Economic Conditions Continue to Worsen

It must be China. Or the weather, which is usually either too cold or to warm – somehow the weather is just never right for economic growth. Surely it cannot be another Fed policy-induced boom that is on the verge of going bust? Sorry, we completely forgot – the Fed is never at fault when the economy suffers a boom-bust cycle. That only happens because we have “too few regulations” (that’s what Mr. Bernanke said after the 2008 bust – no kidding).



Photo credit: Matthew Emmett


No matter what economic data releases one looks at lately, one seems more horrendous than the next. This is apart from payrolls of course, which are not only a lagging indicator, but are apparently a number that is occasionally made up out of whole cloth – such as in December, when 281,000 of the reported 292,000 in non-farm payroll gains were the result of “seasonal adjustment”, which is bureaucrat-speak for “didn’t actually happen”.

Today the markets were inundated with data that strongly suggest that the negative trends observed over much of 2015 continue to accelerate. In what is by now a well-worn tradition, Fed district surveys of the manufacturing sector continued their decline with today’s release of the Empire State survey. One no longer risks being accused of hyperbole by calling its recent trend a “collapse”:


1-Empire State IndexEmpire State Survey, general business conditions index. Such readings are usually not seen during economic expansions – click to enlarge.


As is often the case, not a single economist came even remotely close to correctly forecasting this meltdown. As Mish noted earlier today, it was quite a big miss:


“The Econoday Consensus  estimate was for a slight improvement to -4 from a November reading of -4.59. The actual result was -19.37 with the lowest economic estimate -7.50.”


Our friend Micheal Pollaro has provided us with several charts, including the following comparison chart, which shows the Empire State survey’s new orders index for January, as well as the new orders index of the National ISM and the average of the new order indexes of the Fed district surveys as of December. Not only are new orders one of the most important components of such surveys, as they lead future manufacturing activity, but in recent months the Empire State new orders index has begun to lead other survey data. If it continues to work as a leading indicator, one should expect more negative data points to be released in the near future.


2-Empire State-new ordersNew order indexes: Empire State (red line, for January), average of all district surveys (brown line, as of December) and ISM (blue line, as of December, rhs) – click to enlarge.


Admittedly, this is an especially volatile regional survey, so it is probably not useful as decisive evidence for a broader economic downturn, but every other data points released today proved to be a disappointment as well. The industrial production index has also continued its decline in December. Industrial production was down 0.4% in for the month (3.4% y/y) and the November reading was revised lower to minus 0.9%. In this case, no mainstream economist managed to forecast any of this either. It is noteworthy that readings similar to the current ones have never been recorded outside of recessions in the post WW2 period. Here is a chart showing developments since 1970:


3-Industrial ProductionIndustrial production declines further. Keep in mind that NBER is backdating the beginning of recessions once they are six months old or older. This means that a recession is never officially recognized when it actually begins. In other words, a recession may have begun already; we will only know for sure a few months down the road – click to enlarge.


It is quite funny that the failure to forecast the decline in IP was once again blamed on the weather. The credibility of that excuse is really beginning to wear thin – are economists as a group unaware of the weather? What was it about the weather that hindered industrial production this time? Apparently it was too warm. One might be tempted to conclude that it is the mere fact that weather as such exists that is the problem here, but the reality is of course that forecasts of specific economic data down to 10ths of percentage points are essentially a waste of time. One might as well toss a coin.

But surely December retail sales would come in at a reasonably good level? No luck on that score either, although this weak report (down 0.1%) was actually the best of the day. This time expectations were only slightly undercut, but there were large declines in a broad range of sub-sectors, all of which normally tend to do well in the Christmas season.

Lastly, the Census Bureau reported business sales and inventories for November, with the slide in sales continuing – inventories declined by 0.2% on month-on-month, but were still up 1.6% from a year ago. Sales declined at a similar pace month-on-month, but were down 2.8% from a year ago. As a result, the inventory-to-sales ratio remained stuck at its recent interim high – which is still the highest level since mid 2009. Mid 2009 wasn’t a particularly happy time for the economy.


4-business salesBusiness sales (red line) and inventories (black line) and the inventory-to-sales ratio (blue line, rhs) – click to enlarge.


Negative stand-out in terms of business sales were wholesalers’ sales, which have declined by 5% year-on-year as of the end of November. Inventories are declining as well (m/m), but not fast enough yet – the inventory-to-sales ratio of this sub-sector has consequently made a new high for the move:


5-wholesalers salesWholesalers: y/y change rate in sales (purple line), inventories (red line) and the inventory-to-sales ratio (blue line, rhs) – click to enlarge.


Selected Other Indicators

While we have no new update yet on charge-offs and delinquencies in the commercial and industrial sector, it should be noted by way of reminder that this is yet another datum that is consistent with an incipient recession (the data are as of Q3):


6-Charge-offsThe sum of C&I loan charge-off and delinquencies vs. the FF rate – click to enlarge.


Junk bonds have continued to decline – with yields reaching new highs for the move on Wednesday and improving by just one basis point yesterday. In light of today’s carnage in risk assets, with junk bond ETFs once again falling sharply, it can be safely assumed that yields have yet again reached new highs today. As always, the lowest-rated bonds are the worst performers, but even the Master Index II effective yield has by now nearly doubled from its late June 2014 low. Energy debt plays a big role in these moves, but in the meantime the weakness has begun to spread to other sectors as well:


7-JunkJunk bond yields keep surging – click to enlarge.


Lastly, our coincident boom-bust indicator, the ratio of capital equipment to consumer goods production, remains at quite an elevated level. This suggests that if a bust has indeed begun, it is only in its beginning stages.


8-Cap-Cons-RatioThree booms induced by loose monetary policy, as seen in the ratio between capital and consumer goods production – click to enlarge.


The ratio of capital equipment to consumer goods production gives us a rough idea toward which stages of the production structure the bulk of investment is flowing. Just as capital theory suggests, during times when interest rates are artificially suppressed and the money and credit supply are expanding, the higher stages of production (capital goods producing industries) attract a greater level of investment and display more activity relative to the lower stages (consumer goods).

However, this can never work out in the long run, as production is ultimately not funded by “money”, but by real capital, i.e., by real savings. It is impossible to print the economy to prosperity and these artificial booms are therefore never sustainable. The denouement of the boom can be delayed by keeping monetary policy loose for longer, but such delaying tactics will as a rule merely worsen capital consumption and hence the subsequent bust. The chart above is telling us that more society-wide impoverishment definitely awaits.



Everything continues to suggest that the economic recovery is in the process of screeching to halt. The recovery was already the weakest of the post WW2 era to begin with. Only one datum still gives us pause, and that is the rate of growth of the broad true money supply TMS-2, which has seen a rebound to approx. 8% year-on-year in November.

On the other hand, the annual growth rate of narrow money M1 has reached a new low for the move of 4.65% in mid December, compared to a peak reading of approx. 24.6% attained in October of 2011. While this volatile series has rebounded sharply between mid December and early January (to 9.5%), the effects of changes tend to arrive with a considerable lag. We continue to suspect that it will lead the broader measure TMS-2 lower as well.

Lastly, the stock market, oversold as it already was, proved unable to withstand today’s onslaught of data and proceeded to fall out of bed completely. At one point the DJIA was down more than 500 points. By the close it had recovered to a loss of 390 points, which is still quite hefty. As we noted yesterday in this context: “[An] oversold market can easily become more oversold when it keeps being inundated with evidence that economic conditions are not what they were thought to be.”


9-SPXThe S&P 500 Index bounces after briefly undercutting the August 2015 low by a mere seven points. This level seems ideally suited for a rebound to begin, but at the same time, it remains uncomfortably close – click to enlarge.


Based on technical grounds we still believe that the market is likely close to a short term rebound, but keep our recent warning in mind: Sharp declines during usually seasonally strong periods are a typical bear market characteristic. In fact, as Jason Goepfert reports, the recent combination of market moves has only been seen in the vicinity of a handful of major historic market tops.

Note that Mr. Goepfert’s observations are independent from what we said about seasonal patterns. If we add the occurrences of past warning signals given by unusual seasonal cycle inversions to his list, we find a few overlaps, as well as additional examples (namely 1962, 1973, 2001, 2007, 2008 and Tokyo 1990 – there may be a few more examples for this, but these are probably the most prominent ones). In connection with the economy, the relevance of this consists of the fact that a putative bear market (“officially” the market is merely in a strong correction so far) would almost certainly go hand in hand with a recession.


Charts by: St. Louis Federal Reserve Research, Michael Pollaro, StockCharts



Emigrate While You Can... Learn More



Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!


Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke


2 Responses to “US Economy – Slip-Sliding Away”

  • Mark Humphrey:

    This is an excellent article, actually the best I’ve read about the developing recession we’re in. I don’t understand how any Keynesian weather vane could read what you’ve written and displayed without developing jitters about what she actually understands. Many thanks for many great articles.

    I tried to contribute a little money 3 weeks ago, but failed after 2 tries. I’ll try again.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 5-cotmmrangegc03Ganging Up on Gold
      So Far a Normal Correction In last week's update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn't be regarded as anything but a normal - and in this case actually long overdue -...
  • gold_bullionGold Sector Correction – Where Do Things Stand?
      Sentiment and Positioning When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week's sharp sell-off did in fact move the needle a bit.   Gold - just as nice to look at as it always is, but slightly cheaper since last week. Photo via The Times Of India   The commitments of...
  • wryAustralian property bubble on a scale like no other
      Australian property bubble on a scale like no other Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs:   Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included:    the record run up in commodity prices and subsequent correction;  the associated...
  • "What if we don't change at all ... and something magical just happens?"Prepare for the Unthinkable
      Red Ink Growth and profits mask a variety of problems.  They hide business inefficiencies and the money suck of corporate adminis-trivia.  They also conceal unproductive staff.   The final career leap   But most of all growth and profits obscure the extreme value subtracting forces of bloated management teams.  During good times it is unclear what these smug fellows do.  During bad times it is lucidly clear that most of them ain’t worth a darn. When the...
  • andy-duncan-and-claudio-grassA Looming Banking Crisis – Is a Perfect Storm About to Hit?
      Andy Duncan Interviews Claudio Grass Andy Duncan of has interviewed our friend Claudio Grass, managing director of Global Gold in Switzerland. Below is a transcript excerpting the main parts of the first section of the interview on the problems in the European banking system and what measures might be taken if push were to come to shove.   Andy Duncan of (left) and Claudio Grass of Global Gold (right)   Andy Duncan: How do you see the...
  • urban_ii_croppedPope Francis: Traitor to Western Civilization
      Disqualified There has been no greater advocate of mass Muslim migration into Europe than the purported head of the Catholic Church, Pope Francis.  At a recent conference, he urged that “asylum seekers” be accepted, “through the acts of mercy that promote their integration into the European context and beyond.”*   Before we let Antonius continue with his refreshingly politically incorrect disquisition, we want to remind readers of two previous articles that have...
  • spankinggoodtimeUS Stock Market - a Spanking May be on its Way
      Iffy Looking Charts The stock market has held up quite well this year in the face of numerous developments that are usually regarded as negative (from declining earnings, to the Brexit, to a US presidential election that leaves a lot to be desired, to put it mildly). Of course, the market is never driven by the news – it is exactly the other way around. It is the market that actually writes the news. It may finally be time for a spanking though.   Time for some old-fashioned...
  • fischersDoomed to Failure
      Larded Up and Larded Over We’ve been waiting for the U.S. economy to reach escape velocity for the last six years.  What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out.  Unfortunately, this may not be possible the way things are going.   As Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went...
  • larry-1Meet Your New Stimulus Allocation Czar
      March Towards Midnight The march towards midnight is both stirring and foreboding.  Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom.  Thoughts of imminent mortality haunt each bite.   Tic-toc, tic-toc...   As far as the economy’s concerned, there’s no stopping its march towards midnight.  The witching hour’s rapidly approaching.  We intend to savor each moment and make the best of...
  • state_police_980_600_s_c1_t_c_0_0_1Are the Deep State’s Drones Coming for You?
      What’s Aleppo?   Look out kid Don’t matter what you did Walk on your tip toes Don’t try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don’t need a weather man To know which way the wind blows – “Subterranean Homesick Blues,” Bob Dylan   The entrance to Baghdad's “Green Zone”. Photo credit: Karim Kadim / AP   DELRAY BEACH, Florida – Biggest foreign policy blunder...
  • speculatorInterview with Doug Casey
      Natalie Vein of BFI speaks with Doug Casey   Our friend Natalie Vein recently had the opportunity to conduct an extensive interview with Doug Casey for BFI, the  parent company of Global Gold. Based on his decades-long experience in investing and his many travels, he shares his views on the state of the world economy, his outlook on critical political developments in the US and in Europe, as well as his investment insights and his approach to gold, as part of a viable strategy for...
  • where-to-goThe Bamboozled Middle Class
      Gassy and Bloated BALTIMORE – What a great time for an observer with a sense of mischief! This year’s presidential campaign is the most absurd and remarkable we have ever witnessed. After more than two centuries, Americans are finally getting the democracy they deserve – one that is grotesque... slimy... and immensely entertaining, albeit in the mud-wrasslin’ genre.   The mud-wrestlers – well, we did promise you in these pages it would be entertaining like never...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank




Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Buy Silver Now!
Buy Gold Now!