An Indicator Of Peril

Tyler Durden's picture

Authored by 720Global's Michael Lebowitz, via RealInvestmentAdvice.com,

Thanks to Jesse Felder, we recently stumbled upon a measure of economic conditions that has reliably signaled every recession since 1948. The data point, Real Value Added, is currently in negative territory and may, therefore, be a harbinger of an economic downturn.  If it is a false signal, it would be the first in a 70-year history of observations.

720Global does not rely on any one data source to determine the pace of economic activity or to formulate recession probabilities. Instead, we analyze data from many different sources to help better understand the likely path of the economy. That said, when a single data source has an indisputable track record, we take notice and look for other corroborating evidence and bring it to your attention.

Gross Value Added (GVA) and Real Value Added (RVA)

GVA is a measure of economic activity, like GDP, but formulated from the production side of the economy. It measures the dollar value of all goods and services produced less all the costs required to produce those goods or services. For example, if 720Global buys $100 worth of wood, $20 worth of other materials and employs $30 worth of labor to build a chair, we have produced a good for $150. If that good is sold for $200, 720Global has created $50 of economic value.

Gross Domestic Product (GDP), the more popular measure of economic activity, calculates the level of commerce based on the dollar value of the final goods and services produced. It may help to think of GDP as economic activity measured from the demand side and GVA as measured from the supply side. Despite the differences, the levels of economic activity reported are remarkably consistent. Since 1948, nominal GDP has averaged annual growth of 6.55% while GVA has averaged 6.50%. It is important to note that, while they track each other very well over the longer term, they are less correlated quarter to quarter.

Economists prefer to measure economic activity without the effect of inflation. If inflation were rampant when making the chair in the example above, some of the incremental value was due to the general trend of rising prices and not value added by 720Global. To strip out the effect of inflation and compute a pure measure of value added, it is commonplace to subtract inflation from GVA. The result is Real Value Added (RVA = GVA less CPI).

Charting RVA

The graph below plots RVA since 1948. Periods deemed recessionary by the National Bureau of Economic Research (NBER) are denoted in gray.

Data Courtesy: St. Louis Federal Reserve (FRED)

Since 1948 there have been 277 quarters of data. RVA has only been negative during recessions or in proximity to periods leading up to and/or following recessions.

Summary

Currently, three of the last four quarters have produced negative RVA levels. Real GDP is not producing similar results, having averaged 2% growth over the same quarters. As mentioned earlier, RVA and Real GDP may not be well correlated over short time frames.

RVA is just one source of data arguing that economic trouble lies ahead, therefore, we would be wise not to read too much into this one indicator. Of concern, however, is that negative RVA readings have an impeccable pattern of signaling recession as a coincident indicator. Will this time be different? If not, then we would expect to see other economic indicators reflect similar weakness in the weeks and months ahead. Clinically, our efforts focus on finding valuable data that will allow us to help clients make prudent decisions. This is certainly one such piece of data.

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BullyBearish's picture

what EXACTLY is REAL anymore?

crazzziecanuck's picture

The idea that the RVA is negative in or around recessions is no longer true.

It's been positive but we've been in a recession since 2009.

knukles's picture

The news is still real, silly.

sk0r9y0s's picture

By "really fake"..do you mean all news is fake?

wisehiney's picture

That indicator would be of minimum peril.

Or otherwise.... "Minnie Peril". 

Snaffew's picture

fitting...put a price tag on that straw hat.

Pew Pew Pew's picture

Sir Lancelot: We were in the nick of time. You were in great peril. 
Sir Galahad: I don't think I was. 
Sir Lancelot: Yes, you were. You were in terrible peril. 
Sir Galahad: Look, let me go back in there and face the peril. 
Sir Lancelot: No, it's too perilous. 
Sir Galahad: Look, it's my duty as a knight to sample as much peril as I can. 
Sir Lancelot: No, we've got to find the Holy Grail. Come on. 
Sir Galahad: Oh, let me have just a little bit of peril? 
Sir Lancelot: No. It's unhealthy. 
Sir Galahad: I bet you're gay. 
Sir Lancelot: Am not. 

Soul Glow's picture

Trump tweets will not ignite a recession.  It will be ignited by action.  Until there is a real cause of panic stagflation will continue to hurt the working class and assist the rich.  A real cause of panic is not talk of trade wars and talk of hot war.  It is not indicators flashing red.  A real panic is if PRNK actually hits a landmass with people on it.  It is if the USMIC hit the PRNK.  It is if a bank declares themselves insolvent.  

The triggers for hot war are obvious.  I don't believe the USMIC will choose a first strike.  No one ever wants to be the aggressor.  As for financial panic the Fed has talked a big game via quantitative tightening but they have failed to start it by any measure.  They are still supporting the major banks and other financial proxies.  Some may say the debt ceiling will cause a panic but when have Congress not hiked it?  Even the GOP has chosen to hike it when in power for the same reason the USMIC will not premptively strike PRNK.  The GOP does not want to be the cause of panic.  They vote with their pocketbooks afterall.

Now there is a lot of chaos in the markets, and I do believe we are on the edge of a correction - let's say stocks are down 15% from the highs by the end of November - but Trump has enjoyed touting market gains and as a financial man does not want to give that up.  He will keep Yellen in power or install Cohn so the Fed will stay uber-dovish and keep their support for the banking industry.  In a couple years yes maybe trade wars have taken their tol, a major bank declares insolvent,l or a war goes hot, but not in 2017.

jtz5's picture

I have a different take on Trump owning the current stock market levels.  We all know he said Yellen was causing a major bubble with loose monetary policy while he was campaigning.  I think now he wants to own the market at these levels and take credit for it, then when Congress (nearly all Democrats) deny his budget, refuse to repeal Obamacare, stop his infrastructure plans and balk at raising the debt ceiling, the market gets a major correction and he will point to the Democrats and say how they are all obstructionists and don't want to work for the American people.  All of this will take place as we head into midterm elections so the Republicans can add to their majorities.

sk0r9y0s's picture

Why say: "congress (nearly all democrats)"?

 

Wouldn't the majority be responsible for all that legislation not getting passed?!

I Feel a little Qeasy's picture

"No one ever wants to be the aggressor"

Are you fucking insane?

Korea, Vietnam, Iraq, Libya, Ukraine, Syria etc and on and on.

The lot of you are rabid filth from 'sea to shining sea' as can be seen by the fact that any of your looneys in government ALWAYS becomes more 'popular' if he bombs some innocent people somewhere in the world.

FUCK THE LOT OF YOU.

sk0r9y0s's picture

I don't think you'll convince anyone that #LameDuckTrump is a model of certainty

shizzledizzle's picture

Love how I am getting alerts from PM suppliers today "Spot price is rising, ACT NOW!" No thanks... I acted when it hit 16. 

NugginFuts's picture

haha "Lock in (our) profits now by buying the rip!"

Soul Glow's picture

People buy when prices rise and sell when they go down.  Herd mentality at it's finest.

Yukon Cornholius's picture

I'm buying every week with prices under $20. It's ridiculous for any stacker not to be.

TuPhat's picture

That is true.  I bought an ounce of gold three weeks ago and asked the coin dealer if a lot of people were buying and he said 'no, most people buy when the price is high.'

Mr 9x19's picture

very global population behavior you report here.  ... it's panic buy. the real wise movement is to anticipate the raise.

 

you can't fix stupid.

 

 

Osmium's picture

Not sure RVA is an accurate indicator when the SNB is buying everything.

NugginFuts's picture

Ever heard of the Central Bank of Iceland? Similar fate awaits the SNB.

whatswhat1@yahoo.com's picture

Historical indicators have been mostly invalid for 20 years since the FRAUD became ubiquitous due to the advancement in technology.

Money_for_Nothing's picture

Since they added Obamacare (a tax) to GDP it is worthless. Probably other taxes in GDP but they are hidden better.

Taxes collected (including Social Security and Medicare) is probably the best guess for where the US economy is. Multiply the number by 5 and you will get a real value for the economy.

Deep Snorkeler's picture

Trends Against Us

1. GDP growth per capita is stagnant.  

Economies aren't growing fast enough to support new workers.

2. The new techno-industrial economy requires fewer human laborers.

3. Creeping robots are getting cheaper and easier to program/maintain.

4. The billionaire caste of owners/rentiers/shareholders

do not think about you. Ever.

5. Long term planning is no longer of use to anyone.

 

sk0r9y0s's picture

Long term planning is useless ABSOLUTELY?!

 

You can't think of any time where it helps to plan long term?

Sub MOA's picture

blah blah blah meanwhile the ameritards are celebrating the worlds largest terrorist attack in history perpetrated not only once but 2x freedumb rah rah

sk0r9y0s's picture

Youre having no trouble lumping all Americans into one category SubMOA!

 

#HistoryLesson

HENRY WALLACE

https://en.m.wikipedia.org/wiki/Henry_A._Wallace

sk0r9y0s's picture

Tenure

The outspoken Wallace continued to be controversial, exasperating conservatives and moderates, and even, at times, his allies. His conservative opponents were infuriated when Wallace objected that a militaristic stance toward the Soviet Union was likely to be counterproductive, while his left-leaning audiences booed when he criticized the Soviets.[42] With the development of the atomic bomb, Wallace wrote that "as long as the United States makes atomic bombs she will be looked upon as the world's outstanding aggressor nation."