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.



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!

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


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:

  • 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...
  • 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...
  • 9-market-internalsBubble Dissection
      The Long Term Outlook for the Asset Bubble Due to strong internals, John Hussman has given the stock market rally since the February low the benefit of the doubt for a while. Lately he has returned to issuing warnings about the market's potential to deliver a big negative surprise once it runs out of greater fools. In his weekly market missive published on Monday (entitled “Sizing Up the Bubble” - we highly recommend reading it), he presents inter alia the following eye-popping...
  • 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...
  • 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...
  • 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...
  • 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...
  • 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...
  • walmart-st-augustine-flaEvacuate or Die...
      Escaping the Hurricane BALTIMORE – Last week, we got a peek at the End of the World. As Hurricane Matthew approached the coast of Florida, a panic set in. Gas stations ran out of fuel. Stores ran out of food. Banks ran out of cash.   A satellite image of hurricane Matthew taken on October 4. He didn't look very friendly. Image via   “Evacuate or die,” we were told. Not wanting to do either, we rented a car and drove to Maryland. “We’ll just...

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!