Score 3-2 - the Recession Is Over

Several business indicators released this week by the government show business growth over the last three months.

Overall business sales for January 2010 show the third month of YoY increase.

 

The breakdown of the business sales between manufacturing, wholesale, and retail – all of which are improving:

 

Three months of improving performance is a good indicator that business is recovering, and the recession (decline) is over in this sector. To add icing to the cake, advance February 2010 retail sales data was also released this week showing a fourth month of YoY improvement:

 

 

This business expansion is occurring within a depression of sales – as sales levels are in the range of 2006 / 7 levels.

 

Many analysts have stated the inventory declines are over as inventories are in the historical range. This opinion may be true, however I think we have more inventory rationalization left.

 

 

During the last decade, we continued to have a shrinking inventory to sales ratio. The continuing productivity improvements we have been seeing over the last year are due to component production subcontracting, and when coupled with supply chain lead time improvements allow a significant reduction in inventory over past levels.

The optimum model for industry is food / grocery which has a inventory to sales ratio of well under 0.8 (Walmart was 0.53). Inventories cost money. Inventories are normally financed, and financing is falling in the private sector. Business is faced with finding innovative methods of reducing inventory requirements to improve profitability with lower sales.

Sales to inventory levels are an important monitoring tool of the health of a sector. When viewed in a period following an economic contraction, analysts look to inventory levels to stabilize – this validates the sector has bottomed. Further, this bottoming adds to GDP as production replaces inventory depletion. From a business profitability point of view, when inventories are declining the business is consuming fat to generate profits.

Currently, the inventory to sales ratios are probably telling us nothing as we have no clear picture of what the New Normal inventory to sales ratio should be.

Where are we economically?

 

• Our federal government never had a recession and is free to spend and print money as desired. Score 1-0 for not in a recession.

 

• Our state governments are contracting rapidly due to shortage of income. They are at the beginning of their contraction process which will take years to finish rationalizing. Score 1-1 the recession is over.

 

• Investors are riding the gravy train with equities up sharply for a year now. Score 2-1 the recession is over.

 

• Joe Sixpack is still seeing no improvement - JOLTS Data: Signs of Future Growth for Joe Sixpack? andJoe Sixpack The Loser In Private Sector Balance Sheet Improvement. Let us not forget one in five Joes has no job or is underemployed. Score 2-2 the recession is over.

 

• The business sector is growing and we now have a Presidential commission to boost exports - Should the U.S. Really Be Pushing for More Exports? Score 3-2 the recession is over.

So, pretending the economy is like boxing, we can score the recession is over. Unfortunately, from a people point of view, the majority of Americans are simple Joes and are living in a recession.

As Joe Sixpack is the primary driver of the economy, it is hard to visualize the depression ending without a major contribution from his sector..  This was true in the 1930's, and it appears history is repeating.

 

Other Economic Data this Week

Initial unemployment claims for the week ending 06MAR2010 rose slightly using a seasonally adjusted 4 week moving average to remove the noise. But no matter which metric you prefer, the initial unemployment claims numbers are still bouncing around above 450,000 per week. This is looking like the never-ending depression.

 

According to data released by the Mortgage Bankers Association for week ending 05MAR2010, new mortgage originations improved slightly climbing to levels of November 2009. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.01 percent from 4.95 percent, with points decreasing to 0.82 from 0.99 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Bankruptcies this week: U.S. Dry Cleaning Services, EnviroSolutions Holdings

Failed Banks This Week:

 

Economic Forecasts Published this Past Week

 

The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index which continues to fall. Lakshman Achuthan, Managing Director at ECRI stated:

While coincident indicators like retail sales growth have been rising in the wake of last year's strength in WLI growth, they are likely to start easing back by mid-year .

While the index has generally tended downward in 2010, its annualized growth rate component has fallen for 12 straight weeks. It now stands at 13.1 percent, down from 13.7 percent the prior week, marking its lowest reading since July 2009.