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Monday, July 14, 2014

The economy

Everyday the pundits are talking about how strong the economy is.  These same people never recognized a recession until many months after it started.  The reason is that every recession is different and often the data in real time gets changed later.  The most often cited data for economic strength is the job market.  Here is a chart of the data the last few years.

The last few months have been pretty good with numbers over 200,000 a month.  However, we also had a strong period in early 2012 that was similar, but did not last.  Employment data is highly revised and is not a reliable gauge of future economic strength.  Most of the time job data goes negative near or before a recession, but that is not always the case.  Here is a look at the data around the 1973 recession.

Just before the recession started the job data looked pretty good.  The month just before the recession saw 306,000 jobs created.  Job data was positive for another eight months.  That particular recession was caused by an oil price spike.  Here is a look at the 1960 recession.

That recession started with 354,000 jobs gained.  There are a number of recessions where job growth was over 200,000 within a few months of the start of the recession (e.g. 1990 and 2000).  There is no employment numbers that can be used to say a recession is not possible or is a long way off.  The economy can be generating jobs pretty strongly and reverse quickly. 

Another indicator often cited recently for economic strength is the manufacturing sector.  I believe a significant part of this is the PC upgrade cycle caused by Microsoft dropping support for Windows XP in April.  That event will be short lived, most of it will probably be completed this quarter.  Lets take a look at the recent ISM manufacturing data.

Currently the ISM is pretty good, but is it a reliable indicator of economic growth.  The first quarter of 2011 had three ISM prints above 59 in a row.  That quarter saw 2% growth which dropped to 1.9%and 1.5% over the next two quarters.  The first half of 2012 saw 3.3% and 2.8% growth.  The ISM numbers during that time frame were all in the low 50s with 53.7 being the highest.  The ISM number at the start of the 1973 recession was 68.1.  Again it was not a good indication of the true state of the economy.  There are many historical instances with the same result.  The ISM data is not a reliable indicator of current or future growth.

Therein lies the problem.  The stock market is at all time highs and the pundits are screaming the economy is getting stronger.  However, the pundits are using unreliable economic indicators to make their case.  Lets look at a couple of different charts starting with retail sales.

The growth rate of real final sales has never gotten this low without being associated with a recession.  Check out this next chart.

The growth rate of GDI has never gotten this low without being associated with a recession.  This does not look like a positive for the economy.  I already showed the GDP chart where a reading as bad as we had in the first quarter (-2.9%) has never happened outside of a recession.

Some data indicates the economy is ok and other data indicates we are likely in a recession.  What is really going on here?


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.