How The Economy Quietly Entered A Recession On Friday, And Why The GDP Predicts A Sub-Zero Nonfarm Payroll Number
While the key market moving event from last Friday may have been Bernanke's Jackson Hole speech which merely left the door open to future QE episodes, the most important event from an economic standpoint was the first GDP revision Q2, which dropped from preliminary 1.3% to a sub stall speed, in real terms, 1.0%. What is just as important is that as the following chart from Bloomberg demonstrates, the YoY change in real GDP, which is now at 1.5%, is a slam dunk indicator of recession: "Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy." Bernanke agreed that "growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment." And while Bernanke is shifting dangerously into Greenspan territory with the open-ended interpretation of his statement, another thing that is more actionable is the observation that virtually every time real YoY GDP has dropped below 1.5%, this has led to a negative nonfarm payroll number. Granted, the result may not be as shocking as what the Philly Fed implied vis-a-vis this Friday's NFP, but we believe a subzero print in the August labor report will convince the three Fed holdouts that the time for yet another monetary intervention is here (Arab Spring part deux consequences be damned).
Real GDP YoY:
And Real GDP YoY vs NFP:
Also, below is a complete compendium of all the mecroeconomic charts that matter this week:
And lastly, sealing the deal for the "recession" argument is the following data from John Lohman which finds that the collapse in real-time economic data over the past three months is the sharpest in history.
Another day, another disappointing real-time indicator declines AND is below consensus estimates. In fact, every manufacturing index for the month of August has missed expectations and signaled further weakness. As Bernanke, the IMF, and most Wall St. economists cling to the notion of a second-half acceleration, the rest of us are witnessing a deterioration in global growth which is unprecedented.
Few pictures sum up this collapse in output better than the chart below which plots the three month change in the “Global Surprise Model” (GSM). I created the GSM in the late 1990’s as a means of tracking how the most important (as measured by timeliness and market response) economic statistics were being reported relative to estimates. Although Goldman, and later Citigroup, created comparable models in the early 2000’s, it remains a very useful tool for tracking the change in economic growth (2nd derivative) relative to consensus forecasts.
As shown, the current three month change is the largest in the history of the model. In other words, the collapse in real-time economic data (such as ISM, German IFO, etc.) over the past three months is the sharpest of the last two decades for which data is available.