Friday, September 24, 2010

A Recovery That Looks Like Recession

¹²Market Commentary
A Recovery That Looks Like Recession

By The Comstock Partners Inc. | 23 September 2010

For some strange reason a number of economists and strategists seen on TV and quoted in the press maintain that the exceedingly weak recovery we are now undergoing is really a "normal" or "average" recovery. Nothing could be further from the truth. This is not our opinion, but is based on fact.

We have taken eight major economic indicators and compared them to where we are now as compared to the economic peak 33 months ago. We did the same for the equivalent time periods for the prior two business cycles, using dates designated by the National Bureau of Economic Research. We did not use surveys, opinions or diffusion indexes, but relied on basic economic indicators related to employment, income, consumption, production, housing and capital expenditures.

The results are very clear that the current recovery is far weaker than the prior two expansionary periods, which themselves were below the average for post-war recoveries. The results are outlined as follows. Remember, for each indicator we are showing the change over 31-to-33 months after the cyclical peak for the economy.

1) GDP was up 5.3% and 5.7% at this point in the last two cycles, and is now down 1.3%.

2) New home sales were down 8% and up 31%; now down 42%.

3) Industrial production was up 3% and 1%; now down 7%.

4) Retail sales were up 9% and 12%; now down 4%.

5) Payroll employment was flat and down 2%; now down 5%.

6) Personal income was up 11% and 7%; now up 2%.

7) New orders for durable goods were up 5% and 6%; now down 22%.

8) Initial weekly unemployment claims were down 5% and 9%; now up 34%.

The facts speak for themselves. Moreover, as we discussed in previous comments, even this sub-par recovery has been losing steam in recent months. That is why six months ago the discussion centered on when and how the economic stimulus would be removed, whereas now all of the talk is about another round of quantitative easing (QE2).

Does anyone really think that the probability of QE2 a full 33 months after the economy peaked and 15 months after it bottomed is really saying anything positive for the economy or the stock market? The current market seems based on the same delusionary views that prevailed at the tops of early 2000 and late 2007. In our view the economy will continue to disappoint for some time to come. That is not being discounted at current market levels.


More On The ECRI Leading Indicator

By The Comstock Partners Inc. | 16 September 2010

Last week, toward the end of our comment on consumer deleveraging, we mentioned that the year-over-year change in the ECRI Weekly Leading Indicator had strongly suggested the distinct possibility of recession. In answer to some questions about it, we would like to provide a bit more detail this week.
When we were writing last week the latest release showed the indicator declining 4.11% from a year earlier. We therefore searched the historical data to determine what happened to the economy at other times when the indicator had fallen by that amount or more. We found that over the last 42 years this has occurred seven times, and in all seven instances a recession started shortly before or after the signal. This week we re-examined the data, except that this time we looked for a decline of 3.50% or more, and found that the lead times were even better in four of the seven occurrences.

We can make a number of observations from the data. In all seven instances where the index fell 3.5% or more from a year earlier a recession occurred shortly before or after the signal. There were no occasions where the index declined 3.5% without a recession. In two cases the signal led the recession, in three cases it followed, and two times it occurred in the same month. It ranged between a five-month lead and four-month lag.

The average and median lead times were zero. In all instances the market had peaked before the signal, anywhere from one to ten months, with an average of five and a median of two. We note again that ECRI Managing Director Lakshman Achuthan has not officially called a recession, although he has stated that, based on his indicator, there was more than a 50% chance of one. Although we would not rely on any single indicator to form an opinion, the ECRI Leading Index strongly supports our view as discussed extensively in prior comments that the economy, at best is headed for a severe slowdown, and, at worst, another recession. It also makes it much more likely that the April peak in the S&P 500 will turn out to be the 2010 high, and that the performance of the economy in the period ahead will be highly disappointing to investors looking for a normal economic recovery.

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