FMX | Connect – www.fmxconnect.com - (Reported 8/16/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
DOUBLE-DIP OR SINGLE-SCOOP?
A few readers have taken us to task for our reliance on the U.S. Household Employment Survey given that the steep declines in the past few months were skewed by the removal of the Census workers from the data. There is indeed some truth to that criticism but we went back and adjusted the Household employment numbers by netting out the federal government segment from the Payroll survey, the results are the same. Excluding non-postal government workers, Household employment fell 446k in May, 80k in June and by 11k in July. That is a total loss of 537k and again, history shows that when the household employment is down three months in a row, we are already in recession or about to head into one 98% of the time. That has not changed and still applies to the current backdrop.
What is playing a key role in dragging these numbers lower is not the reversal of the Census hirings as much as the steady declines we are seeing in self-employment — the “entrepreneurial” part of the jobs picture. The number of job losses here has exceeded 130,000 in just the past three months and, at 9.64 million, the level is down to the lowest it has been since November 1987.
The ECRI leading index did improve again in the latest week, to -9.8%, but the die has been cast and the damage has been done. It has never before hit these negative levels without the economy heading into a downturn. In addition, the Chicago Fed’s National Activity Index never gave the green light that the recession that began in December 2007 ever really ended despite the inventory pickup and concomitant manufacturing rebound we saw. This may be why the Nation Bureau of Economic Research (NBER) has dragged its heels in making any proclamation.
As former Labor Secretary Robert Reich said over the weekend: “It’s nonsense to think of the economy heading downward again into a double-dip recession when most Americans never emerged from the first dip. We're still in one long Big Dipper.”
We would tend to agree with this assessment. Others are beginning to fall into line even though this remains a minority view — see Double Dip? A Tipping Point May Be Near on page 4 of the Sunday NYT. Even the folks at the ECRI are starting to sound a bit nervous after months of dismissing the forecasting relevance of their own leading index — Lakshman said “We are at a very critical moment in the business cycle” though he added that he would not know until the fall as to whether “we’re dipping back into recession”?
Of course, maybe this is a single scoop and not a double dip — the recession never ended and the bounce in GDP off last year’s lows was merely noise along a downward trend. Is a reflexive rebound, a brief response to tremendous stimulus, really the end of the prior down-cycle? Or is it part of a continuum — all of this from the mild start to the recession in early 2008, to the temporary stabilization of the Bush tax rebates in early 2008, to the steep decline in late 2008, to the detonation of early 2009 and then the mild recovery phase of the second of last year to the first quarter of 2010, to the sudden slowing in the second quarter and what appears to be stagnation this quarter and likely contraction next quarter not all part of the same cycle? We don’t envy how the NBER ultimately deals with this, but then again, maybe it is only an academic exercise. The reality is that the equity market and other risk assets believed the recession ended through much of last year and went on to price in a sustainable and vigorous recovery as everything peaked out in early spring, and the history books cannot be re-written. Right or wrong, the markets priced in something really good even if we never did buy into the “sustainability” story. It was akin to the premature 50% rally off the interim lows in the opening months of 1930 — the huge rally that nobody seems to recall. Already, the memory of the 80% dead-cat bounce this time around is starting to fade.
And look at how earnings season is now turning out. The good stuff got out of the way at the beginning — the industrials benefitted the most from the rebound in manufacturing, which seems to have peaked out early in the second quarter. The mini-inventory cycle that played a key role in the profits recovery, not to mention critical changes to how the banks could account for loan losses, looks to be over. But it did have an impact. Now we are getting the earnings of companies who rely on domestic demand, like the retailers, and let’s face it, things don’t look too good.
Indeed, the markets are beginning to sniff something out and the smell isn’t so good. The equity market was so oversold going into last Friday’s action that a technical rally should have been baked in the cake. The fact that the major averages faltered in such a deeply oversold market is not good news for the bulls. The bond market is really telling the tale as the long Treasury has generated a total return of 17% so far this year while the S&P 500 has triggered a loss of 2%. In fact, the 10-year note yield closed the week at a new low of 2.67% — the lowest since March 20, 2009 when the stock market was still struggling around the 12-year lows at the time. The long bond yield is all the way down to 3.86%, the lowest it has been since April 27, 2009. The big bull flattener in bonds seems to be starting. No doubt there is always the risk of some countertrend reversal in yield activity after the monumental rally we have seen in the bond market, but the charts don’t lie and the case they present is one of a major downward trend in interest rates right out the curve.
Bonds do not generally outperform equities to such an extent without a pronounced slowing in economic activity or a recession coming down the pike.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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