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Friday, December 03, 2010


EMRATIO back to recession low

following up on last month's analysis, this morning's non-farm payrolls release did little to assuage me on the household survey data.

on an absolute level, the EMRATIO is back down to its recession low point from december 2009 at 58.2% as household data continues to be frighteningly bad. more importantly than the absolute level, however, is the continuing steep reversion from the april high point. as was highlighted last month, EMRATIO hasn't backed off a local high to this extent without the US economy entering recession since the 1960s, a period characterized by a much higher share of manufacturing employment and therefore generally more volatile overall employment dynamics. current FRED page here, employment situation data index here.

downturns in EMRATIO tend to lead -- on the way down -- aggregate weekly hours worked, civilian employment and total nonfarm payrolls by a handful of months -- which is why and how i used it in september 2007 to help call the recession that began in december of that year.

no one, and i mean almost literally NO ONE, in the financial world is looking for the united states to return to recession now, only a few months after double dip fears ran rampant. a shot of quantitative easing and massive expansion of the ZIRP-funded, dollar-based risk carry trade wiped away many of those fears, along with relatively strong manufacturing data as production has caught up with restocking following inventory drawdowns incurred in 2008 and early 2009. but i think we're now seeing the onset of exactly that.

it's becoming clearer now that japan is well on its way into a double dip, with new orders, PMI and net exports heading south rapidly under a strengthening yen. the euro periphery and PIIGS have seen what can only be called a bond market crash in recent days, an event likely to catapult the lot, weak and stagnating economies all, into a severe double dip. with important sources of global demand like these contracting, it is hard to see how a soft US economy will not be impacted at least marginally.

but i think the bigger story is soft domestic demand, as households continue to delever rather than borrow, as government deficits succumb at the margin to first the deceleration and then contraction of stimulus spending as well as nascent austerity measures (such as the refusal of emboldened house republicans to extent unemployment benefits, an imminent shutoff of $80bn annual systemic income spigot). the framework established by richard koo would see even mild reductions in government deficit spending support of systemic income as both deflationary and recessionary, and i expect some of both. pictured here are real final sales as denominated by civilian employment (in red) and by total population (in blue). while sales have picked up from the low point of the recession, that expansion has only really kept pace with population growth off the low. meanwhile, the income recovery driving real final sales (as reported in the BEA's personal income report) have clearly been dependent on a massive expansion of transfer payments as well, which helps explain what looks like a large jump in spending per employed person. with congress now refusing extensions that would maintain this expansion and with an eye on transfer payments of all kinds, we need payroll and compensation growth to sustain income. (for context, transfers are have jumped from about 22% to 29% of the size of compensation received during the recession. PCTR is also up over 18% of personal income from 14%. cutting off extended unemployment benefits probably step-change reduces the flow of personal income in the area of 1%.)

as mentioned earlier, manufacturing has been restocking drawn-down warehouses throughout the economy after 2008's "sudden stop" in production, but that catch-up is now all but over. i think soft demand is now feeding through the manufacturing chain, showing up in some fattening inventories and softening new orders. we're already seeing examples, such as DRAM pricing, of supply simply exceeding demand after the restocking jolt ended.

This decrease has all happened in the wake of the PC industry suffering right after it experienced explosive shipment growth mid-year. Back in September, Samsung, the world’s number one manufacturer of memory, was one of the first to say that hubris off the back of midyear shipments growth will likely lead to supply far exceeding demand, leading to a steady decline in DRAM prices. True to their predictions, this has happened, with DRAMeXchange simply confirming this.

just this morning the census bureau's factory orders figure came in disappointing, though within the range of the uptrend. this is another metric normally led by EMRATIO to the downside, though orders usually lead EMRATIO in recovery.

which metric we're being led by at the moment is not altogether certain, and depends very much on whether a consumer-demand expansion is in the cards. i tend to think continuing disappointment in hiring in response to a lack of end demand alongside reductions in government transfer payments will exacerbate the "non-recovery" in per capita real final sales, increase the private sector's balance sheet remediation prerogative and weaken orders as recession returns.

EDIT: doug short via business insider is following the ECRI weekly leading index and wondering if it isn't also signaling recession. It had fallen below (-10), and has since recovered to (-2.4).

The question, has been whether the latest WLI decline that began the the Q4 of 2009 is a leading indicator of a recession or a false negative. The published index has never dropped to the current level without the onset of a recession. The deepest decline without a near-term recession was in the Crash of 1987, when the index slipped to (-6.8).

short also looks at the philly fed ADS business conditions index and CFNAI from the chicago fed, neither of which rebounded as strongly as did ECRI WLI (probably because they do not have monetary policy components, as the ECRI black box likely does) and both of which are behaving quite poorly in their latest readings.

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from perrone: aw, I love having ya back, gm. and nah, I don't do twitter. call me antique, call me a philistine.

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Glad to see you back and posting. I always enjoy your posts. Michael(?) Dueker who used to post on econbrowser now posts his index here:

He seems to be optimistic about recession chances.

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