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”:
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.
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:
Industrial 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.
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:
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):
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:
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.
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.”
The 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! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “US Economy – Slip-Sliding Away”
Most read in the last 20 days:
- Alan “Bubbles” Greenspan Returns to Gold
Faking It Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961 He was in it for the power and the glory... Alan Greenspan gets presidential bling...
- End of an Era: The Rise and Fall of the Petrodollar System
The Transition “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
- Writing on the Wall
Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so. It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
- A Fully Automated Stock Market Blow-Off?
Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals. The bots keep buying... Illustration via...
- The Central Planning Virus Mutates
Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination. A...
- Destination Mars
Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks. If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical. But, in certain economies, this is now standard operating procedure. The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
- America Has Become a “Parasitocracy”
Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to. Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
- Fat People for Trump!
Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot. The protest vote attractor with the funny hair. Image credit: Liberty Maniacs Trigger warning: In the following ramble, we make fun of...
- Long Term Market Perspectives
Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world. Ye olde bristlecone Photo credit: Kosta Konstantinidis You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
- EU Sends Obsolete Industries Mission to China
“Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”) and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
- Gold is not Going to $10,000
One Cannot Trade Based on the Endgame The prices of the metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322! All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...
- The Real Reason the “Rich Get Richer”
Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs. Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...