Still The Scariest Data

I tend to view the data as being modestly optimistic in that it has generally surprised on the upside of late, enough to drive away fears that the slow patch this summer would evolve into a recession in the near future.  Still, the data has not been sufficiently optimistic to sway me from my general view that underlying growth continues to be slow and steady.

For example, I would like to see initial unemployment claims make another push lower to cement a stronger outlook:


That said, I remain unsettled by the core manufacturing data, which I would say is clearly in recession territory:

I think this is the scariest near-term indicator at the moment.  Of course, one piece of data in no way makes a recession.  I attribute the decline to three factors.  First, expiring tax credits pulled some investment into 2011.  Second, the drag from international weakness.  Third, uncertainty about the extent of fiscal tightening in 2013.  At least the second, and probably the third, of these three factors is weighing on earnings growth, which in turn has brought the bull market in equities to at least a pause.  From Neil Irwin at the Washington Post:

The CEO mindset on the fiscal cliff has been evident in a spate of third-quarter earnings announcements in the past two weeks. Almost uniformly, company executives discuss the looming threat to the economy, usually offering only vague comments that it has been a drag on their confidence and that they don’t know exactly what a resolution would look like….

…Some of the gloomiest assessments of economic conditions have come from companies that do extensive business overseas. By many accounts, as troubled as the U.S. economy has been in recent months, it looks better than many of its counterparts.

Yes, sad as it seems, across the globe the US is a bright spot at the moment.

Bottom Line:  The core manufacturing data stands out as an aberration.  While arguably a recessionary indicator, it also comes at a time of an improving housing market.  It would be unusual, to say the least, to experience a recession when housing is trending up.  Moreover, I remain skeptical that trade channels are sufficient to trip the economy into recession.  Still, I can’t discount the recession threat entirely; to do so would be ludicrous in the face of the looming fiscal cliff.  On average, Congress and the Administration have tended to limp things along, and hence the median bet should be that they will continue to do so.  But all bets wear thin after awhile.  Assuming monetary policy remains on hold (which it will), the degree of fiscal austerity in 2013 remains my chief concern.

This post was originally published at Tim Duy’s Fed Watch and is reproduced here with permission.

5 Responses to "Still The Scariest Data"

  1. barf   October 26, 2012 at 7:19 pm

    and of course the GDP number going into the election shows "there is no fiscal austerity" as defense spending more than made up "for all that other squigly line stuff." there really is not limit to what the USA can produce. Since interest rates are at or near zero…as you state…and will be for a long, long, long time…as you also state…i don't see what you find so scary.? Government spending will continue apace…obviously in the goods sector…a MASSIVE debt restructuring has been underway for some time now. Even small corporations are finding the cost of capital dropping to "at or near zero" now (Corning for example) such that opportunities in the junk space is starting to get highly limited. still…lest we get all to hunky-dory "there's always the inflation you all keep saying doesn't exist." that should make the actual "benefit" in the benefit (other than the check of course) hard to find. Governor Cuomo of New York State sure isn't messing around….

    • windriven   October 28, 2012 at 10:06 am


      " Since interest rates are at or near zero…as you state…and will be for a long, long, long time…as you also state…i don't see what you find so scary.?"

      There are several reasons to be twitchy. First and foremost, ZIRP is ultimately unsustainable and all of that excess liquidity will have to be mopped up at some point. Second, the global economy remains mired in the muck with Q3 earnings reports largely disappointing. Corporations went through cost-cutting exercises to in the last few years to maintain bottom line performance but with little chance for significant revenue growth they have few tools left to prop up the bottom line. Third, The Republicans will certainly control the House and possibly the presidency after the election. All but a handful of Republican Congresspersons have signed the Norquist pledge suggesting that any deal to avoid the precipice will contain significant cuts in government spending. And even if, as you suggest, defense spending inches up, that simply further distorts an already distorted economy. Fourth, "at or near zero" interest rates on corporate debt is meaningless without markets to absorb corporate output. No rational CEO is going to spend on expansion while recovery remains tenuous. If they spend it will be on automation which will further exacerbate problems in employment and ultimately in growth.

      Further, the long term impact of wholesale currency debasement in much of the industrialized West is not entirely clear. Neither the dollar nor the Euro is a predictable store of value. For the moment neither is the RMB though that could begin to change. It may be that it all results in a defacto across the board devaluation of Western currencies with second and third world debt holders largely paying the price of devaluation. But that would be a best case scenario.

  2. Bogwood   October 27, 2012 at 12:26 pm

    Housing(and autos) has been massively distorted by government mandates at all levels. It is no longer a productive asset. There is no associated food production,workshop,store or boarder. The builder gets a fee at completion, like a bank fee, but the actual value of the house needs to be heavily discounted. Each house sale is another pin in the Uncle Sam-shaped voodoo doll. Cars are small living rooms cruising the highways with little productivity. Without government interference there would be locally assembled human/electric hybrids costing 800$ per year,not the current AAA estimate of 8000$ per year.

    • windriven   October 28, 2012 at 10:14 am


      I fail to understand the theory underpinning your arguments. It is not the value of the house that is being discounted, it is the cost of money that purchases the house that is being discounted. I'm more at sea understanding the forces you imagine would stimulate production of $800 per year (a curious way to value automobiles) human/electric hybrids absent government interference. I don't see a big market for human/anything hybrids with or without government interference.

  3. gAnton   October 30, 2012 at 2:13 pm


    What this country needs more than anything else is the TRUTH. I'm pretty sure that government economist s start wirh the result, and then work backwards to derive the data, changing the definitions of crucial parameters along the way. For example, why are economic data corrections to which almost nobody gives attention almost always more pessimistic than the origional erroneous data?

    As long as politicians are judged by economic data and also have control over gathering and processing of data and associated results, the average American will be far asunder from economic truth. After all, what's important to the politicians is not what is known by the average American, but but what is generally belived by him.

    What is badly needed in the USA is an institution completely outside of political influence and control that is dedicate to providing the American public with accurate and very informative economic data.