While many economists and the Fed are convinced that things will "muddle through", multiple economic reports are showing the distinct "tipping point" pattern that precedes a recession. This broad pattern did not occur during the previous recession scares and indicates that at least the non-service part of the USA economy may already be in recession. If the downward trend continues recession is inevitable.
The July increase in retail sales was encouraging but there doesn't appear to be much on the horizon that will maintain an upward trend. Real (inflation-adjusted) retail and food service sales reached a high point in March 2012 which was significantly below the pre-recession peak. Since March, these sales have entered the longest period of decline since the recession bottom. Even the positive surprise of July only brought sales back to May levels. The chart below compares these sales to the S&P 500 - note that the S&P 500 drops significantly when retail and food service sales goes into an extended decline.
(click to enlarge)
Wholesale trade sales peaked in April and have declined since as shown in the chart below. As a result inventories as a percent of sales are currently at the highest level since December 2009, which is negative for future GDP growth.
(click to enlarge)
With declines in both wholesale and retail sales, manufacturing should be showing declines, at least in orders. Sure enough, manufacturing new orders peaked in absolute terms in December 2011 as shown in the chart below.
(click to enlarge)
This decline is confirmed by the ISM Manufacturing New Order Index which has recently dropped below 50, indicating contraction in manufacturing orders. The recent Philly Fed Business Outlook Survey, Empire State and Dallas Manufacturing Surveys confirm that this decline is ongoing.
(click to enlarge)
The early decline in manufacturing new orders is probably a combination of declining government spending due to austerity measures and dropping exports due to the international economic slowdown (also austerity based).
The drop in retail sales is more interesting as it's probably related to the classic Keynesian Paradox of Thrift where everyone trying to save results in lower consumption and, if taken to extremes, recession. Shown below is the change in real personal consumption expenditures compared to the personal savings rate. The chart below shows that savings rates have been increasing since November 2011 and, as income growth has been very weak, has resulted in a decline in personal expenditures, in line with the drop in retail sales.
(click to enlarge)
If something does not change, expect the service sector to be dragged into recession. Perhaps housing is reviving - but probably not based on the Mortgage Bankers Association home purchase index which was down another 2% in the last weekly report.
The Keynesian solution to this is for government to step in with lower interest rates to increase investment (already done) and increased consumption (fiscal stimulus) to offset the decline in consumer consumption. Even the Chinese know this as they are frantically starting new stimulus programs now that the effects of their earlier stimulus have faded in the face of austerity in the rest of the world.
The Fed, with it's statements that interest rates will be low until late 2014, obviously believes that American fiscal stimulus is not going to happen even when the election is over. This should be no surprise as neither candidate seems to believe in Keynesian economics.
Surprised to hear that Obama is not a Keynesian? A large portion of Obama's stimulus was ineffective tax cuts which did nothing except increase the deficit. Keynes recommended government spending and income redistribution during a depression to offset increased savings and decreased consumer spending. This means increasing taxes while the government spends even more than it taxes. This is the classic tax and spend hated by conservatives - but it does seem to have reversed the Great Depression declines triggered by Hoover's austerity.
Now there is growing support among liberal economists for what they call "balanced-budget stimulus" - tax and spend light where stimulus spending is limited to the amount that taxes are increased. Conservatives will hate it but if we fall into recession they may become desperate enough to try anything - but probably not.
Given current negative trends, it's unlikely that the economy-and therefore the market-is likely to continue to go sideways much longer. The next few weeks and months will be interesting as we see if the retail sales bounce is a sign of an emerging uptrend and the market takes off or just a one-off event and the USA tumbles into recession.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
No comments:
Post a Comment