Chicago, Il  9/24/2012 (BasicsMedia)  —  Information is from my long followed friend Lou Brien who always has great insight..Can we talk? ..is his piece for this week!!

” The latest reading of GDP is nothing to shout about, but at +1.7% it doesn’t scream recession either. Although the complimentary economic measure, the GDI, is just a bit higher at +2.16%, I think it looks a bit worse than GDP. The GDI led the way out of the recession and reached higher levels than the GDP quarter after quarter during the recovery, but the peak of 7.26% occurred in Q1 2010 and the latest result is the lowest since Q3 2009, when the US was said to be emerging from the recession; the chart of the GDI looks like it has rolled over. But if the +1.7% GDP doesn’t scream recession then the latest reading of GDI can’t even be considered a whisper. Maybe so, but there some recessionary murmurs in the higher frequency data that encourages my misgivings about the future path of the GDI; the sort of chit-chat that reflects badly on the state of the economy, let’s discuss.

The National Bureau of Economic Research (NBER) is the group that sets for the historical record the dates on which the US enters into and exits recessions; the business cycle reference dates. They see the GDP and GDI as the most reliable comprehensive estimates of aggregate domestic production and indicators of the business cycle, but that is not to say that these quarterly data series have to be negative in the quarter in which they identify the month during which a recession began. As it happens, neither measure was negative in Q4 2007; as a matter of fact the record shows that the GDP back then matched the current rate of growth and the GDI was a full percent better at the end of 2007 than the latest reading. The NBER slices and dices the longer cycle data into monthly estimates in order to pin point the month in question, and they use other data series to see the big picture.

Among the other indicators the NBER uses to determine the cycles are industrial production, real manufacturing and wholesale-retail trade sales and adjusted personal income levels. How’s that going?

Industrial production was down 1.2% on a month on month basis in August, the most recent reading; it is the worst monthly decline since March 2009, the depth of the recession. Sure that’s just one month, but the annualized rate of this indicator is +2.80%, the lowest level since February 2010; it peaked twenty-six months ago. In a related matter the ISM Manufacturing Index has been sub-fifty for the last three months; sure just barely below the break-even level but it is the first such triplet since the final days of the recession. The ISM New Orders component has also been sub-fifty for three months running and the latest result, 47.1, is the lowest since the recession month of April 2009. Additionally, the Production component of this report was 47.2 last month; it’s not been down here since May 2009.

Wholesaler’s sales have been negative the last three months, the first three month dip since mid-2008. The average decline in the last three months is -0.9%; the lowest average since March 2009. Durable Goods Orders were strong in July, the most recent report; they were up 4.1% month on month. But if you remove transportation orders from the mix the results were less good and have been so all year. Orders Ex-transportation was down 0.6% in July; the fifth negative result so far in 2012. The annualized rate for these orders is +0.1% and that has not been so low since the end of 2009. But that almost looks good when you compare it to Capital Expenditures, as reported in this data series (Capital Goods Order, less defense and aircraft). This component was -4.0% on a month on month basis in July, it has been negative in five of the seven months this year and is -6.9% on an annualized basis, and, yes, you have to go back to 2009 to find a similar drop.

The story with Personal Income is more nuanced. On an annualized basis income is +3.6%, so-so at best when you consider that this is twenty-five percent below the twenty year average, but it has improved in five of the last six months. By the way this income measure was +5.5% when the recession hit in December 2007. But the deeper you dig on income and wages the worse it looks. The annualized hourly wages for non-supervisory production workers, about eighty percent of all workers, is +1.25% in the most recent two months. This measure of wages has never been as low as this in the five decades this data series has been around. In December 2007 when the recession is said to have begun this was at +3.8%; in December 2008, when the Fed took the funds rate to zero in order to jump start the economy, this was at +4.0%; and when the recession ended in June 2009 this was at +2.9%. And if we look at the median real income as measured by the Census Bureau report, the 2011 level has fallen to a level last seen in 1995. So the story here has more to do with extended and ongoing stagnation for most of the population as opposed to any near term gyrations.

Retail Sales have been up the last two months, but were down in the three months prior to that. But there are reasons to believe that outlook is dim. According to a report from MarketBeat, “the peak shipping season for the holidays is already winding down, and it looks to have been weaker than a year ago, according to Inttra, which runs an online logistics service for shippers…’We do not see a very bright Christmas,’ Inttra CEO Ken Bloom told MarketBeat. Usually sometime between July and September, cargo traffic will see an increase, a noticeable spike in volume as manufacturers fill orders for retailers bulking up for the holidays. That spike didn’t appear this year, Bloom said.” Reinforcing this view is the Harpex Index, a measure of the cost of shipping containers; it is down by about twenty percent in the last few months alone. Another report says things are just as tough for this sector on land as they are at sea. The American Petroleum Institute (API) reports that in August “consumption of ultra-low sulfur diesel, the type used on highways, slipped 5.7 percent to average 3.5 million barrels a day, the report showed.” The chief economist of the API, John Felmy, told Bloomberg, “The very weak numbers are really troubling. Diesel demand, which is closely correlated to economic growth, fell off a cliff last month. This is probably a sign that additional weakness has slipped into the US economy.”

The Economic Cycle Research Institute (ECRI) has spoken up; they think the US has already entered a recession. They have been warning about the possibility for most of the year and recently made their call. “Since July, when we highlighted the weakness in personal income growth, there have been revisions showing even weaker income growth going back a few months, followed by some apparent recovery recently. As with some of the other coincident data, this series will come under significant revisions in the months (and year) ahead. Nevertheless, the weakness in income growth is showing through in retail sales data, which, as mentioned has actually declined since March,” says their press release on the opinion. The ECRI figures that downward revisions are a key characteristic of an economy falling into a recession and that has certainly been a feature of the last few jobs reports. Payroll data for June and July have both been reduced in the subsequent months; that’s what happened in 2007 in the four months preceding the onset of the recession in December of that year. Oh, and did I mention that the number of employed as reported in the Household Survey from the Employment Situation Report has been negative in four of the last six months and is averaging only +6k since March.

S & P doesn’t go as far out on the limb as has the ECRI, but they see growth slowing in the second half of this year and make book that there’s a twenty to twenty-five percent chance of a double-dip recession here. “The credit rating agency which downgraded the US’ sovereign credit rating last year noted unemployment could peak above 9%, real GDP would contract 0.9%, and housing markets would once again collapse under their adverse scenario. The catalyst: Congress failing to reach an agreement to avoid the fiscal cliff,” reports Forbes magazine, “No matter what happens, a strong economic recovery is ‘a long ways away,’ explained S&P deputy chief economist, Beth Ann Bovino.”

Sure the auto sales are rebounding and have been for a couple of years, though still more than a million under the annualized pace of late 2007. And the service sector ISM is not weak. Housing is better, but compared to what? There are certainly arguments to be made that counter the idea that a recession is imminent, or that one has already begun. Besides the Fed will come to the rescue; they could ease if they sense trouble. Oh, well they could ease in a way that is really effective; that’s the ticket. And let’s not forget the stock market, it hasn’t been so high since late 2007, you remember back when it set its all time high in October, a month or so before the beginning of the worst recession since the thirties, oh, never mind.

I don’t know one way or the other about a recession; the point is that it is a topic that can be discussed in polite company without feeling the fool for bringing it up.”

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