Is the Global Economy Sinking Into a Recession? (excerpt)

One of the most accurate and reliable global economic indicators is the CRB raw industrials spot price index. It has been falling this year, and is now the lowest since November 9, 2009. However, other global economic indicators show that there is growth, and no reason to conclude that a recession is imminent or looming on the horizon. The latest upbeat indicator is June’s 2.0% increase in Germany’s new factory orders, led by foreign orders, to the best reading since April 2008.

The JP Morgan Global Composite PMI edged up from 53.1 during June to 53.4 during July. Its M-PMI component remained unchanged at 51.0, while the NM-PMI led the rise in the overall index. On the other hand, The HSBC Emerging Markets Composite PMI remained weak during July at 50.2, though that was an increase from 49.6 the month before.

China’s July trade figures remained on the soft side. On a seasonally adjusted basis, imports fell 2.1% m/m and 8.1% y/y. Some of that weakness reflected the drop in oil prices. However, imports excluding petroleum still fell 3.4% y/y during June, suggesting weak domestic demand. Exports declined 4.9% m/m last month and 8.3% y/y, suggesting weak global demand. Exports have been essentially flat now since early 2013.

In the US, the labor market continues to improve as discussed below. The Citigroup Economic Surprise Index has rebounded from the year’s low of -73.3% on March 23 to -7.6% at the end of last week.

Today's Morning Briefing: Summer Swoon? (1) Sinatra was right about the Windy City. (2) Lots of turbulence in the financial markets last week. (3) Technical picture deteriorating. (4) Omens and Death Crosses. (5) Railroads hauling less coal, but with cheaper fuel. (6) Is the bubble bursting in the commodity markets this time? (7) Mixed global picture. (8) German orders are up, led by exports, while Chinese exports remain flat. (9) Known unknown: Will small Fed rate hike have big adverse impact? (10) Yellen will soften the blow. (11) Summer swoon could be buying opportunity. (12) Latest employment reports have same rhythm as previous ones. (More for subscribers.)

US Economy: Not on Fire (excerpt)

The US economy continues to cruise along at a leisurely pace. On a year-over-year basis, real GDP has been growing between 2.3% and 2.9% since Q2-2014. It certainly isn’t showing any signs of overheating despite tightening labor market conditions. Let’s review the latest developments:

(1) Exports. The stronger US dollar and slower global growth continue to weigh on US merchandise exports. A 3/11 WSJ article highlighted Duke University’s CFO Magazine Business Outlook Survey. Not surprisingly, the results for 489 US firms showed that 80% of the firms that derive at least one-fourth of total sales from exports said the dollar has had a negative effect on their revenues. Soft global growth is also keeping a lid on exports of capital goods and industrial supplies as overseas companies cut back on expansion plans.

Inflation-adjusted exports have stalled around $1.45 trillion (saar) over the past 11 months through June. They are down 6.3% y/y in current dollars and 0.2% in real dollars.

In current dollars, exports are highly correlated with S&P 500 revenues, which is no surprise since at least 50% of these revenues are generated outside the US. June’s weak export growth is consistent with the negative surprises in Q2’s S&P 500 revenue growth.

(2) Factory orders. S&P 500 revenues are also highly correlated with factory orders. These orders fell 6.2% y/y during June. Leading the decline was petroleum orders, which are the same as shipments. They were down 27.9% y/y. However, even excluding them, orders were down 2.5%.

(3) Transportation. Railcar loadings of intermodal containers always dip during the winter and rebound during the spring and summer as retailers restock their inventories. The dip was a bit worse than normal this year as a result of the West Coast dock strike. However, the rebound has been solid. On the other hand, the ATA trucking index dipped in June and was 3.5% below its record high during January.

(4) Auto sales. While manufacturing data show lots of soft patches, the auto industry is doing well. The level of sales remains high. It averaged 17.0 million units (saar) during the first seven months of this year, up 4.8% from the same period a year ago. The problem is that domestic automakers are scrambling to produce more of some of their most popular models, but may be capacity constrained.

(5) Services. While the manufacturing sector seems to be cooling, with the notable exception of the auto industry, the services sector is hot. It isn’t affected as much by the dollar and overseas economic growth. The national NM-PMI rose to 60.3 in July, the highest since August 2005. Wednesday’s ADP payroll report for July showed that nearly the entire gain of 185,000 was attributable to services companies.

Today's Morning Briefing: We Didn’t Start the Fire. (1) 16,000 fans. (2) Islanders vs. Rangers. (3) Joel & Simon. (4) Headlines as verses. (5) New service. (6) Pieces of the puzzle. (7) Lots of debt in the big picture, and more coming. (8) More can kicking in China and Greece. (9) Companies borrowing lots to buy other companies. (10) Big banks back in the big mortgage business. (11) US economy isn’t on fire. (More for subscribers.)

More on the Standard of Living (excerpt)

The income-inequality crowd is obsessed with the narrowest measure of median real household income compiled by the Census Bureau to measure poverty. Yet it excludes significant noncash government benefits. Furthermore, as I’ve observed previously, it is pre-tax so it doesn’t reflect income redistributed through the tax system. Even with all their tax shelters, the rich pay lots of taxes. The poor can get the Earned Income Tax Credit to boost their incomes.

In June, personal income per household was at a record high of $130,277 (saar) in current dollars. It was $118,803 in real dollars, and up a whopping 108% since the start of the Census data in 1967. I don’t have a way of calculating median personal income per household, but I note that the trends in the Census measures of mean and median household income have been similar, though they do show the rich getting richer. In any event, mean real household income is up 49% since the start of the data, lagging well behind the comparable measure of total personal income.

The important point is that incomes haven’t been stagnating as charged by the income-inequality crowd. Furthermore, in June, personal consumption per household rose to a record $104,440 in current dollars. It was $95,244 in real dollars (saar), and up 118% since the start of the Census data in 1967.

There simply aren’t enough rich people to explain this record high in the standard of living as measured by mean real consumption per household. To reiterate, mean real household income, which admittedly gives more weight to the rich than does the median measure, has also stagnated, but for a shorter period than the median. It is actually down 5% since 1999 through 2013. Yet since the start of 1999, real personal income per household is up 24% and real consumption per household rose 27%, both to new record highs.

Today's Morning Briefing: American Dream or Myth? (1) Myth, dream, and nightmare. (2) Rich, poor, and balderdash. (3) Widespread prosperity. (4) A misleading indicator of income. (5) Cash and noncash income. (6) The rich are richer, but everyone is better off too on average. (7) Income distribution before vs. after benefits and taxes. (8) Declining percentage of families in households. (9) Fewer people per household. (10) Consumers are doing what they do best. (11) More on the skills gap. (12) Bachelor’s degree not required to work at Starbucks. (13) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Timing the Next Bear Market (excerpt)

Since bear markets are usually caused by recessions, timing the next significant drop of 20% or more in stock prices depends on forecasting the next recession accurately. Previously, I have explained why March 2019 is a plausible estimate for the start of the next recession based on the average length of previous economic expansions.

Perhaps there are some leading indicators that might help us anticipate the next bear market. Consider the following:

(1) Leading indicators. The problem is that the S&P 500 is one of the 10 components of the Index of Leading Economic Indicators (LEI). In other words, the market is already discounting future economic developments including booms and busts. How about the spread between the 10-year Treasury bond yield and the three-month Treasury bill rate? The yield curve spread is a component of the LEI as well. The same goes for initial unemployment claims. They all remain in bull market territory.

(2) Industrial commodity prices & the BBB. I am a big fan of the CRB raw industrials spot price index as a daily real-time indicator of the global economy. It’s looking bearish for stocks currently. However, I also divide it by initial unemployment claims to derive my Boom-Bust Barometer, which remains relatively upbeat, signaling neither a boom nor a bust.

(3) Misery Index. A less timely indicator is the Misery Index, which is the sum of the unemployment rate and the PCED inflation rate. It too tends to rise during bear markets without providing much warning. In June, it fell to 6.6%, the lowest reading since August 2007, with the unemployment rate at 5.3% and inflation at 1.3%. Perhaps this is a useful warning: When misery is as low as it is now, the next big move in the index has tended to be in a more miserable direction. However, keep in mind that there is still room for less misery given the 5.3% lows of both February 1966 and August 1999.

Today's Morning Briefing: Less Misérables. (1) No bargains in US. (2) Plenty of bargains in Greece, but for good reasons. (3) Timing the next bear market and recession. (4) The problem with bear market indicators. (5) The Boom-Bust Barometer sees neither. (6) The Misery Index loves companies. (7) Room for less misery. (8) Will the bear market in commodities trip up secular bull market in stocks? (9) Will China’s next shock-and-awe show be shocking enough to boost commodity prices? (10) Easing on down Silk Road. (11) Italian manufacturing is on the mend. (12) Will one-and-done be followed by a melt-up? (13) Blankfein’s big sniff. (More for subscribers.)

GDP Continues to Cruise (excerpt)

I remain impressed by how well the US economy is doing despite all the meddling from federal, state, and local governments. Consider the following:

(1) GDP cruising at stall speed. Real GDP growth on a year-over-year basis has been hovering around 2% since Q2-2010. It was 2.3% during Q2. Along the way, “endgamers” warned that 2% has been the economy’s stall speed in the past. Whenever it fell below that rate, a recession followed. So far, it has been different this time. That may be because the private sector has been growing around 3% over the same period, measured by real GDP excluding government spending.

(2) Consumers still consuming. Consumer spending in real GDP rose 3.1% y/y during Q2. That’s among the highest growth rates during the current economic expansion! Real consumer spending per household rose to a record $96,240 during May, up 2.2% y/y. Household formation has recently been growing at a faster pace. That certainly augurs well for consumer spending. So does the strength in employment indicators. On the other hand, wage gains remain lackluster, as discussed below, though they are outpacing price inflation.

(3) Capital spending not all bad. Capital spending in real GDP rose just 2.6% y/y during Q2, one of the weakest growth rates during the current expansion. Such spending on business structures fell 1.7% y/y. On the other hand, equipment spending increased by 2.1%, and intellectual property products rose 6.6%.

The good news is that while total real capital spending has stalled over the past three quarters, it has done so at an all-time record high exceeding $2.2 trillion (saar). Industrial equipment spending rose to a record high during Q2, while transportation equipment spending remained near recent record highs, which well exceed the previous cyclical peak. The sum of real capital spending on information processing equipment, software, and R&D rose to a record high of $942 trillion (saar) during Q1, and held around that level during Q2, up 3.9% y/y.

Today's Morning Briefing: A World of Hurt? (1) Bronx and Brooklyn cheers. (2) Jared Bernstein to the rescue. (3) Krugman is a man for all seasons. (4) Keynesians are never wrong. (5) Straying from the path. (6) White House shocked that so many jobs require a license. (7) GDP still growing at stall speed. (8) Households are doing well and forming at a faster clip. (9) Some good news under the hood for capital spending. (10) More renters seeking shelter. (11) Nine factors weighing on wages. (12) Global economy continues to stagnate. (13) China’s big snow job. (14) “Mission Impossible--Rogue Nation” (+). (More for subscribers.)