A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Monday, December 31, 2007

Forecast Friday comes on a Monday this month: Podcast transcript

Monday December 31, 2007

The Demand Side forecast is far too recent for us to bail on it already. We’ve put it up on the website at Demand.net again. It is the doom and gloom forecast, possibly just shy of John Williams prediction for hyperinflation and depression. We also refer you there to a few of the causal elements, most proposed by Nouriel Roubini of NYU’s Stern School. There’s a link to Roubini’s more detailed versions.

Since there has been no great rush from other economists to this side of the bell curve, we wondered what the hell they were looking at and wandered over. It is a bit intoxicating, as they pass around the bong of confidence in Fed interest rate cuts to apparently monetize us out of peril of every type. But we didn’t inhale.

Many were looking at the Conference Board’s (registered trade mark) U.S. Business Cycle Indicators (service mark) which were released on December (copyright – just kidding) twentieth. The leading index, the press release says, “decreased sharply for the second consecutive month in November, and it has been down four of the past six months.”

It was down 0.6 points in November after being off 0.7 points in October. But really, if you look at past charts, that is not so sharp. Also, yes down four of the past six months, but also three of the past four and the only exception being a tiny rise in September which followed a big drop in August.

Leading economic indicators as trademarked, service marked, but not yet copyrighted by the Conference Board. How good are they? What’s up with them?

First of all, they are not and they do not pretend to be causal. They are either forward seismic sensors on the supply side, such as new orders and building permits, indicators of demand to come like unemployment claims, or assessments of economic actors, like stock prices, interest rate spreads and consumer confidence.

Specifically, the leading indicators are ten:
  1. average workweek for manufacturing production workers
  2. average weekly initial unemployment claims,
  3. manufacturers new orders for consumer goods,
  4. vendor performance,
  5. manufacturers new orders for nondefense capital goods,
  6. building permits
  7. stock prices,
  8. M2 money supply,
  9. the spread between Treasury bonds and federal funds,
  10. and the index of consumer expectations
Let me repeat that .... No?

These seem to be the talking points for most of the economists I’ve heard. The first thing I did was to reach over their shoulders and toss into the drink the money supply M2. With credit cards, Fed willingness to print, and the seizing up of credit markets, it is hard to see what relevance this rather narrow version of money has going forward, or even since the 1980s.

The workweek doesn’t change in manufacturing, they just fire people. Those who are left continue to work the same schedule. There may be three instead of thirteen, but they’re still working a 40-hour week. Or actually a 41.1-hour week.

I grabbed the whole manufacturing sheaf, including the two manufacturers new orders and the vendor performance. Manufacturing used to be one-fifth of the economy. You could argue in the late seventies that it generated another two-fifths in support services. Now it is a tenth of the economy and maybe up to a total of three tenths including support. But it is half the Conference Board’s list of leading indicators. Now it is confusing matters. Manufacturing is up, yes, for the export market, but that will be mitigated if the dollar rebounds, or it will translate into higher prices if it doesn’t, since it is not only imports that will increase in price with a lower dollar, but products where export markets bid up domestic prices – like food.

Then I slipped the stock prices out of the deck. Stocks are strong not on the economic outlook, but on the demand for inflation proofing and their cheapness as a hedge against a rebound in the dollar. So we’re left with consumer expectations, interest rate spreads, building permits, and average weekly initial unemployment claims.

The aggregate of these four were:
  • Down 0.31 in November.
  • Down 1.56 since July.
With only two positive numbers among the sixteen: a microscopic 0.01 rise in consumer expectations in September (following August’s 0.22 drop) and a bump in the index for unemployment claims, also in September. (Notice these are index numbers, not percentages.)

Looking over at the graph of the indicators since 1960. The leading indicators, and really all the indicators, were much more emphatic predictors prior to 1980. The strength of movement has declined steadily since then. The jagged teeth of the line graph have been rounded off and softened. Yes, E.B., I realize it is a log scale. If it weren’t a log scale they would all look like a ski jump or a J curve.

This softening is no doubt related to the declining importance of manufacturing in the real economy not reflected in the trademarked leading indicators. BUT the turns are pretty close to the mark, and the turn has occurred. This is referencing the Conference Board’s full list of ten. There was one spot in the 1966-67 Guns and Butter era when a false signal was given, but that was back in the days of a strong middle class.

Other than that, no. Flattening and decline have always meant recession, as defined by the official arbiters, the Conference – trademark not for redistribution or public posting without express permission – Board.

[Thank you, E.B.]