Monthly Archives: April 2010

Updates On Economic Indicators

Here are various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The April Chicago Fed National Activity Index (pdf) (last updated 4/29/10)

The Consumer Metrics Institute’s Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

an excerpt dated 4/29/10:

“The April update of the USA TODAY/IHS Global Insight Economic Outlook Index shows moderate growth in real GDP, at a six-month annualized growth rate, through late summer. The forecasted April growth rate of 3.6% is expected to slow to 3.0% – 3.1% for June through September. Tight credit, high debt burdens and the government’s monetary and fiscal stimulus programs coming to an end will temper consumer spending, keeping the growth rate solid but moderate.”

The ECRI WLI (Weekly Leading Index) : Last updated 4/16/10:

The WLI is at 133.0

Fortune’s Big Picture Index:

-I was unable to locate updated values for this index-

The Dow Jones ESI (Economic Sentiment Indicator):

As of 3/31/10 the Indicator was at 39.4.  An excerpt from the release:

“”Although the rise is modest, it is better than the stagnation of recent months,” Alen Mattich, Dow Jones Newswires “Money Talks” columnist, said. “If repeated in April it could indicate that the economy is starting to haul itself slowly upwards again.”

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index

Here is the latest chart, updated through 4-24-10:

The Conference Board LEI (Leading Economic Index) and CEI (Coincident Economic Index): (pdf)

As of April 19, the LEI was at 109.6 for March, and the CEI was at 100.2 for March.  The chart shows a continuing large disparity between the two measures.

From the Press Release: “Adds Ken Goldstein, economist at The Conference Board: “The indicators point to a slow recovery that should continue over the next few months.  The leading, coincident and lagging series are rising.  Strength of demand remains the big question going forward.  Improvements in employment and income will be the key factors in whether consumers push the recovery on a stronger path.”

“New Financial Conditions Index”

I had a post of this index on 3/10/10.  There is currently no updated value available.

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

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SPX at 1206.26 as this post is written

Four Confidence Survey Charts

Here are four charts reflecting confidence from the SentimenTrader.com site.  They provide a longer-term historical timeframe, which I have found to be rare.

Here are the charts.  Each is plotted vs. the S&P500:

Conference Board Consumer Confidence, last updated 4/27/10:

University of Michigan Consumer Confidence, last updated 4/16/10:

ABC News Consumer Comfort Index, last updated 4/16/10:

NFIB Small Business Optimism, last updated 4/16/10:

The above NFIB chart is particularly useful in conjunction with the April 15 post that discussed the latest NFIB results.

The four above charts certainly seem to indicate that “this time is different” – at least from the perspective of “confidence.”

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SPX at 1205.20 as this post is written

Home Prices Vs. Gold

On April 23, chartoftheday.com had an interesting chart, shown below, that compares the median home price vs. the price of Gold:

Traditionally, houses have been viewed as “hard assets.”  However, as one can see above, their recent (from a long-term historical perspective) price pattern seems more geared to that of a “paper asset” – i.e. strong performance during the ’80s and ’90s, while significantly underperforming Gold for roughly 7 years.

There are many other observations and interpretations that can be made from this ratio as well.  It certainly “frames” home prices in a different light, especially from an investment standpoint.

Going forward, it will be interesting to see how this ratio evolves…

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My previous posts on Gold can be found under the “Gold” tag.

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SPX at 1189.38 as this post is written

Two Quotes From Alan Greenspan

As an extension of the last post concerning bubbles, here are two of Alan Greenspan’s past comments that I find particularly relevant given our current environment:

This is from a September 26, 2005 speech he gave in which he speaks about how negative “shocks” may impact the economy.  I find this quote interesting as it is an example of, among other things, how one can overlook the severity of embedded risks in a bubble environment:

“How significant and disruptive such adjustments turn out to be is an open question. Nonetheless, as I have pointed out in previous commentary, their economic effect will, to a large extent, depend on the flexibility inherent in our economy. In a highly flexible economy, such as the United States, shocks should be largely absorbed by changes in prices, interest rates, and exchange rates, rather than by wrenching declines in output and employment, a more likely outcome in a less flexible economy.”

This next quote is from his “The Crisis” paper, p. 45:

“‘…history has not dealt kindly with the aftermath of protracted periods of low risk premiums.'”

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SPX at 1217.28 as this post is written

Mishkin’s Previous Comments On Bubbles

On April 8 I commented upon William C. Dudley’s “Asset Bubbles” speech.

In that speech, he refers to Frederic Mishkin’s speech of May 15, 2008.  It should also be noted that Mishkin offered similar thoughts in a Financial Times op-ed of November 9, 2009.

There is much I can comment about in each of Mishkin’s commentaries about bubbles.  For now, I will limit myself to the following:

Here is a passage from the aforementioned 2008 speech which I found most interesting:

“…monetary policy should not try to prick possible asset price bubbles, even when they are of the variety that can contribute to financial instability. Just as doctors take the Hippocratic oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good. Instead, monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation, then adjusting policy as required to achieve maximum sustainable employment and price stability. This monetary policy response should prove sufficient to prevent adverse macroeconomic effects of some types of asset price bubbles.”

I interpret this (and other points in his speech) as (in effect) saying that monetary policy shouldn’t be used to prevent bubbles, but it should be used to “clean up the mess” should they “pop.”

This “mindset” seems to be prevalent now among policy makers.

I believe this overall “treatment” of bubbles is frightfully perilous, has already created immense damage, and will end very badly.

It appears as if not only are we (as a nation) downplaying the risks of bubbles, but also are continually unable to identify their existence.

As I wrote on March 29: “I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about….While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity.”

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SPX at 1217.28 as this post is written

Pricing In Our Current Environment

Pricing is a very complex discipline even during periods of economic growth and stability.  With the onset of increased economic uncertainty and volatility over the last few years, pricing’s complexity has significantly grown.

Of course, it is impossible to characterize all firms as having the same pricing issues, as each industry and firm has a different set of circumstances.  As well, any substantive discussion of pricing, especially in today’s economic environment, would be exceedingly lengthy and complex.  However, there appears to be enough commonality among past and future pricing issues as to allow for some general comments.

Many aspects of today’s economic environment are negatively impacting pricing and profitability.  Among these are outsized excess capacity and generally weak, if any, revenue growth.  As well, many firms are encountering customers unwilling, and/or unable, to pay previously acceptable prices.  Inventory issues (mentioned in the last post), forecasting complexities (discussed in this article), and recent steadily increasing commodity costs further complicate the situation.  While many larger firms have been reporting strong profits, much of this profitability has been attained through cost-cutting and other related measures.  As such, it is not necessarily profitability derived through “pricing power” and increased gross margins.

Many firms have responded to the current economic environment by reducing prices.  Much of the heavy discounting and promotional activity appears rather indiscriminate in nature.

Although cutting prices is perhaps the easiest way to attain revenues, this tactic likely holds even greater danger now than in the past.   Gauging the effectiveness of pricing decisions is often complex, especially when viewed in a strategic sense encompassing multiple time horizons.  While pricing decisions made now can appear proper, continued economic volatility and uncertainty can serve to undermine the effectiveness of such pricing.  In essence, what may appear to be a proper pricing decision now may radically change with changing economic conditions.  The odds of inadvertently managing a firm into some type of adverse pricing situation (or trap) like a “price war” or other various profitability-depleting scenarios is increased with greater economic uncertainty as well as customers who are increasingly price sensitive.

Although the current economic environment holds significant peril for pricing and profitability, there is upside to the situation.  Those firms that can effectively manage pricing in such an economic environment stand to gain significant competitive and strategic advantage across many different business functions – not to mention significantly increasing revenue and profitability when viewed against a scenario of ineffective pricing management.

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SPX at 1208.67 as this post is written

Inventories

One of the key questions with regard to economic activity is the extent to which it is being driven by inventory replacement.   As seen in the CalculatedRisk blog of March 12, “the contribution to GDP in Q4 from ‘Change in private inventories’ was 3.88 of the 5.9 percent annualized increase in GDP.”

Here are two charts that give a historical perspective…

This one is from the aforementioned CalculatedRisk post of March 12, in which he states: “…clearly most of the inventory adjustment is over.” :

Here is another look at inventories, from ContraryInvestor.com of April 15, 2010, in which it says “…clearly most of the inventory adjustment is over.”:

Another key question is whether current inventory levels are appropriate given the future sales environment.

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SPX at 1192.38 as this post is written

Recession Measures – Two Charts

As an additional note to the last post, on April 12 the CalculatedRisk blog had an interesting post titled “Recession Measures.” In it, he discussed key measures that the NBER uses to determine recoveries.

In the post he shows four charts, constructed in a “percent of peak” fashion.  Here are the two that I find most notable (the other two not shown: employment and GDP/GDI):

Industrial Production, Percent of Previous Peak:

Real Personal Income Less Transfer Payments, Percent of Previous Peak:

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SPX at 1207.17 as this post is written

NBER BCDC Member Robert J. Gordon Comments

On April 12 Robert J. Gordon, a member of the NBER Business Cycle Dating Committee, wrote of the reasons why he believes that “It is obvious that the recession is over.”

There are many noteworthy items in his article, and I could extensively comment on his arguments.  Needless to say I disagree, fully or partially, on many of his points.

I will highlight four items.  First, I found this to be interesting, and it underscores the initial severity of the downturn:

“There was a powerful economic downdraft that started with the failure of Lehman in September 2008 and extended into the winter and spring of 2009. Everybody panicked. Firms laid off employees by the millions, and real gross private domestic investment declined between 2008:Q3 and 2009:Q2 at an unprecedented annual rate of -41.6 percent, even faster than at any time during the Great Depression.”

Second, this is highly notable:

“Thus the American economy is enjoying strong upward momentum that is evident every day in the announcements of retail sales, service sector production, and almost everything else. There are no negatives in the actual data,  but rather the negatives reside in doomsayer worries that consumers are too weak to spend or that the economy will collapse after the Obama stimulus dollars have been spent.”

I strongly disagree with this above statement.  While there have been signs of “strong upward momentum” – as he suggests – there are also many signs of pronounced weakness, broadly seen across many measures.  Various posts on this blog discuss these measures and weaknesses.

Third, he states, “A double dip, i.e., two quarters with negative real GDP growth, is extremely implausible at any time over the next year.”

Fourth, he states, “There are no plausible shocks that would suddenly push real GDP below its trough value of 2009:Q2 in the next year or two.”

Those familiar with this blog know that I view this purported economic recovery as unsustainable, due to a variety of factors.  Needless to say, I don’t agree, for a variety of reasons, with his two above assertions concerning the durability of economic growth.

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SPX at 1192.13 as this post is written

Three Unemployment Charts

This post provides updated charts to the “Three Unemployment Charts” post of January 12.

As I have commented previously, most notably in an October 6 post, in my opinion the official methodologies used to measure the various job loss and unemployment statistics do not provide an accurate depiction.  However, I believe that the following charts provide an interesting perspective of the officially-stated  employment situation from a long-term historical perspective.

The first two charts are from the St. Louis Fed site.  Here is the Median Duration of Unemployment:

Here is the chart for Unemployed 27 Weeks and Over:

Lastly, a chart from the Minneapolis Federal Reserve site.  This shows the employment situation vs. that of previous recessions (as characterized by severity):

As depicted by these charts, our unemployment problem is severe.  Unfortunately, there do not appear to be any “easy” solutions.

Back in July 2009 I wrote a series of blog posts titled “Why Aren’t Companies Hiring?”

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SPX at 1192.13 as this post is written