Gross Output Remains Under Pressure

We should mention right from the outset that recent data releases – weak as most of them were – are still not confirming an imminent recession with certainty. The situation remains a bit fuzzy: we see a lot of weakness in important data, and considering the overall picture – which includes what is happening globally – we can infer that the likelihood of a significant economic downturn this year is extremely high, but it’s not inevitable. While it is still possible that a recession can be dodged this year, that seems a low probability outcome by now.

 

img_7122-hdrPhoto credit: Darren Ketchum

 

Last week the government has updated the gross output (GO) per industry data, which means we now have the picture until the end of Q3 2015. In terms of GDP, Q3 wasn’t much to write home about either (2% real), and we can see from GO that there has been weakness in quite a few business areas. The parts of the economy that are responsible for the bulk of wealth creation didn’t really do all too well. Our suspicion that the trends observed in the Q2 gross output data would continue has been confirmed – and in all likelihood, Q4 will once again show weakness. Below we compare the y/y change rates of selected gross output data to those of new orders for capital goods and industrial production.

 

1-Gross Output and Ind ProdThe lines ending in Q3 show the gross output data of: all private industries, mining, manufacturing, wholesale trade, retail trade. As you can see, only retail sales managed to show positive growth momentum among these – growth in every other sector (including the combined data) has weakened further, with manufacturing, mining and wholesale trade all in negative territory (note that utilities and construction output, which are not shown above, both grew). The black line depicts the growth rate of new orders for non-defense capital goods, the purple line (which is the most up-to-date series at the moment) shows the y/y rate of change in industrial production – which has likewise turned negative – click to enlarge.

 

The data shown above are definitely consistent with what is normally seen at the onset of recessions. However, there are historical examples of “false positives”, one of which we will discuss further below, as it seems relevant to the current situation. First a few more words on gross output though. As he always does when the data are updated, Mark Skousen has discussed them as well and has published an update of the adjusted GO/GDP growth comparison chart:

 

2-Skousen_Graph_01Via Dr. Skousen: adjusted GO vs GDP, quarterly change, nominal – – click to enlarge.

 

We quote from his comments:

 

“Gross output (GO), the new measure of U. S. economic activity published by the Bureau of Economic Analysis, slowed significantly in the 3rd quarter of 2015. And the Skousen B2B Index actually fell slightly in real terms in the 3rdquarter. Both data suggest the possibility of a mild recession developing in 2016.

Based on data released today by the BEA and adjusted to include all sales throughout the production process, real GO grew by only 2.5% in the 3rd quarter of 2015, almost half the rate in the 2nd quarter (4.6%). Adjusted GO reached $39.2 trillion in the 3rd quarter, more than double the size of GDP ($18.0 trillion).

In nominal terms, the adjusted GO growth rate declined from 6.3% in Q2 to 2.3% in Q3. In the same period GDP fell from 6.0% to 2.7%, illustrating the higher degree of volatility of GO compared to GDP (see chart below).  The higher volatility indicates that GO might be a better indicator of economic activity than GDP, since GO includes economic activity that GDP leaves out.”

 

(emphasis added)

Dr. Skousen is only looking for a mild recession at present. As he remarks further:

 

“The GO data and my own B 2B Index demonstrate that total US economic activity has slowed dramatically. A recession could develop in 2016, although I expect it to be mild.

B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain, and it indicates tepid growth and maybe even a downturn.”

 

We should perhaps add that as far as we are aware, Dr. Skousen is by nature an optimist…:). Considering that the GO data only show the situation up to the end of Q3 and we have in the meantime seen further weakness in assorted surveys, gross output has likely continued to worsen. Much will also depend on developments in the rest of the world and future trends in money supply and credit growth. If e.g. China’s credit bubble were to suffer a serious contraction, it would likely have wide-ranging effects.

 

Recent Survey Data

The Philly Fed and Dallas Fed manufacturing surveys were recently released. The former came in “less bad than expected”, but remained in negative territory. Apparently one of the reasons for the somewhat slower pace of contraction was a notable downward revision of the data of previous months, so one can hardly call the release “good news”.

The Dallas survey was an unmitigated disaster that made landfall way outside the range of what were already very modest expectations. The consensus was for the headline index to clock in at minus 14, which sounds grim enough (with expectations ranging from -10 to -17). The actual number was a rather more alarming minus 34.6. The production index was a negative standout, plunging a full 22.9 points from 12.7 to minus 10.2. Here is a chart of these particular catastrophes:

 

3-Dallas Survey, production and activityDallas manufacturing survey – production nosedives, and the headline index enters territory usually associated with severe recessions – click to enlarge.

 

Obviously, the Dallas survey is strongly influenced by troubles in the oil patch. More on this follows further below, but first we want to show two comparison charts our friend Michael Pollaro has mailed to us, which compare the new order data of the two surveys with the average of the new orders indexes of all regional surveys and the national ISM new order component:

 

4-Philly Fed New OrdersNew orders: Philly Fed survey (January) – red line; average of all district surveys (as of Dec. 2015) – black line; ISM (as of Dec. 2015) – blue line – click to enlarge.

 

5-Dallas new orders

New orders: Dallas Fed survey (January) – red line; average of all district surveys (as of Dec. 2015) – black line; ISM (as of Dec. 2015) – blue line – click to enlarge.

 

National ISM figures always lag in downturns and overall tend to act a bit better than many of the more volatile regional data, but it is to be expected that the gap to the regional average will soon narrow.

 

The Significance of the Oil Price Crash

The last time a sharp downturn in Texas was clearly triggered by an oil price crash was in 1986. The size and speed of the plunge in crude oil prices at the time was comparable to the recent decline and economic conditions in the region deteriorated significantly. Below is a chart of the Texas leading index published by the Fed. Whenever it has declined to near its current level in the past, a nation-wide recession either soon followed or was already underway – except in 1986:

 

6-Texas leading indexTexas leading index: a decline to current levels was usually associated with impending nation-wide recessions, but the 1986 oil price crash caused a downturn that remained confined to the region – click to enlarge.

 

It appears that many observers believe that the current downturn is ultimately going to result in a similar outcome. There are certainly many parallels to the 1986 event, but we believe it does not necessarily follow that it will remain similarly well contained this time around. We would actually argue that the current downturn has to be more serious and will have more far-reaching effects than the one in 1986.

The recent shale boom was of different magnitude and importance, and has made a major contribution to capex and employment growth in the post GFC recovery. US oil production has more than doubled, returning to levels last seen 40+ years ago. The debt growth associated with the boom has been quite stunning as well. The economy overall has been a lot weaker than in the mid to late 1980s, so it stands to reason that the current boom’s demise will be of greater moment than the oil bust of 1986.

In addition, the still growing problems in the junk bond market are providing indirect evidence that the negative effects of the energy bust are rather unlikely to remain confined to the main oil-producing regions.

 

7-JunkMerrill US high yield Master II Index and CCC and below effective yields – the surge in yields continues – click to enlarge.

 

As an aside: the S&L crisis, the 1987 stock market crash and the recession of 1990 all followed shortly after the 1986 oil crash, which was probably no coincidence.

 

Conclusion

We may not yet have final confirmation that a recession is imminent, but so far nothing suggests that the danger has receded.

 

Charts by: St. Louis Federal Reserve Research, Mark Skousen / Ned Piplovic, Michael Pollaro, Acting Man

 

 
 

Emigrate While You Can... Learn More

 
 

 

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

   
 

One Response to “US Economy: On a Knife’s Edge”

  • Kreditanstalt:

    These charts are all macro “data”…and government data at that…

    Walk down most any street, talk to people, watch store traffic, storefronts, count “for sale” and “for lease” signs, see the numbers directly or indirectly dependent on government spending…and you will get a more accurate picture.

    SPENDING – “economic activity” – may be up, for the wealthiest 20-30%. But PRODUCTIVITY, when labour and regulatory costs are taken into account, is DISMAL.

    Timing…of course we don’t know…but those lower living standards are baked in the cake.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • French labour union workers and students attend a demonstration against the French labour law proposal in Marseille, France, as part of a nationwide labor reform protests and strikes, March 31, 2016. REUTERS/Jean-Paul Pelissier/File PhotoHow the Welfare State Dies
      Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico).  Gee, we wonder why?   They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
  • The-answer-is-yesToward Freedom: Will The UK Write History?
      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • water houseA Market Ready to Blow and the Flag of the Conquerors
      Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast.   St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6   Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • deflated-souffleThe Fed’s  Doomsday Device
      Bezzle BALTIMORE –  Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh?   Only two? There were four last time!   Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...
  • Incrementum signalIn Gold We Trust, 2016
      The 10th Anniversary Edition of the “In Gold We Trust” Report As every year at the end of June, our good friends Ronald Stoeferle and Mark Valek, the managers of the Incrementum funds, have released the In Gold We Trust report, one of the most comprehensive and most widely read gold reports in the world. The report can be downloaded further below.   Gold, daily, over the past year - click to enlarge.   The report celebrates its 10th anniversary this year. As...
  • rate_hike_cartoon_10.15.2015_largeJanet Yellen’s $200-Trillion Debt Problem
      Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.   “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
  • Brexit supporterGold and Brexit
      Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use.   August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge.   Moreover, insuring against Brexit might ironically be equivalent...
  • times are changingVive la Revolution! Brexit and a Dying Order
      A Dying Order Last Thursday, the Brits said auf Wiedersehen and au revoir to the European Union. On Friday, the Dow sold off 611 points – a roughly 3.5% slump. What’s going on?   Surprise winners of the “Britain has political talent” contest...   In Europe and the U.S., the masses are getting restless. Mr. Guy Wroble of Denver, Colorado, explained why in a short letter to the Financial Times:   The old liberal world order is dying because the...
  • cameron at the EUBrexit Paranoia Creeps Into the Markets
      European Stocks Look Really Bad... Late last week stock markets around the world weakened and it seemed as though recent “Brexit” polls showing that the “leave” campaign has obtained a slight lead provided the trigger. The idea was supported by a notable surge in the British pound's volatility.   Battening down the hatches...   On the other hand, if one looks at European stocks, one could just as well argue that their bearish trend is simply continuing – and...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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!
 

Oilprice.com