Friday, June 12, 2009

Are Things Getting Better or Worse in the Economy? Probably Yes

The Economic Cycle Research Institute (ECRI; is out today reporting another gain in its weekly leading indicators. Here is the associated Reuters press release:

WLI Growth at 18 Month High:

A gauge of future U.S. economic growth rose along with its yearly growth rate, reaffirming hope that yearly growth will turn positive in the summer months, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 34-week high of 115.4 for the week ending June 5, from 113.5 the previous week.

In recent weeks, the group has forecast that the U.S. recession will end sometime during this summer, as its yearly economic growth reading rebounds from late-2008 lows.

The index's annualized growth rate spiked to a one and a half year high of minus 4.7 percent from the prior week's rate of minus 7.1 percent.

It was ECRI's highest yearly growth reading since the week ended December 7, 2007, when it stood at minus 3.9 percent.

"With WLI growth rising to its best reading in a year and a half -- namely, since the recession began -- economic recovery prospects are brightening rapidly," said Lakshman Achuthan, managing director at ECRI.

The weekly index rose in the latest week due to higher commodity prices and stronger housing activity, Achuthan said.

The ECRI is top-drawer. Its publicly-disclosed data's use as a stock market forecasting instrument is, however, questionable. Dr. Achuthan has forecast an end to the economic downturn by around Labor Day. ECRI has been making bullish noises for some months, already, and one wonders how much of the expected turnaround is embodied in today's stock and bond prices.

On the negative side, here are some of the negatives as summarized by David Rosenberg, Chief Economist and Strategist for Gluskin Sheff in Canada, in today's Email:

The U.S. consumer is yet again, for the first time in two years, benefiting from huge fiscal stimulus (tax relief and extra social security receipts) and yet the ‘core’ retail sales index that feeds directly into GDP was flat as a pancake in May and down at a 4.0% annual rate over the last three months. We have no idea how that gets translated into a ‘green shoot’ unless we want to compare that to the -10.0% trend at the end of 2008 when the post-Lehman collapse economy went into free-fall.

Much like the tax rebates last year, the stimulus is having very little effect on consumer spending. The message from the retail sales report is that while spending is not collapsing, it is still very soft and there is still a clear trend away from discretionary towards essentials.

Furniture sales fell 0.4% MoM in May and are down in each of the last three months — a 14.0% annualized collapse.
Electronics/appliance stores are also under downward pressure after a brief January-February countertrend bounce — down 0.5% MoM in May, also down three months running, and sliding at a 33.6% annual rate over that time frame.
Clothing sales did hook up 0.4% in May but that followed two months of big declines and left the trend since March running at a -9.0% annual rate.
General merchandise stores (ie, department stores) posted a 0.2% drop, the third decline in a row (sound familiar?) and running at a -4.8% annual rate over the last three months.
Sporting goods/music/books sales fell 0.8% in May and off at a 3.3% annual rate over the last three months.
Nonstore retail sales (online sales) fell for the fourth month in a row — down 0.4% in May and the three-month trend is at a -5.6% annual rate.
Restaurants did turn in a 0.2% gain in May but sales here are on a -2.5% trend over the last three months.
The positives: Food/beverage stores saw retail sales rise 0.4% in May and have advanced at a 2.7% annual rate over the last three months. Pharma stores jumped 0.7% MoM and up at a ripping 8.0% annual rate over the last three months.

And here is Dr. Rosenberg in the same missive on trends in global trade:

Global Trade Flows Reversing Course: After a couple of ‘green shoots’ after global trade finance was revived in the opening months of the year, it seems as though everyone’s exports are taking it on the chin again. The latest data on China’s outbound shipments showed renewed hints of slowing. Same for Korea. German exports plunged 4.8% in April and are off 28.7% from a year ago. Canadian export volumes sank 5.1% in April — and this transcended the problems in the auto sector — on top of 2.3% slide in March, taking Canada into a deficit position of $178 million in what is a vivid sign of a hugely overvalued loonie. U.S. export volumes also dropped 4.3% in April after a 0.5% decline in March, taking the YoY trend down to a new all-time low of -20.4% from -13.8% in March.

Conclusion: Current trends have remained bad; money-printing has provided some short-term fix; a turn in the economy of some strength and durability is priced into the markets. Going back to the ECRI, the leading indicators can move up or down in the future, and thus assuming they are correctly forecasting the end of this economic banana in 3 months, stocks and bonds may well move independently of the economy. The reason the stock market surged from 1947 to 1962 (and beyond) despite 4 recessions in 12 years was that stocks were the cheapest asset class based on net asset value, cash return to investors, etc.; the reason that stocks have plunged in the past 9 years despite only 2 economic downturns (one of them mild) was that stocks were expensive and high-quality bonds relatively cheap.

At this point, it is unclear whether any major asset classes remain cheap or expensive relative to one another.

Individual securities analysis and individual-specific portfolio diversification may be more important now than ever relative to glomming on to broad themes that worked in the 1980s such as "buy and hold financial assets". Keeping an open mind in this time of ferment and numerous unprecedented situations is especially important, as well.

Copyright (C) Long Lake LLC 2009

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