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May 11, 2015

Storm Clouds in the Blue Skies

During my morning reading I ran across this article by my friend Cullen Roche, via Pragmatic Capitalist, entitled "The Economic Recovery That Can't Get Any Respect," or more commonly known as the "Dangerfield Recovery."
"I hate to be the guy trying to highlight some of the good in a pretty weak recovery,but this economy just can’t get any respect. I find myself thinking about this on the heels of the employment report which was pretty good. But if you look at the news headlines it 'missed expectations' and was actually a 'net negative' because of past revisions.
I am going to be ridiculous now and talk about how good some things actually are.So, here are some interesting macro data points that actually point to things beingmuch better than the mainstream media might have us all believe."
I admire Cullen very much. However, I am going to have to disagree with him on this issue. First, the majority of the mainstream media touted that it was the "strength" of Friday's employment report that sent stocks soaring into the close. 
Secondly, as I have discussed many times previously, there are many issues with the current calculation of the unemployment rate in the U.S. that obfuscates the economic realities. To wit:
"Is the BLS overstating employment growth? I guess it depends on whose data set you choose to believe. However, there is little denying the fact that with over 60% of the population living paycheck-to-paycheck, stagnant wage growth and declining net worth over the last five years, there is something that simply does not add up. If employment growth were indeed growing as strongly as in the late 90's, it would seem logical to expect that many of the disparities in the economic landscape should be starting to equalize somewhat. Unfortunately, that has yet to be the case."
That really is the point that the majority of analysis misses when they point to jobless claims and the U-3 or U-6 unemployment rates. IF, and that is a big IF, employment was as strong as suggested by headlines then wage growth would be rising sharply and economic growth would be running near levels historically associated with "full employment rates."
However, the chart below, which is the labor force participation rate of 16-54-year-olds as a percentage of just that age group, is representative of the real problem. Just because the BLS chooses not to "count" those individuals, it DOES NOT mean that they have ceased to exist.  (The percentage of workers participating in this age group as has fallen for the past 3 months.)

However, I am not suggesting that there has been NO JOB growth. As my friend Doug Short recently noted:
"In 2000, the three younger cohorts constituted 66% of the labor force. Now they have shrunk to 56%, which means the 45 and older workers have grown from 34% to 44% of the labor force. In the late 1990s the dream of early retirement was common among the Boomers. But the reality is that an increasing number are delaying retirement, and many who did retire have now reentered the workforce.

There is little doubt that the two 20th century recessions and major market selloffs devastated the retirement plans for a great many of the individuals nearing that milestone."
Again, while Cullen is right about the headline data looking "Tony the Tiger, GREEEAATT!," the underlying economic dynamics suggest a far different picture.
This brings me to Dr. Mark Skousen who once said:
"The reality is that business and investment spending are the true leading indicators of the economy and the stock market. If you want to know where the stock market is headed, forget about consumer spending and retail sales figures. Look to business spending, price inflation, interest rates, and productivity gains."
Skousen is correct. The real economy, and one that delivers real levels of higher employment, wage growth, and economic stability, is driven by the "production" side of the economic equation. Individuals must produce first in order to have income with which to consume. Therefore, if you want to measure what is happening in the actual economy, measure what businesses, and the factors that directly affect them, are doing.
The first chart below are Skousen's four leading economic factors.

Notice the problem here. Despite bullish economic headlines, the four primary indicators have all turned lower in recent quarters suggesting a weaker economy than headlines currently suggest.
However, let's take this analysis one step further and combine all four components into a single index. The Skousen Index is a simple average of the four components above.

There are two interesting points about the index above.
The first is that economic activity has previously had a pickup just before the onset of an economic recession. Given mainstream economists tendency to analyze activity from one data point to the next, rather than the historical trend, these last "gasps" of activity are misconstrued as a pickup in economic strength with prognostications of "blue skies" ahead. As any sailor will tell you, what makes "squalls" so dangerous is that they appear quickly and with little warning. A failure to react quickly can have devastating consequences.
Secondly, the index has once again fallen below levels that have historically denoted weak economic environments or worse.
While the indicator, or the underlying components, do NOT suggest the economy is about to plunge into recession, they do imply that the current environment is far weaker than headline statistics suggest.
The Skousen Index, along with the Economic Composite and a variety of others, all suggest that the reported employment headlines are overstating actual employment in the economy. This is most likely due to seasonal adjustment factors that have been skewed due to the structural shift in the economy and the lingering effects of the financial crisis. 
Importantly, as investors, it is crucial to ignore headline statistical data and focus on the underlying data trends that affect the real economy. While it is currently "blue skies" for investors, there are clearly storm clouds forming on the horizon. It will be those who fail to take precautionary actions that suffer the worst of consequences when the storm hits.
Courtesy Lance Roberts at StreetTalkLive.com (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
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