Paper Economy
This chart shows the “minimum” reported recession probabilities in black since 1967, the “maximum” reported probabilities in red and the “actual” reported series in light blue. Yellow bands are recessions. (SoldAtTheTop)
Recession is a real probability
Last week I reported on a relatively new recession probability indicator (… the “markov switching” series recently introduced to the Fed FRED/Blytic) that was giving a pretty clear, though preliminary, indication of probable recession.
Since then, there has been quite a bit of scuttlebutt around the econo-blogesphere (here and here) about this series and the validity of its present value.
While I agree that this series’ nearly 20% indication of recession is VERY preliminary (as I noted in my original post), I would like to respectfully take issue with the analysis offered by some of the “debunkers” of this recession warning as well as add some further perspective on the series in general.
First, while Professors Chauvet and Piger suggested (in the original methodology paper) that a probability value at or above 80% for a period of three consecutive months was required for a positive indication of recession, I would like to point out that looking at the “minimum” and “maximum” extract of all reported values for this series indicates pretty clearly that the current 20% is not likely to be completely “revised away” as some would suggest.
Further, looking EXCLUSIVELY at the “maximum” reported values clearly shows that there is cause for concern in so much as NEVER has the “maximum” series indicated a value at or above 20% that a recession hasn’t followed within 6-8 months.
In order to determine the “minimum” and “maximum” series, I simply extracted the MIN and MAX values from every reported period (from Professor Piger’s complete history of this series) for this series thus creating two additional series, one containing all the lowest reported values for each period and one containing all the highest reported values (you can download my spreadsheet here).
This chart shows an annual 'term spread' probability indicator for US recessions over the past quarter century. According to this method, the odds of a recession are increasing, but only to 5.9 percent. (SoldAtTheTop)
How likely is another US recession?
While it is well know that “all good things must come to an end”, on “mediocre things”, we are totally in the dark, adrift without any wise or memorable turn of phrase to help lend a guide.
To that end, and given the current state of affairs, I think now is about as good a time as any to start directly tracking the probability of recession.
First, let’s remember that while the NBER makes the official call of both the “peak” of a business cycle expansion and the “trough” of the subsequent recession, their officiating is delayed to say the least.
For a more “real time” assessment of the prospects of recession, various methods of number crunching have been formulated to distill out a basic probability assessment from several underlying macro series data sets.
First, there is the popular yield-curve based “Term Spread” probability method.
Spearheaded by economist Professor Arturo Estrella of the Rensselaer Polytechnic Institute, this method derives a probability of recession from the spread between long and short yields (10-year and 3-month) and is by all accounts the standard for recession probability forecasting.
The latest data indicates that the probability for recession is starting to rise with a September 2013 probability (the probability that there will be a recession by that date) of 5.9%.
Keep in mind that a positive indication using this method would require this probability to reach 30% so while the probability is clearly rising, the current probability is still quite low.
In 2008, Marcelle Chauvet of the University of California and Jeremy Piger of the University of Oregon published a paper titled “A Comparison of the Real-Time Performance of Business Cycle Dating Methods” which outlined two novel statistical methods (most notably the markov-switching method) for distilling recessionary turning points out of the very same macro data series that the NBER uses to make it’s cycle assessments.
As of August (the latest data… there is a lag), the markov-switching method is indicating a 19.6% chance of recession, a notable finding to say the least.
In fact, a probability this high has positively indicated every recession since 1967, (the extent of this probability series) an ominous harbinger for sure, but before you head for the window, remember that this probability series is HIGHLY revised as a result of the revisions made to the underlying macro series.
As always, it will take more time to determine for sure whether the current mediocre “expansion” is drawing to a close, but looking at both of these sensitive indicators, one could clearly argue that the probability of that prospect is on the rise.
This chart shows total continued unemployment claims since 2010. Jobless claims dropped by 8,000 since the prior week. (SoldAtTheTop)
Jobless claims drop by 8,000
Today’s jobless claims report indicated a decline to both initial and continued jobless claims while initial claims continued to trend below the closely watched 400K level.
Seasonally adjusted “initial” unemployment claims declined by 8,000 to 355,000 claims from a revised 363,000 claims for the prior week while seasonally adjusted “continued” claims dropped to 3.127 million resulting in an “insured” unemployment rate of 2.4%.
Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls. ( Continue… )
This graph shows the Institute for Supply Management's Business Activity Index since 2006. (SoldAtTheTop)
Service sector slows in October
Today, the Institute for Supply Management released their latest Non-Manufacturing Report on Business indicating that service related business activity was slowed in October with the business activity component weakening and the overall non-manufacturing index declining to 54.2 from 55.1 in September.
At 55.4 the business activity index declined a notable 7.51% since September but remained 3.94% above the level seen a year earlier.
This month, service industry respondents are sounding mixed reporting "sluggish" conditions but steady activity:
"Business with markets and customers we serve remains strong." (Management of Companies & Support Services)
"Business is steady, with good fourth quarter expected." (Information)
"The sluggish pace of economic recovery coupled with rapid increases in gas prices on the West Coast continue to drag down customer traffic and discretionary spending. Levels remain well below last year." (Arts, Entertainment & Recreation)
"Ongoing concerns about healthcare reform; reluctance to expand or hire." (Health Care & Social Assistance)
"Outlook is positive yet still guarded. Clients have some pent-up demand that they are acting on with short-term contracts." (Professional, Scientific & Technical Services)
"More companies seeking relief from fuel increases." (Public Administration)
This graph shows total private non-farm payrolls since 2002. Private employers added 158,000 jobs in October 2012. (SoldAtTheTop)
Private employers add 158,000 jobs in October
Private staffing and business services firm ADP released the latest installment of their National Employment Report Thursday indicating that the situation for private employment in the U.S. improved in October as private employers added 158,000 jobs in the month bringing the total employment level 1.67% above the level seen in October 2012.
It's important to note that with this months release, ADP has teamed up with Moody's Analytics and completely revised all their jobs data in an effort to provide a more precise depiction of private job market dynamics as well as offer additional breakouts not found in prior releases.
Perusing the rest of the data in the ADP dataset you can see the the economy is currently showing the most growth for small to mid-sized service providing jobs with goods-producing jobs remaining near trough levels.
Look for Friday’s BLS Employment Situation Report to likely show somewhat similar trends.
This graph shows total continued unemployment claims since 2010. Seasonally adjusted continued jobless claims dropped to 3.263 million since the prior week. (SoldAtTheTop)
Jobless claims fall by 9,000
Today’s jobless claims report indicated a decline in initial jobless claims while continued unemployment claims remained flat as seasonally adjusted initial claims trended just below the closely watched 400K level.
Seasonally adjusted “initial” unemployment claims declined by 9,000 to 363,000 claims from a revised 372,000 claims for the prior week while seasonally adjusted “continued” claims dropped to 3.263 million resulting in an “insured” unemployment rate of 2.5%.
Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.
Currently there are some 2.13 million people receiving federal “extended” unemployment benefits.
Taken together with the latest 2.81 million people that are currently counted as receiving traditional continued unemployment benefits, there are 4.95 million people on state and federal unemployment rolls.
This graph shows Hong Kong residential property prices since 1997. (SoldAtTheTop)
Residential prices on the rise in Hong Kong
Recently, the University of Hong Kong released their Hong Kong Residential Real Estate Series (HKU-REIS) indicating that, in July, the price of residential properties increased 0.19% since June and climbed 7.54% above the level seen in July 2011.
The HKU-REIS is a set of property price indices constructed monthly using a “modified” repeat-sale methodology similar to that of the S&P/Case-Shiller indices yet suited to the Hong Kong property market.
This graph shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006. (SoldAtTheTop)
Mortgage rates up from last week
The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages as well as the volume of both purchase and refinance applications.
The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.
The latest data is showing that the average rate for a 30 year fixed rate mortgage (from FHA and conforming GSE data) increased 1 basis point to 3.53% since last week while the purchase application volume increased 1% and the refinance application volume declined 6% over the same period.
Clearly, the Federal Reserve's QE3 announcement and implementation has had a notable effect on mortgage rates in recent weeks continuing to lift refinance application activity and possibly helping to establish a base of sorts to purchase applications.
The question is though, if the Fed is stimulating this activity by forcing artificially low rates, what would these trends look like if prevailing rates were based on a more fundamental market function?
This graph tracks the S&P/Case-Shiller Composite-10 Index since 2000. The Composite-10 home prices index increased 1.35 percent in August 2012 compared to August 2011. (SoldAtTheTop)
Home prices increase in August
The latest release of the S&P/Case-Shiller (CSI) home price indices for August reported that the non-seasonally adjusted Composite-10 price index increased 0.87% since August while the Composite-20 index increased 0.88% over the same period.
The latest CSI data clearly indicates that the price trends continued to experience a lift through the typically more active spring-summer season and as I recently pointed out, the more timely and less distorted Radar Logic RPX data while continuing to capture rising prices, is starting to see a leveling off of the trend as the data moves through the summer transactions and heads for the typical declines seen in late-summer and fall.
The 10-city composite index increased 1.35% as compared to August 2011 while the 20-city composite increased 2.03% over the same period.
Both of the broad composite indices show significant peak declines slumping -29.90% for the 10-city national index and -29.37% for the 20-city national index on a peak comparison basis.
To better visualize today’s results use Blytic.com to view the full release.
This graph shows real gross domestic product since 1999. On a year-over-year basis real GDP increased 2.32 percent in Q3 2012. (SoldAtTheTop)
GDP increases 2 percent in Q3
Today, the Bureau of Economic Analysis (BEA) released their first "estimate" of the Q3 2012 GDP reportshowing that the economy continued to expand with real GDP increasing at a tepid annualized rate of 2.0% from Q2 2012.
On a year-over-year basis real GDP increased 2.32% while the quarter-to-quarter non-annualized percent change was 0.50%.
The latest quarterly results indicate that the most notable source of weakness in the economy came from declining exports of goods and services, a notable decline private farm inventories and weakness in non-residential structures.
Government spending worked to buoy GDP with a 13% quarter-on-quarter increase in non-defense spending while a decline in imports of goods also added positively (declining imports contribute positively to the final GDP aggregate).
Other categories such as residential structures also saw notable slowing from the prior quarter registering a still respectable rate of 8.5% while non-residential fixed structures expand by just 0.6%.
Keep in mind that these results are likely very poorly estimated and are sure to be revised notably in following quarters and even years to come.
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