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).

 

forgotten-heritage

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.

 

Conclusion

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

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add 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:

  • The Golden Age Has Just Begun
      Some Things Actually Go Up Before and During the Fall... In recent issues of Seasonal Insights I have discussed two asset classes that tend to suffer  performance problems in most years until the autumn, namely stocks and bitcoin. I thought you might for a change want to hear of an asset that will be in a seasonal uptrend over coming months.   Many things, including bitcoin, stocks and leaves tend to fall in the aptly named fall... but some things actually start to...
  • A Look at the Gold and Silver Price Drop of 3 July, 2017
      Mystery Nosedive The price of gold dropped from $1,241 as of Friday’s close to $1,219 on the close Monday, or -1.8%. The price of silver fell from $16.58 to $16.11, or -2.9%. It is being called a gold and silver “smash” (implication being that one party or a conspiracy is doing the smashing).   The flight of the gold rocket, different phases [PT]   Our goal is to help you develop a clear understanding. The move was no mystery. Monetary Metals makes an intensive...
  • Adventures in Quantitative Tightening
      Flowing Toward the Great Depression All remaining doubts concerning the place the U.S. economy and its tangled web of international credits and debts is headed were clarified this week. On Monday, Mark Yusko, CIO of Morgan Creek Capital Management, told CNBC that:   “…we’re flowing toward the path of 1928-29 when Hoover was president. Now Trump is president. Both were presidents with no experience who come in with a Congress that is all Republican, lots of big promises,...
  • Tales from the FOMC Underground
      A Great Big Dud Many of today’s economic troubles are due to a fantastic guess.  That the wealth effect of inflated asset prices would stimulate demand in the economy. The premise, as we understand it, was that as stock portfolios bubbled up investors would feel better about their lot in life.  Some of them would feel so doggone good they’d go out and buy 72-inch flat screen televisions and brand-new electric cars with computerized dashboards on credit.   The Wilshire...
  • How Dumb Is the Fed?
      Bent and Distorted POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed? The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog.   They're not the best map readers, that much is known for certain. [PT]   [O]ur message to the folks in Jackson Hole this week [at the annual central banker meeting there] is that the end of the Fed’s reckless experiment in social engineering via QE and...
  • The Money Velocity Myth
      Popular Imagery of Money on the Move For most financial commentators an important factor that either reinforces or weakens the effect of changes in the money supply on economic activity and prices is the “velocity of money”.   An image from an article on the intertubes that “explains” the velocity of money (one of the articles we came across started out as follows: “The economy runs smoothly only when there is enough money in circulation. How much is enough?” ...
  • Which Is Worse? America or France?
      French Fraud POITOU, FRANCE – “Which is worse? America or France?” The question must be put in context. We were invited to dinner with local farmers last night. Jean-Yves and Arlette live in a modest house in the nearby town – an efficient and cozy place built about 25 years ago. They’ve added a solarium to the back, where we had dinner.   FAF – French-American Friendship. These days it's a “which is worse” competition... [PT]   Arlette operates a...
  • The Student Loan Bubble and Economic Collapse
      The Looming Last Gasp of Indoctrination? The inevitable collapse of the student loan “market” and with it the take-down of many higher educational institutions will be one of the happiest and much needed events to look forward to in the coming months/years.  Whether the student loan bubble bursts on its own or implodes due to a general economic collapse, does not matter as long as higher education is dealt a death blow and can no longer be a conduit of socialist and egalitarian...
  • Gold and Silver Capitulation – Precious Metals Supply & Demand Report
      Last Week in Precious Metals: Peak Hype, Stocks vs. Flows and Capitulation The big news this week was the flash crash in silver late on 6 July.  We will shortly publish a separate forensic analysis of this, as there is a lot to see and say.   Silver - 1,000 troy ounce good delivery bars, approved by the COMEX. Whatever you do, do not let one of these things land your feet. For readers used to the metric system: these bars weigh approximately between 28 to 33 kilograms...
  • No “Trump Bump” for the Economy
      Crackpot Schemes POITOU, FRANCE – “Nothing really changes.” Sitting next to us at breakfast, a companion was reading an article written by the No. 2 man in France, Édouard Philippe, in Le Monde. The headline promised to tell us how the country was going to “deblock” itself.  But upon inspection, the proposals were the same old claptrap about favoring “green” energy... changing the tax code to reward one group and punish another...  and spending more money on various...
  • Putting the Latest Silver Crash Under a Lens
      An Unenthusiastic Market On Thursday, July 6, in the late afternoon (as reckoned in Arizona), the price of silver crashed. The move was very brief, but very intense. The price hit a low under $14.40 before recovering to around $15.80 which is about 20 cents lower than where it started.   1 kilogram cast silver bars from an Austrian refinery. These are available in 250 g, 500 g and 1 kg sizes and look really neat. We use the 250 g ones as paperweights, so this is an...
  • What Really Happened When Gold Crashed, Monday June 26?
      The Earth is Still Round Let’s establish three facts up front. One, the volume of contracts traded was not “millions” (as at least one conspiracy theorist is claiming). During the 1-minute window when the price of gold dropped from $1,254.10 to a low of $1,236.50 and recovered to $1,247, 18,031 August gold contracts traded. There was negligible volume in the October and December contracts. Two, the Earth is round. This did not occur while “everyone” was sleeping (as at least...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

350x200

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

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

savant