Is the recession over? While the recovery is being touted as "anemic," in many ways, the data are showing a very strong recovery. Using various key metrics that are known to be either leading or at least co-incident indicators, the recession has been over for a while and the recovery is strong.
Many are familiar with the index of Leading Economic Indicators (LEI), which purports to pinpoint turns in GDP growth. I've always had concerns about LEI as an investing tool because it uses market-oriented measures as key inputs. It doesn't help me as a trader to use LEI to gauge the stock market if in fact the
is part of LEI.
I prefer to follow my own set of 10 economic figures, most of which were taken from the Leading or Coincident indices. Some are adjusted versions of the classic LEI measures, but all are
from any market-based measure. No S&P 500 level and no yield curve slope.
Change in Non-Farm Payrolls
Average Weekly Hours
Initial Jobless Claims
Real Personal Income
Real Retail Sales, Less Autos
Real Industrial Production
Real Manufacturing/Trade Sales
Real Factory Orders
Real Durable Goods Orders
One way to consider whether the recession has ended or not would be to compare current levels of each of these indicators to other periods of economic growth. Taking all of these indices back to 1960, I calculated the average non-recessionary level for each of the 10 indicators. I used the NBER's official dates for each recession.
I then looked at the average for the last three months of each figure and took that as a percentage of the average non-recessionary level. This produces some interesting results.
To interpret the chart above, Industrial Production figure is 153%, meaning that the last three months have come in 1.53 times
than the average non-recessionary month since 1960.
Notice we have six figures showing above-average economic activity, and other than Durable Goods, each of the indicators is substantially higher than typical levels. Notice also that all of these measures are concentrated in production, sales and income.
Among the four weaker figures, we first have housing starts. In a typical recession, a resurgence in homebuilding would indicate an improvement in consumer confidence. This particular recession is different in that we came into the recession with an overhang in home inventories. So while I think Housing Starts is
a leading indicator, this particular time, it will probably lag.
The three employment indicators are all showing below-average results -- or, in the case of Claims, above-average is a negative indication -- but even here there is good news. Average Hours is almost to non-recessionary levels, and this figure tends to lead the other two.
I then looked back to at what point the majority of my 10 indicators shifted into above-average levels. The answer was December 2009, when Durable Goods shifted to above-average. This is also the point where at least five of these 10 measures showed year-over-year improvement.
Taking all the measures together, the theory that this is an anemic recovery just doesn't hold in any significant area other than employment. Obviously, if employment were to never improve, the recovery would be blunted, but to imagine that production and spending are as strong as we're seeing but that companies are not hiring would imply that businesses are choosing not to expand their operations in the face of increased demand for their products. I find that extremely hard to believe.
What's the investment implications? First, a double-dip scenario is remote. The economy is showing plenty of momentum, and it would take a lot to derail it at this point. The headwinds we're seeing -- such as higher taxes, cautious lenders or slow employment growth -- won't be enough.
Persistent growth will also help solve some of our biggest worries. For example, if generalized growth is improving tax receipts, then both local and the federal government will find the bond market perfectly willing to roll over debts. Already, it is likely that the federal government's borrowing needs will come in well below initial expectations for 2010. If foreign accounts can just see progress on our debt, they will remain strong buyers.
While I would expect interest rates to eventually rise given a growing economy, the timing is probably still a ways off. Inflation isn't likely to be a problem until more of the slack capacity is utilized, and real rates aren't going to rise until there is more demand for credit.
Tom Graff is a managing director of
, a registered investment adviser in Baltimore Maryland. The opinions expressed here are Graff's own and in no way are the statements of Cavanaugh Capital Management, and may or may not reflect the strategies being pursued for clients of Cavanaugh Capital Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Graff appreciates your feedback;
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