Show Me the Recovery

Article written by Steven Hansen, compliments of Seeking Alpha

 Jason: This is one of the best economic analysis articles I have seen drafted in a long time to demonstrate where we are in this downturn event. My opinion is that we are now starting the ascent of the middle of a W shaped event as I wrote about here at TBP in April http://theburningplatform.com/groups/deflation-hyperinflation-debate/discussions/the-depression-will-be-a-w-shaped-formation---suggested-strategy . The inflation already being visibly seen will continue in energy and trickle down effects, while asset values continue to decline. Agree with Steven Hansen's assessment on nearing or at bottom.

Article:

 

I stand accused of being a pessimist. If that means I must accept inconclusive data as a sign of recovery – then I am a pessimist.

Do I think a recovery is coming? I think we are close to an economic bottom for our recession. A recovery to me means a return to the growth line of the past. I do not believe this will happen.

But it does not matter what I think. I have seen things in this Great Recession which I have thought were impossible – and I believe tomorrow holds more impossible events. I will continue to evaluate the data calling a spade a spade.

It came as a surprise that the President of the Kansas City Federal Reserve Thomas Hoenig pretty much sees the “recovery” as I do. Some excerpts from a 03 June 2009 speech.

In estimating the effect on consumption growth if the annual savings rate steadily increased from zero toward 8 percent between now and the end of 2013, the article [an article by Martin Barnes – managing editor of The Bank Credit Analyst – published in May 2009] suggests that consumer spending would grow at an average rate of only 1.3 percent per year. This would be a significant reduction of consumption growth, the slowest since the 1930's. There can be little doubt that such a growth rate would have a significant adjustment effect, even if only temporary, not only on the U.S., but also on the rest of the world.

Starting from where we are today, it is clear that interest rates must rise. As the economy recovers, even at a modest pace, resource demands will begin to increase. At this point, the current level of monetary accommodation will need to be withdrawn to avoid introducing inflationary impulses. Also, with the almost certain adjustments that need to occur in consumption, savings and the rebalancing of imports and exports, I expect there would be additional pressure for interest rates to rise steadily over time. To the extent that these adjustments will require considerable time to complete, unemployment levels, for example, may decline more slowly than anyone wants. If such a set of events occurs, then I also suspect there will be considerable pressure on the central bank to “help out” in easing this adjustment process by keeping interest rates low for an extended period. This happens because people often confuse the establishment of low interest rates – and therefore the creation of money – with the creation of wealth. Sadly, through history, it has been shown repeatedly that excessive reliance on monetary policy as a means to avoid fundamental economic policy choices leads to high inflation and an actual worsening of an economy's long term performance.

The Federal Reserve System over the past nearly two years has more than doubled its balance sheet as it has provided liquidity and monetary stimulus to the U.S. and world economy. In doing so, it has served to staunch the financial and economic panic. But it now must turn to the matter of carefully removing this stimulus at the very time that consumers, businesses and the government will need to fund pent-up demand for goods and service and to meet committed obligations. There is little doubt that such a “coincidence” of needs will place upward pressure on interest rates. Central banks will have little choice but to allow these increases to occur or risk the consequence of higher inflation, perhaps significantly higher. As I said, this process of removing past monetary accommodation will be resisted. However, in contemplating this process and the pain of adjustment, I often emphasize that inflation is the least fair, most regressive and most corrosive tax we can impose on ourselves. It is particularly harsh for low to moderate income citizens.

The bottom line is that we really do not understand what will happen next. Historical economic theories are inoperative in the face of unprecedented economic intervention.

Economic data must be critically analyzed to establish where we are headed not spun to project where we wish we were headed. To date, there is no coincident data which supports a recovery.

Pessimism is warranted as most punters believe we have a lock on recovery.

Additional Economic Events from This Past Week

Import prices increased for the third consecutive month in May 2009 rising 1.3% due entirely to a 8.3% increase in petroleum prices. Export prices rose 0.6% in May with the main contributor being a jump in soybean prices.

Advanced May 2009 Retail and Food sales numbers showed a gain of 0.5% over April but down almost 10% YoY. If you remove gasoline (fuel prices rising) and car sales (heavy discounts) the numbers were unchanged from the previous month. According to Bank of Tokyo – Mitsubishi UFG:

Consumer spending seems to be hanging on by a thread in the second quarter and at least some of the boost in May likely came from the receipt of stimulus checks. But those checks are a one-time payout that disappear come June, which means real consumer spending will likely post a decline of as much as -0.5 percent in the second quarter compared to an increase of +1.5 percent in Q1.

The Treasury reported the 2009 budget deficit to date is $991 billion with the May 2009 deficit $190 billion.

The Federal Reserve has published 1Q 2009 Flow of Funds Accounts. The following summary table showing the change in debt caught my eye. Debt is contracting except at government level. Private sector net worth is at 2004 levels and is still declining (page 124 of this report).

Most of us have heard about Ron Paul's House Resolution 1207 to audit the Federal Reserve, and the Fed's intransigence to the point of hiring a high powered public relations person and the issuing of a new report, entitled Federal Reserve Credit and Liquidity Programs and the Balance Sheet to forestall attempts for an audit.

The Federal Reserve prepares this report as part of its efforts to enhance transparency in connection with its various programs to foster market liquidity and financial stability and to ensure appropriate accountability to the Congress and the public concerning policy actions taken to address the financial crisis.

This report does not even come close to transparency. My tax return was 48 pages, and this report was 24 pages – completely unauditable and loaded with nice graphs and tables without backup.

The Federal Reserve's June 2009 Biege Book (current economic conditions) pretty much reads like last month – close to an economic bottom but no cigar yet. This is a subjective analysis of the market, but as hard data follows several months later – this serves as an early warning flag of changes. As there is really no change in the tone of the commentary, the recession appears to be continuing. The headline summary:

• Manufacturing activity declined or remained at a low level across most Districts.
• Demand for nonfinancial services contracted across Districts reporting on this segment.
• Retail spending remained soft as consumers focused on purchasing less expensive necessities and shied away from buying luxury goods.
• New car purchases remained depressed, with several Districts indicating that tight credit conditions were hampering auto sales.
• Travel and tourism activity also declined.
• A number of Districts reported an uptick in home sales, and many said that new home construction appeared to have stabilized at very low levels.
• Vacancy rates for commercial properties were rising in many parts of the country, while developers are finding financing for new commercial projects increasingly difficult to obtain.
• Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories. Credit conditions remained stringent or tightened further.
• Energy activity continued to weaken across most Districts, and demand for natural resources remained depressed. Planting and growing conditions varied across Districts as did agricultural input costs.
• Labor market conditions continued to be weak across the country, with wages generally remaining flat or falling. Two Districts also mentioned employers’ plans to scale back employee benefit programs. The Atlanta, Chicago, and St. Louis Districts reported that some state and local governments faced hiring freezes or outright job cuts. While manufacturing employment levels remained low, some Districts saw signs that job losses may be moderating.
• With few exceptions, Districts reported that prices at all stages of production were generally flat or falling. The notable exception to the downward pressure on prices was the widely-reported increase in oil prices.

The trade deficit widened slightly in April 2009, with both exports and imports falling. With commodity and energy prices rising in May, the trade deficit will rise in May.

Wholesale trade – sales (down -0.4% MoM / -19.5% YoY) and inventories (down -1.4% MoM / -6.2% YoY) – continued to fall in April 2009. There is a green shoot here in that there is a definite trend in getting the inventory to sales ratios to pre-recessionary levels. However, it will take several years to get inventories in order in this sector. The consolidated March 2009 total business (manufacturing, retail, and wholesalers) shows the same result with both sales and inventories down – with inventories more down than sales.

Economists Barry Eichengreen and Kevin O'Rourke, as part of a broader study comparing our current Great Recession with the Great Depression offered the following charts.

My opinion is that the economic data does not support at this time a depression doomsday scenario. Data in most cases is no longer in free fall, and a significant amount of data indicates a bottoming process. Eichengreen and O'Rourke summarized their study:

The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.

The Conference Board April 2009 Employment Trends Index declined. Even though April employment data has been sliced and diced a month ago, this index's value is that it tries to identify underlying trends. The Conference Board's Senior Economist Gad Levanon take on the data:

The outlook for employment is much less negative than in prior months, but still it is not likely that employment growth will resume before the final quarter of the year. In April, the Employment Trends Index recorded its smallest decline since June 2008, and three of its eight components actually showed an improvement.

Mortgage applications are hitting the wall. The four week moving average of mortgage loan application volume decreased 8.7% (after dropping the same amount last week) and increased 14% compared with the same week one year earlier. The refinance share of mortgage activity decreased slightly to 60% of applications. This is not good news as the trend line on mortgages still is down – and that means the volumes of homes being sold is not rising regardless of any pundits assertions. The average interest rate for 30-year fixed-rate mortgages increased over 30 basis points this week to 5.57%.

The 4 week moving average of initial unemployment claims improved slightly to 621,750. It is too early to say that the ever-so-slightly improvement in the unemployment claims is a trend.

Filing for Bankruptcy: Aviza Technology (AVZA), MagnaChip Semiconductor, Crescent Resources Bank failures this week: none.

Economic Forecasts Published This Past Week

The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said:

With WLI growth rising to its best reading in a year and a half – namely, since the recession began – economic recovery prospects are brightening rapidly.

 

Every six months, the oldest survey of economists (Livingston Survey) is issued. The June 2009 survey results of the median value of the 32 economic forecasters:

Disclosures: long MMFs, PYEMX, EWZ, TBT, PGJ, EWY, DBC, EWA, EWC, EWT, PIN, Physical Gold

I stand accused of being a pessimist. If that means I must accept inconclusive data as a sign of recovery – then I am a pessimist.

Do I think a recovery is coming? I think we are close to an economic bottom for our recession. A recovery to me means a return to the growth line of the past. I do not believe this will happen.

But it does not matter what I think. I have seen things in this Great Recession which I have thought were impossible – and I believe tomorrow holds more impossible events. I will continue to evaluate the data calling a spade a spade.

It came as a surprise that the President of the Kansas City Federal Reserve Thomas Hoenig pretty much sees the “recovery” as I do. Some excerpts from a 03 June 2009 speech.

In estimating the effect on consumption growth if the annual savings rate steadily increased from zero toward 8 percent between now and the end of 2013, the article [an article by Martin Barnes – managing editor of The Bank Credit Analyst – published in May 2009] suggests that consumer spending would grow at an average rate of only 1.3 percent per year. This would be a significant reduction of consumption growth, the slowest since the 1930's. There can be little doubt that such a growth rate would have a significant adjustment effect, even if only temporary, not only on the U.S., but also on the rest of the world.

Starting from where we are today, it is clear that interest rates must rise. As the economy recovers, even at a modest pace, resource demands will begin to increase. At this point, the current level of monetary accommodation will need to be withdrawn to avoid introducing inflationary impulses. Also, with the almost certain adjustments that need to occur in consumption, savings and the rebalancing of imports and exports, I expect there would be additional pressure for interest rates to rise steadily over time. To the extent that these adjustments will require considerable time to complete, unemployment levels, for example, may decline more slowly than anyone wants. If such a set of events occurs, then I also suspect there will be considerable pressure on the central bank to “help out” in easing this adjustment process by keeping interest rates low for an extended period. This happens because people often confuse the establishment of low interest rates – and therefore the creation of money – with the creation of wealth. Sadly, through history, it has been shown repeatedly that excessive reliance on monetary policy as a means to avoid fundamental economic policy choices leads to high inflation and an actual worsening of an economy's long term performance.

The Federal Reserve System over the past nearly two years has more than doubled its balance sheet as it has provided liquidity and monetary stimulus to the U.S. and world economy. In doing so, it has served to staunch the financial and economic panic. But it now must turn to the matter of carefully removing this stimulus at the very time that consumers, businesses and the government will need to fund pent-up demand for goods and service and to meet committed obligations. There is little doubt that such a “coincidence” of needs will place upward pressure on interest rates. Central banks will have little choice but to allow these increases to occur or risk the consequence of higher inflation, perhaps significantly higher. As I said, this process of removing past monetary accommodation will be resisted. However, in contemplating this process and the pain of adjustment, I often emphasize that inflation is the least fair, most regressive and most corrosive tax we can impose on ourselves. It is particularly harsh for low to moderate income citizens.

The bottom line is that we really do not understand what will happen next. Historical economic theories are inoperative in the face of unprecedented economic intervention.

Economic data must be critically analyzed to establish where we are headed not spun to project where we wish we were headed. To date, there is no coincident data which supports a recovery.

Pessimism is warranted as most punters believe we have a lock on recovery.

Additional Economic Events from This Past Week

Import prices increased for the third consecutive month in May 2009 rising 1.3% due entirely to a 8.3% increase in petroleum prices. Export prices rose 0.6% in May with the main contributor being a jump in soybean prices.

Advanced May 2009 Retail and Food sales numbers showed a gain of 0.5% over April but down almost 10% YoY. If you remove gasoline (fuel prices rising) and car sales (heavy discounts) the numbers were unchanged from the previous month. According to Bank of Tokyo – Mitsubishi UFG:

Consumer spending seems to be hanging on by a thread in the second quarter and at least some of the boost in May likely came from the receipt of stimulus checks. But those checks are a one-time payout that disappear come June, which means real consumer spending will likely post a decline of as much as -0.5 percent in the second quarter compared to an increase of +1.5 percent in Q1.

The Treasury reported the 2009 budget deficit to date is $991 billion with the May 2009 deficit $190 billion.

The Federal Reserve has published 1Q 2009 Flow of Funds Accounts. The following summary table showing the change in debt caught my eye. Debt is contracting except at government level. Private sector net worth is at 2004 levels and is still declining (page 124 of this report).

Most of us have heard about Ron Paul's House Resolution 1207 to audit the Federal Reserve, and the Fed's intransigence to the point of hiring a high powered public relations person and the issuing of a new report, entitled Federal Reserve Credit and Liquidity Programs and the Balance Sheet to forestall attempts for an audit.

The Federal Reserve prepares this report as part of its efforts to enhance transparency in connection with its various programs to foster market liquidity and financial stability and to ensure appropriate accountability to the Congress and the public concerning policy actions taken to address the financial crisis.

This report does not even come close to transparency. My tax return was 48 pages, and this report was 24 pages – completely unauditable and loaded with nice graphs and tables without backup.

The Federal Reserve's June 2009 Biege Book (current economic conditions) pretty much reads like last month – close to an economic bottom but no cigar yet. This is a subjective analysis of the market, but as hard data follows several months later – this serves as an early warning flag of changes. As there is really no change in the tone of the commentary, the recession appears to be continuing. The headline summary:

• Manufacturing activity declined or remained at a low level across most Districts.
• Demand for nonfinancial services contracted across Districts reporting on this segment.
• Retail spending remained soft as consumers focused on purchasing less expensive necessities and shied away from buying luxury goods.
• New car purchases remained depressed, with several Districts indicating that tight credit conditions were hampering auto sales.
• Travel and tourism activity also declined.
• A number of Districts reported an uptick in home sales, and many said that new home construction appeared to have stabilized at very low levels.
• Vacancy rates for commercial properties were rising in many parts of the country, while developers are finding financing for new commercial projects increasingly difficult to obtain.
• Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories. Credit conditions remained stringent or tightened further.
• Energy activity continued to weaken across most Districts, and demand for natural resources remained depressed. Planting and growing conditions varied across Districts as did agricultural input costs.
• Labor market conditions continued to be weak across the country, with wages generally remaining flat or falling. Two Districts also mentioned employers’ plans to scale back employee benefit programs. The Atlanta, Chicago, and St. Louis Districts reported that some state and local governments faced hiring freezes or outright job cuts. While manufacturing employment levels remained low, some Districts saw signs that job losses may be moderating.
• With few exceptions, Districts reported that prices at all stages of production were generally flat or falling. The notable exception to the downward pressure on prices was the widely-reported increase in oil prices.

The trade deficit widened slightly in April 2009, with both exports and imports falling. With commodity and energy prices rising in May, the trade deficit will rise in May.

Wholesale trade – sales (down -0.4% MoM / -19.5% YoY) and inventories (down -1.4% MoM / -6.2% YoY) – continued to fall in April 2009. There is a green shoot here in that there is a definite trend in getting the inventory to sales ratios to pre-recessionary levels. However, it will take several years to get inventories in order in this sector. The consolidated March 2009 total business (manufacturing, retail, and wholesalers) shows the same result with both sales and inventories down – with inventories more down than sales.

Economists Barry Eichengreen and Kevin O'Rourke, as part of a broader study comparing our current Great Recession with the Great Depression offered the following charts.

My opinion is that the economic data does not support at this time a depression doomsday scenario. Data in most cases is no longer in free fall, and a significant amount of data indicates a bottoming process. Eichengreen and O'Rourke summarized their study:

The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.

The Conference Board April 2009 Employment Trends Index declined. Even though April employment data has been sliced and diced a month ago, this index's value is that it tries to identify underlying trends. The Conference Board's Senior Economist Gad Levanon take on the data:

The outlook for employment is much less negative than in prior months, but still it is not likely that employment growth will resume before the final quarter of the year. In April, the Employment Trends Index recorded its smallest decline since June 2008, and three of its eight components actually showed an improvement.

Mortgage applications are hitting the wall. The four week moving average of mortgage loan application volume decreased 8.7% (after dropping the same amount last week) and increased 14% compared with the same week one year earlier. The refinance share of mortgage activity decreased slightly to 60% of applications. This is not good news as the trend line on mortgages still is down – and that means the volumes of homes being sold is not rising regardless of any pundits assertions. The average interest rate for 30-year fixed-rate mortgages increased over 30 basis points this week to 5.57%.

The 4 week moving average of initial unemployment claims improved slightly to 621,750. It is too early to say that the ever-so-slightly improvement in the unemployment claims is a trend.

Filing for Bankruptcy: Aviza Technology (AVZA), MagnaChip Semiconductor, Crescent Resources Bank failures this week: none.

Economic Forecasts Published This Past Week

The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said:

With WLI growth rising to its best reading in a year and a half – namely, since the recession began – economic recovery prospects are brightening rapidly.

 

Every six months, the oldest survey of economists (Livingston Survey) is issued. The June 2009 survey results of the median value of the 32 economic forecasters:

 

Disclosures: long MMFs, PYEMX, EWZ, TBT, PGJ, EWY, DBC, EWA, EWC, EWT, PIN, Physical Gold