The End is Near (of the Recession)
Having spent the week at Sea Asia 2009 Shipping Conference, and reviewing the economic data for this week and the month to date – it is becoming more obvious that the many economic conditions are no longer in a free fall. Soon the recession will be over.
Before you think me crazy, let me clarify. It is the definition of a recession, and how economic activity is tallied which leads me to saying we are getting close to the end of the recession.
In America, the lord and master of recessions is the NBER. According with their procedures, a recession will be over when the following items are no longer contracting:
(1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.
NBER procedures do not care about the Dow Industrials equities prices, real estate prices, bankruptcies, wealth destruction, currency value or debt. In fact, half the people in America could be unemployed but they could call an end to the recession. In other words, this recession will end while the economy is still in chaos.
Personal income really did not go negative this recession. However, averaging 650,000 job losses over the last few months cannot be good. Obviously more and more consumers are out of a job. The quantity of job losses monthly is not getting worse.
But the the NBER looks at employment – not unemployment. Remember this recession began in December 2007 and we have more people employed today then in December 2007. Once the overall percentage of unemployment growth starts to slow, it is obvious the overall employment numbers will be rising.
Having worked around logistics most of my career, I am fairly comfortable using shipping counts to monitor economic performance. Shipping counts (which is a measure of movement of goods which were produced) are stabilizing. All of the manufacturing indexes either are beginning to bottom or are bottoming.
NBER's criteria for ending a recession will soon be met.
The end is near.
P.S. - We are in a depression. There is no criteria today for a depression, and the economic crap we are in will not be ending soon. When economists use the words “L shaped recovery or protracted U shaped recession”, this simply means we are in an old fashioned depression. A depression ends when economic activity returns to normal. We have a long way to go.
P.S.S. - I don't want to confuse you but the NBER did not use employment or earnings to determine when this recession began – they used industrial production. I think that this current recession should have started in 3Q 2008 which corresponds to employment and worldwide / domestic shipping turning points. So your guess is as good as mine what criteria the NBER will use to call the end to this recession.
Additional Economic Events from this Past Week
The IMF this week revised their world economic outlook. The short version is:
In the most severe recession since World War II, the global economy is projected to shrink by 1.3 percent in 2009, with a slow recovery expected to take hold next year, according to the IMF’s April World Economic Outlook (WEO).
While the rate of contraction should moderate from the second quarter of 2009 onward, output per capita is projected to decline in countries representing three-quarters of the global economy. Growth is projected to reemerge in 2010, but at 1.9 percent it would be sluggish relative to past recoveries.
Many punters view this as too pessimistic. My view is that this outlook is pretty mainstream, and chances are conditions will be worse than their predictions. During this recession, the IMF has been continuously underestimating the severity of the downturn. Remember that all these economists are talking about GDP which leaves out issues such as debt, asset values, and unemployment. To the average Joe, this economy will seem bad for some time to come.
You can compare the IMF's forecasts to those more pessimistic ones of Nouriel Roubini's RGE Monitor:
• Global economic activity is expected to contract by 1.9% in 2009. Advanced economies are expected to contract 4% in 2009. Japan and the Eurozone will suffer the sharpest downturns. U.S. GDP will continue to contract, albeit at a slower pace throughout 2009, with negative growth in every quarter.
• Emerging markets will slow down sharply from the stellar growth rates of the past few years, with the BRIC economies growing at half their 2008 pace.
• Deteriorated terms of trade, slower capital flows and tighter credit will push Latin America into recession from the 4.1% growth of 2008. Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela will all shift to negative territory on a year-over-year basis while smaller countries, like Peru, will experience a significant slowdown.
• Countries in Eastern Europe and the CIS will experience some of the sharpest contractions given the withdrawal of foreign credit and the risk of a severe financial crisis. The reduction in oil revenues and financial stress will contribute to a 5% yoy contraction in Russia and some countries - especially in the Baltics – are at risk of double-digit contractions.
• Export-dependent Asia's growth will slow significantly to less than 3% in 2009. China will have a hard landing with GDP growth falling to 5.5% while India will slow sharply to 4.3%. All four Asian Tigers (Singapore, Taiwan, South Korea and Hong Kong) as well as Malaysia and Thailand will experience recessions.
• The Middle East and Africa will mark much slower growth, half of their 2008 pace, given the reduction in capital inflows, reduced demand from the U.S. and EU and decline in commodity prices and output. Israel and South Africa will suffer slight contractions.
• Latin America into recession from the 4.1% growth of 2008. Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela will all shift to negative territory on a year-over-year basis while smaller countries, like Peru, will experience a significant slowdown.
• While the rate of U.S. contraction will slow from -6 per cent in the last two quarters, US growth will still be negative (around -1.5 to -2 per cent) in the second half of the year (compared to the bullish consensus of +2 per cent).
According to a Bank of Tokyo – Mitsubishi study, the commercial real estate market real estate values lag the overall economy. Construction activity declines have run about 20% on average in past cycles and have lasted 1-1/2 years. Commercial property values fell in 1990 through 1993. George Soros says commercial real estate will fall 30%, and Deutsche Bank AG says that a 30% decline has already happened. In my opinion, it could get much worse than 30% because the Fed is not targeting loans for this market (which must be rolled over every 5 to 10 years). Commercial real estate values are determined by return on investment.
Existing home sales declined slightly in March 2009, but the existing home selling prices are creeping up for the third month in a row. As this data is from the the National Association of Realtors, I am cautious of accepting this data until confirmed by another source. Next week S&P/Case-Shiller index will be released, and we can see if the trend is validated.
Mortgage loan application volume increased of 5.3% from one week earlier and 76.9% compared with the same week one year earlier. The refinance share of mortgage activity increased slightly to 79.7% of applications. The average interest rate for 30-year fixed-rate mortgages increased slightly to 4.73%. From these numbers we can derive that original loan origination must be higher than a year ago (it was so bad a year ago that being better is not saying much).
Advance data for new orders for manufactured durable goods in March 2009 decreased 0.8%. This was the seventh decrease in the last eight months and followed a 2.1% February increase. Going over the detailed data including unfilled orders and inventories, as well as the various subdivisions – there was no area of strength. From the data this month it appears the February data was an aberration – with the trend is still downward at a slower rate.
The Chicago Fed National Activity Index was down slightly in March month-over-month. This index tries to measure several economic indicators to measure the strength of the economy. The chart below is the three-month moving average, CFNAI-MA3. What this index is suggesting that there was essentially no change between February and March 2009, and that we continue to be deep in recession.
The daily Treasury yield curves for April 2009 are here. Long term yields are rising, and short term are falling.
The rate of job destruction had a slight decrease for the week ending April 18 with the four week moving average with 646,750 jobs being lost every 4 weeks. It is good news that the 4 week average is holding steady. I would expect a slow and steady reduction in the four week moving average to start soon (I cannot define soon). This does not mean the economic crisis is ending, but it is finding fewer and fewer companies to victimize.
Filing for Bankruptcy: None. Bank failures this week: First Bank of Idaho (Ketchum, ID), First Bank of Beverly Hills (Calabasas, CA), Michigan Heritage Bank (Farmington Hills, MI), and American Southern Bank (Kennesaw, Georgia)
Economic Indicators Published this Past Week
The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said With WLI growth rising to a 27-week high, U.S. economic growth, which is now at a record low, will soon begin to improve.
ECRI is saying that from a business point of view, the economy will soon bottom. All of my other economic data is saying the same thing. The economy was not destined to be falling forever. We are now approaching the point of economic consolidation where we can start licking our wounds, and hope there will be no further economic kicks to the stomach.
I suspect there will be a slight upward bounce after we hit bottom. But there is a lot of systemic problems which will prevent a typical recovery we have had in the past. I would like to point out that that most economists currently are envisioning little or no GDP growth in 2009.
There is a chance that a secondary downturn happens after we work our way through this economic consolidation phase we are going through. At this point with all the the Fed's and Treasury footwork, it seems everything is under control. Unfortunately, their footwork has most likely mortgaged our recovery. A this point I will be very surprised if a real recovery occurs within the next few years.
If you would like a summary of all government financial indicators, click here.