March 9, 2010

10 Graphic Reasons Not To Celebrate The Recovery Just Yet

The Obama recovery? Not so fast. There's still a lot of fear out there about a double dip recession, and with good reason. People tend to focus on the unemployment rate as an indicator but that is considered a lagging indicator of economic activity, not a leading indicator. The other indicator people look to is GDP. The problem with GDP is that it can be distorted by things like a stimulus fund bubble.

Is there no recovery coming? I'm not saying that I'm saying that while there are indicators that a recovery has started, there are also indicators that the recovery is at least susceptible to some negative factors and potentially, going to stall. Here are 10 graphic reasons not to celebrate the recovery just yet.

In no particular order.

(1) The Baltic Dry Index, which tracks worldwide international shipping prices of various dry bulk cargo. It provides an insightful indicator of the volume of global trade, without political concerns factored into it.  In other words, the BDI is a good leading indicator for economic growth and production.

Despite the touted recovery, the and the growth of the BDI off of its lows, the BDI has clearly not recovered to it's post crash levels.  Worldwide trade is increasing only modestly.  There will be no rush return of demand in the near term.

(2) Auto industry sales appear to have spiked during the cash for clunkers program, as predicted, and that spike has fixed the demand to a particular period.  Future recovery of the auto market has been hampered by the short term auto bubble of the cash for clunkers program.

The precipitous drop off in demand has not yet returned, and any return particularly in total cars and light trucks has a long road ahead of it (pardon the pun).

(3)  Spending in areas other than autos is another good place to look for economic recovery.  Two thirds of the American economy is based on consumer demand.  Non-defense capital goods shipments are a good indicator of economic activity.  The chart below indicates that the recovery while appearing to be moving in the right direction, is well below it's pre-recession levels.  That sort of level of recovery, looking at the previous broader cycle between 1999 and 2007 would seemingly require a longer cyclical time frame and still has a long way to go.

Further, the seemingly quick turnaround clearly is as a result of the effects of stimulus spending and that spending will not continue unabated.  And despite that stimulus, the 'recovery' would seem incomplete as far as spending goes.

(4) A big part of the economy is housing starts.   How are housing starts in Obama's recovery?

Bubble or not, housing starts are well below even 1999 levels.  The construction industry may have bottomed out, but there is a huge amount of upside still needed for it to be considered in recovery.

(5)  Of course construction is indicative of future sales, but more immediate is existing sales.  Single family home sales, both existing and new, are also far from recovered.

(6)  But not all construction is residential.  Private non-residential construction looks like 2006 and is trending down.  So that doesn't appear to be of much help in the near term.

(7)  Of course consumer spending is highly dependent on the Consumer Confidence Index.

That's down this month, 'unexpectedly'.  If consumer confidence is down, consumers are less likely to spend in the future.  They're more likely to save.

(8)  Personal Savings Rates are still on the upswing.  In a consumer based economy, savings mean less spending.  Less spending means less GDP and that in turn means less recovery.  Or more recession.

Look again - that's trending upward.  Now savings aren't necessarily a bad thing.  Savings and investment in research and development are good things long term for the country.  But right now, they represent a recessionary pressure.

(9)  Of course savings rates can increase without any deleterious effect on the economy if real personal disposable income is rising.  If your disposable income is rising you can save more and continue to spend (or some mix of the two).  Oops:
The rate of change real personal disposable income year over year is also dropping.  People not only are saving more, but also have less available to spend.  Why less?  

(10) Because despite the fact that disposable income is unchanged versus last year, inflation isn't.  Inflation, inevitably given the government borrow print and spend mentality, looks like it has started its comeback.

I don't want to start the stagflation alarm bells just yet, but it is a risk.  High unemployment, high inflation and high interest rates.  Combined that makes not for a bad recovery, but a potential for a double dip recession.

Don't celebrate a recovery just yet.  It isn't doomed, but it most certainly isn't guaranteed.

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