Paper Economy
Cashier Liliana Romero checks out a customer who is using a Supplemental Nutrition Assistance Program (SNAP) card at Tesoro Supermarket in Framingham, Mass., in this October 2010 file photo. Every month over 47 million individuals receive $133.42 through the Department of Agriculture’s Food Stamps program for a total monthly cost of $6.28 billion dollars or $75.3 billion annually, SoldAtTheTop writes. (Melanie Stetson Freeman/The Christian Science Monitor/File)
Whatever happened to limited government?
I’d like to take a moment to reflect on the notion of “limited government”.
With the latest election, the last four years in particular and the last decade or so in general, the concept of “limited government” seems to have become a relic of sorts, mocked by one side of the ideological spectrum, paid lip service to by the other but widely discarded overall.
It’s strange that such a basic concept could fall so far out of fashion… as if it has no merit at all… yet most “reasonable” people must acknowledge that there are “limits” to what the government can and should do.
By “reasonable” people, of course, I mean those who accept as valid the overall order of our society which seeks to balance the government “public interest” with the individual “private interest” and not those who occupy the extremes of the many philosophies who want nothing more than to radically reorganize everything (…one way or another) from the ground up. ( Continue… )
This chart shows the rate of industrial production for business equipment since 1999. The latest downturn may be hinting at a looming recession, the author argues. (SoldAtTheTop)
Are we headed for another round of downsizing?
Looking deeper into last Friday’s weak industrial production report, it appears that the “Business Equipment” component is giving a clear sign of weakness as well as substantiating the business investment pullback noted over the weekend by the WSJ.
In fact, looking at the data (click on the chart below for a full-screen dynamic version of the entire history of this data series) it’s easy to see that this series makes fairly sharp tops as the economy transitions into recession making it a useful contraction indicator.
Keep in mind though, while the latest results look like another solid harbinger of looming recession, the data is still fairly preliminary and subject to revision.
Another couple or few months of data will be required to determine if this pullback is simply a slowing of our halfhearted recovery or a more notable slide into a new recessionary decline.
This chart shows the number of existing single family homes sold monthly over the past five years. Sales have increased steadily since the beginning of 2011 and climbed over 2 percent in October 2012. (SoldAtTheTop)
Existing home sales climb in September
Yesterday, the National Association of Realtors (NAR) released their Existing Home Sales Report for October showing a increase in sales with total home sales rising 2.1% since September and climbing 10.9% above the level seen in October 2011.
Single family home sales also rose climbing 1.9% from September rising 9.6% above the level seen in October 2011 while the median selling price declined slightly on the month but increased 10.9% above the level seen a year earlier.
Inventory of single family homes went flat from September at 1.89 million units dropping 20.9% below the level seen in October 2011 which, along with the sales pace, resulted in a fairly balanced monthly supply of 5.4 months.
The following charts (click for full-screen dynamic version) shows national existing single family home sales, median home prices, inventory and months of supply since 2005.
This graph shows industrial production levels since 2005, according to the Federal Reserve's monthly read of industrial production. (SoldAtTheTop)
Industrial production falls in October
Last week, the Federal Reserve released their monthly read of industrial production and capacity utilization showing an notable pullback in October with total industrial production declining 0.43% since September but rising 1.74% above the level seen in October 2011.
Capacity utilization also declined falling 0.57% from September and remaining just 0.24% above the level seen in October of 2011 to stand at 77.79%
It's important to recognize that though the "recovery" is well over two years old, both industrial production and capacity utilization are notably below the peaks set in late 2007.
This graph compares EU and US quarterly GDP change since 1996. The graph illustrates the similar trends between the two economic areas. (SoldAtTheTop)
EU dips into recession. Is the US next?
Yesterday, EuroStat, the European Union’s statistics office, released their Q3 2012 read on the 17-nation combine GDP showing a quarter-to-quarter decline of 0.1%, tipping the group squarely (though possibly temporarily due to future revisions) into recession, as economic conditions worsened and continued from the prior quarter’s -0.2% reading.
While recession for Europe is no surprise, given all the attention that has been directed to the crisis economies of Greece, Spain, Italy, and Portugal and the broader weakness elsewhere in the European Union, it should also be clear that the U.S. faces nearly identical prospects as the burdens of government overreach take their toll on macroeconomic conditions.
Further, while the U.S. generally prides itself on having more robust economic conditions than Europe, comparing the quarterly growth rates, one can easily see that for over a decade now, our economic conditions have, more or less, trended together.
So this begs the question, how long can the U.S. expect to buck the trend?
Unless you expect notable improvement in future quarters, it would appear that the European Union’s poor conditions are just another harbinger of larger global underperformance that could crush the U.S.’s tepid recovery.
This graph shows total continued unemployment claims since 2010. Jobless claims surged by 78,000 to 439,000 claims from a revised 361,000 claims for the prior week. (SoldAtTheTop)
Jobless claims surge by 78,000
Today’s jobless claims report indicated a major setback to the weak economic "recovery" with both initial and continued jobless claims rising unexpectedly as initial claims jumped back above the closely watched 400K level.
Seasonally adjusted “initial” unemployment claims surged by 78,000 to 439,000 claims from a revised 361,000 claims for the prior week while seasonally adjusted “continued” claims increased by 171,000 claims to 3.334 million resulting in an “insured” unemployment rate of 2.6%.
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 2.12 million people receiving federal “extended” unemployment benefits.
Taken together with the latest 2.77 million people that are currently counted as receiving traditional continued unemployment benefits, there are 4.89 million people on state and federal unemployment rolls.
This graph shows the average interest rate for 30-year and 15-year fixed-rate mortgages since 2006. (SoldAtTheTop)
Mortgage rates down 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) decreased 6 basis point to 3.43% since last week while the purchase application volume increased 11% and the refinance application volume increased 13% 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 shows percent of population on food stamps and the total unemployment rate since 2005. Individuals receiving food stamp benefits rose to 47.1 million in August 2012. (SoldAtTheTop)
Food stamp use jumps in August
As a logical consequence of the prolonged economic downturn, it appears that participation in the federal food stamp program is continuing to rise.
In fact, household participation has been climbing so steadily that it has dwarfed the last peak (which looks like a minor blip by comparison) set as a result of the immediate fallout following hurricane Katrina.
The latest data released by the Department of Agriculture indicated that in August, a whopping 420,863 new recipients were added to the food stamps program with the current total increasing 2.86% on a year-over-year basis.
Individuals receiving food stamp benefits rose to 47.10 million which, as a ratio of the overall civilian non-institutional population, increased 1.30% on the month to now stand at a whopping 19.33% of the population.
Households receiving food stamps benefits increased by 146,677 to 22.68 million, a 4.42% increase on an annual basis.
As participation continues to swell, so too has the total nominal benefit cost climbing 2.51% on a year-over-year basis to $6.28 billion for the month.
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.
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