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

 

 
 

 
 

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

   
 

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:

  • 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