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ECRI Leading Economic Index Drops For 12th Week In A Row
Don't look now, but the leading indicators continue to paint a double-dip picture. From David Rosenberg:
The smoothed ECRI leading economic index for the U.S. fell last week for the 12th week in a row, to stand at its lowest level since July 2009. Something tells us a slowdown is about to start. With a week to go before the debate with the legendary Jim Grant at the Plaza in New York, we seem to recall that this was the index he was using several months ago to predict that nominal GDP growth was set to accelerate to a double-digit annual rate. We seem to have stopped well short of that mark.
We too marvelled at the 5.9% annual rate real GDP growth performance in Q4, though it should not be lost on anyone that nearly all the growth came in two non-recurring items — inventories and capital spending (the former is a temporary alignment of stocks with sales and the latter is a late-year rush to take advantage of some tax goodies). The rest of the economy actually slowed to less than a 1% annual rate last quarter. This is actually encouraging to those who see a big slowdown coming, or even a double dip.
Here’s why: We looked the 60-year history of the quarterly GDP data and broke the numbers into two subsets. The first set included business expansions that lasted more than 12 quarters (these cycles were: 1961-1969, 1975-1979, 1983-1990, 1991-2000, 2001-2007). And the second included expansions that were 12 quarters or less (1950-1953, 1954-1957, 1958-1960, 1971-1973, 1980-1981). The results are quite different.
If we expect to undergo another long economic expansion (average of 30 quarters) then we are not likely to see the peak in growth until the 13th quarter, when on average real GDP was running at a 7% annual rate. But if this turns out to be a short economic expansion (12 quarters or less) then the peak in growth happens in the first and second quarter of expansion. And that is exactly what seems to have happened this time around.
In other words, when the quarterly peak in growth happens this early — the second quarter of expansion this time around — then it usually signals a high chance of this being a truncated expansion; and we are seeing signs of this in the ECRI leading index too. This all augurs quite well for defensive, not cyclical strategies and buying insurance right now to protect any long portfolios is dirt cheap with the VIX index sitting at 17.
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A big difference this time is the 9% of GDP that the government borrowed and pumped into the economy. Unprecedented in peace time and about to end. Its unlikely that politically or even financially they can repeat the trick. So its likely that the downturn will be much faster than has historically been the case.
Especially when you look at what the money was spent on. Ignoring the amount that went to Wall Street bonuses it seems that it went to delay the firing of government employees. Now the money is ending, the jobs will be ending as well. No new productive cpacity has been put in place. No imbalances have been fixed. No workforce has been trained to improve their skills. Nothing.
Just a year's delay in firing government workers at the state level.
Was that worth the next 3 generations paying interest on the debt for?
Sadly +1000-
They are trying to paper over that fact with the census workers and every other trick in the book . Timing it is everything -get it wrong and you and me will both be broke - I have read countless articles of when the next down leg is and they have all beenn wrong so far . I am almost at the point of capitulating and jumping on the other side ,but I know the truth and I know it will turn .When I can't say but we are close being I want in on that gravy train going the other way .
I'm not a finance guy, but some stuff I've read (i.e., Hussman) indicated that the next leg down would occur around (or after) April. Still have a few more paychecks to acquire canned food. :)
Great post. And the most appropriate question we should ask:
Are we really that surprised?
That must be a picture of the new "Death Ride 2010" roller coaster opening at Six Flags this summer. Looks like they haven't finished construction yet. Or maybe it's that new "surprise" ending they've been advertising.
Come on guys, maybe the peak happens 1Q13 at 20% growth. With all the money around, that could happen, no? Who's to say 5.9% is a peak figure. As long as the current political staff is in place, I wouldn't put it passed them to fudge this thing all the way through just to satisfy history.
Surprised? Not at all.
AMAZING what $1.2T (give or take) of stimulus will do to "pump-up" growth numbers -- until the stimulus ends....
To those expecting a boom: no such luck.
To those expecting a crash: no such luck.
Instead we'll get a slow decline with false bottoms and upswings that disintegrate and revert to the trend. Sorry. And this will mirror what's going on in the broader economy and society. Capital won't get allocated with youthful bravado. No, money will want to play defense, politely declining invitations to party. The slow but constant trickle of discouraging news and occasionally spooky news will cinch it. Every once in a while the ole animal spirits will rekindle for a shindig, dragging in a horde of wide eyed investors. The music will play to the tune of 1999. But once the wallflowers start to dance the top will already be in as money knowingly realizes this isn't 1999 anymore. Old timers will be full of stories.
"Instead we'll get a slow decline with false bottoms and upswings that disintegrate and revert to the trend"
disagree, a crash will occur but not as steep, when the market reflects reality, then you will have a slow decline that mirror's the actually economy
Rosie was telling all all the way through 2009 how the ECRI doesn't matter and we shouldn't conclude it has any bearing on stock markets. Now on the way down we should pay attention all of a sudden? Pathetic.
I believe he was mentioning the constant harping of this number by the financial press monkeys. He also said 3 months ago that the number was turning over but would be ignored or swept under the rug. Kinda of like the "snow" excuse this past month for housing sales until consumer sales debunked that myth. Now it's back in vogue with the NAHB. Total farce.
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