billion. Services-producing industries' payrolls decreased $10.9 billion, in contrast to an increase of $17.5 billion. Government wage and salary disbursements increased $0.4 billion, in contrast to a decrease of $1.8 billion.

Real DPI, real PCE and price index

Real DPI -- DPI adjusted to remove price changes -- decreased 0.3 percent in August, compared with a decrease of 0.2 percent in July.

Real PCE -- PCE adjusted to remove price changes -- decreased less than 0.1 percent in August, in contrast to an increase of 0.4 percent in July. Purchases of durable goods increased 0.1 percent, compared with an increase of 2.2 percent. Purchases of nondurable goods decreased 0.4 percent, compared with a decrease of 0.5 percent. Purchases of services increased 0.1 percent, compared with an increase of 0.4 percent.

PCE price index -- The price index for PCE increased 0.2 percent in August,compared with an increase of 0.4 percent in July. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.
Some charts will help put these numbers onto perspective.

Real Disposable Personal Income Since 1969



Real Disposable Personal Income Since 1989



Real Disposable Personal Income % Change from Year Ago



The second chart is the same as the first except the time period is smaller to better show the decline in the last recession. Together the charts show an unprecedented decline in real personal income.

The third chart shows percentage change from a year ago. Note how rare it is for this number to cross the zero-line. It is headed there again, following an unprecedented drop in 2008-2009.

Unlike the 1970's where consumer prices were soaring this decline comes at a time when the Personal Consumption Expenditures Price Index is tame.

Personal Consumption Expenditures (PCE) Price Index



The above chart courtesy Personal Consumption Expenditures: Price Index for August by of Doug Short.

It's Credit that Matters

Inflationists will immediately howl over excluding food and energy from the price index (and they will be right). However, inflationists conveniently ignore the collapse in home prices, instead focusing on the price of a Big Mac.

When energy prices send price index lower (which will happen shortly), the inflationists will conveniently ignore that data as well, preferring to scream inflation when commodities are rising while hiding under a rock when commodity prices fall.

Moreover, and more importantly, focus on prices is silly in the first place because in a credit-based economy it is expansion and contraction of credit that matters, not modest increases or decreases in prices (totally ignoring the plunge in home prices to boot).

Drop in Personal Income Highly Deflationary

With real wages falling and jobs exceptionally hard to get (and keep), this drop in personal income will be accompanied with more unwillingness of banks to lend, and therefore must be considered highly deflationary.

For further discussion as to a realistic approach to what inflation and deflation are all about, please see


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Shilling Sees Evidence of Deflation in 5 of 7 Key Areas; Bernanke Begs Congress for Fiscal Stimulus, Admits Fed is Out of Bullets

Posted: 30 Sep 2011 01:41 AM PDT

Shilling Sees Evidence of Deflation in Financial Assets, Tangible Assets, Median Income, Commodities, Currencies



Shilling says "Forces of deleveraging and deflation are greater than the Fed can handle."

I certainly agree and have been saying the same thing (correctly I might add) for several years. All the Fed has ever managed to do is slow the deflationary outcome and that is in spite of $trillions in both monetary stimulus from the Fed and fiscal stimulus from Congress.

Once again, if you mistakenly think inflation and deflation are about consumer prices instead of vastly more important credit, you will come to a different conclusion.

For further discussion as to what deflation is all about, please see


Fed Out of Bullets

In spite of what the Fed says and wants everyone to believe the Fed is Out of Bullets
Let's Twist Again (and Not Much More) as I expected

There were a lot of expectations regarding numerous options the Fed might take today. I did not expect the Fed would risk trying them.

See Six Things the Fed May Announce Tomorrow (But Likely Won't); Would Any of Them Matter? Gaming the Reaction for details.

The Fed said "Let's Twist Again" and not much more other than throwing a bone at mortgages. Neither will work and the Fed is out of bullets.
Bernanke Begs Congress for Fiscal Stimulus

In a question session following Bernanke's speech Lessons from Emerging Market Economies on the Sources of Sustained Growth (in which Bernanke proves he does not really understand what is really happening in China), Bernanke begged Congress for help and admitted the Fed is out of bullets.

Yahoo Finance reports Bernanke: Long-term unemployment a national crisis
Federal Reserve Chairman Ben Bernanke said Wednesday that long-term unemployment is a "national crisis" and suggested that Congress should take further action to combat it. He also said lawmakers should provide more help to the battered housing industry.

Bernanke said the government needs to provide support to help the long-term unemployed retrain for jobs and find work. And he suggested that Congress should take more responsibility.

In the question-and-answer period, Bernanke cautioned U.S. lawmakers against cutting deficits too quickly to reduce budget deficits. He has said that could put the fragile economy at risk.
In practical terms, Bernanke was begging Congress for help, and in the Q&A session, Bernanke went even farther.

Please consider Everyone Missed It, But Ben Bernanke Peed On The Fed Again Last Night by Joe Weisenthal.
We've talked about this before, the fact that Ben Bernanke is growing increasingly vocal about his skepticism that monetary policy can do much to save this economy.

This is a HUGE change from someone who once said that the Great Depression was entirely the Fed's fault, and that the Fed would never let that happen again!

In his daily note, Art Cashin caught a key bit from a Ben Bernanke Q&A last night after he gave a speech, further emphasizing that Bernanke has radically changed his views.

"Monetary policy can do a lot, but monetary policy is not a panacea," Bernanke said.
That is a close an admission that the "Fed is out of Bullets" that you are ever going to see.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Germany Retail Sales Decline 2.9%, Most Since May 2007; Retail Sales in the Eurozone Fell Fifth Consecutive Month

Posted: 30 Sep 2011 12:42 AM PDT

Those looking for evidence that Europe is already in recession can find it in this headline: German Retail Sales Decline More Than Forecast
German retail sales declined the most in more than four years in August as concerns about the economic impact of Europe's sovereign debt crisis sapped consumers' willingness to spend.

Sales, adjusted for inflation and seasonal swings, slumped 2.9 from July, when they rose 0.3 percent, the Federal Statistics Office in Wiesbaden said today. That's the biggest drop since May 2007. Economists forecast a 0.5 percent drop, according to the median of 18 estimates in a Bloomberg News survey. Sales rose 2.2 percent in the year.

The debt crisis is threatening to tip Europe back into recession, damping confidence even as falling German unemployment boosts household purchasing power in Europe's largest economy. While a possible Greek default has clouded the outlook, the Bundesbank still predicts a "robust" third quarter and growth of about 3 percent this year.

The European Commission on Sept. 15 cut its euro-region growth forecasts for the second half and warned the economy, Germany's biggest export market, may come "close to standstill at year-end." The International Monetary Fund in Washington on Sept. 20 also lowered its growth projections for the euro region and Germany for this year and next.

Deutsche Lufthansa AG on Sept. 20 lowered its full-year profit forecast and said it would deepen capacity cuts this winter after last month's results were weaker than expected and forward bookings slumped.

Still, Germany's jobless rate fell to 6.9 percent this month, the lowest since the country's reunification two decades ago, as companies stepped up hiring to meet export orders.
I will take the "under" on 3% German GDP in the second half. Moreover, given the slowdown in Europe, the US, Australia, and now China, the ability of the vaunted German export machine to keep humming along is simply not believable.

Retail Sales in the Eurozone Fell Fifth Consecutive Month

Finfacts reports Rate of decline in Eurozone retail sales slows in September


Retail sales in the Eurozone fell for the fifth month in a row in September, according to Markit's latest PMI (Purchasing Managers' Index) surveys. That said, the rate of decline slowed to a marginal pace as sales rose in both France and Germany. The survey data again signalled stubbornly high inflationary pressures in the sector, with purchase price inflation at retailers the strongest in over three years.

The Eurozone Retail PMI is a single-figure indicator of changes in the value of sales at retailers. The PMI is adjusted for seasonal factors, and any figure greater than 50.0 signals growth compared with one month earlier. The PMI remained below 50.0 in September, signalling a fifth successive monthly drop in sales revenues. The current sequence of decline is the joint-longest in the past two years. But the index rose during the month, to 49.6 from 48.0, indicating only a marginal decline in sales revenues. The latest PMI figure suggested that the pace of decline in retail sales as measured by the EU's statistical office Eurostat (on a three-month-on-three-month basis) may ease in the coming months.

Markit says Eurozone retail PMI figures are based on responses from the three largest euro area economies. September figures suggested that Italy remained the weak link, registering a seventh successive monthly drop in retail sales. The rate of contraction was the slowest since March, but still strong overall.

German retail sales continued to rise in September, extending the current sequence of growth to 12 months. This is the longest period of expansion since monthly sales data were first collected in January 2004. The rate of growth slowed to a weak pace, however.

French retail sales rose for the first time since May. The rate of growth was modest, however, and slightly weaker than the average for 2011 so far.
The articles seem at odds with each other since they were both released in the last two days. However, the Bloomberg article was for August, Finfacts was for September.

The important points are the European retail sales PMI is negative and Germany is weakening.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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