Friday, November 06, 2009
AWHI and its irrelevance
the moderation in the decline of AWHI, a traditional precursor of recovery, was noted in june. a month ago, i called into question the nascent recovery implied by AWHI on grounds of diminishing fiscal stimulus.
the employment ratio, or EMRATIO, one of my favorite leading indicators of recession, ticked lower to 58.8% -- a level reminiscent of times before the mass migration of women into the workforce. most disturbingly, in falling over the previous three months from 59.5%, or (-0.7%), the pace of employment contraction is -- almost two years into this contraction -- seen to be accelerating again.
similarly, AWHI has reversed a moderation in its decline and ticked lower to 98.5. total hours (weekly) fell to a new low of 33.0 hours from 33.1. there's quite a bit of noise in the first derivative of AWHI, though there's little doubt that the rate of contraction peaked in march. but this will bear watching over coming months. turns up in AWHI have tended to lead EMRATIO, but if the recent stimulus-aided inventory cycle upswing has run its course further contraction in AWHI is likely.
citing prieur de plessis' reportage on richard koo, ed harrison said:
Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I am convinced that it is politically unacceptable to have the government propping up the economy as Koo suggests it should. The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.
AWHI continues to decline -- ticking a new depression low in october -- but as can be seen here at a much moderated pace. this is consistent with nascent recovery from recession. it is also i think completely irrelevant in a balance sheet recession.
on the basis of the total loans and leases -- updated through the end of september, showing an annualized rate of contraction of (-15%), the worst in a sample dating back to 1947 -- and continuing to gain steam with ever-greater seasonally-adjusted month-over-month contractions -- we can see that private sector credit is being destroyed at an unbelievable rate. i haven't data comparisons to offer from the early 1930s, but would suspect that even then the rate of commercial bank credit contraction rarely if ever grew so formidable. and this is to ignore the annihilation of the commercial paper market and the titanic if ethereal contraction of trade credit, both offset only by the expansion of capital market corporate debt issuance -- much of which has been for financial institution refinancing and facilitated by the TGLP.
and yet we see a positive GDP print in the third quarter. how? the government is running an annualized deficit of 12% of GDP -- that's how. and should it falter from those levels of debt-financed spending while private sector finance remains in full retreat, it will cease to be the necessary counterweight to depression and economic activity will summarily collapse.
in the end, indications like the change in AWHI or the weekly leading economic indicators matter little -- they are about consequence. forecasting big-picture changes in economic activity over the next few years will likely be as easy as monitoring changes in the government deficit in comparison to the rate of private sector balance sheet repair -- that is about cause.
If you are interested in the data I can send it to you.
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