There are countless ways to quantify the risk of a new recession. Unfortunately, every methodology is flawed, which implies that it’s essential to analyze the beast from multiple angles. Monitoring the ratio of potential GDP to actual GDP deserves to be on the short list. It’s a timely topic because the Congressional Budget Office recently updated its estimate of potential GDP. The good news is that comparing this metric with reported GDP suggests that recession risk is still low, or at least it was through 2013’s fourth quarter.
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● Panic, Prosperity, and Progress: Five Centuries of History and the Markets
By Timothy Knight
Summary via publisher, Wiley
With the financial markets seemingly careening from one crisis to another, it’s vital for today’s investors and traders to have an historical perspective on market performance during times of great turmoil. In this book, Tim Knight provides an exhaustive analysis of financial market behavior prior, during, and following tumultuous events since 1600. Making copious use of charts and basic technical analysis, Knight demonstrates how external shocks tend to create extreme reactions in the financial markets and how these predictable reactions provide opportunities for investors and traders to profit. Knight traverses five centuries of financial market history, from Tulipmania in the 1600s to the contemporary sovereign debt crisis.
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rise slightly to +0.37 in the January update that’s scheduled for release on Monday (Feb. 24), according to The Capital Spectator’s median econometric forecast. In the previous release for December, the three-month average was +0.33, a reading that equates with economic expansion. Only values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate for January, CFNAI’s three-month average is projected to remain at a level that’s historically associated with growth, and at a rate that’s moderately above trend.
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The economic news for the US has been disappointing in recent weeks, although yesterday’s updates on jobless claims and the manufacturing sector offer a brighter view. Nonetheless, it’s easy to assume that the business cycle is faltering, based on weak numbers for housing starts, retail sales, payrolls and personal income in the latest releases. But when you step back and consider the broad trend based primarily on year-over-year changes, there’s still no overt sign that the economy is deteriorating. A diversified set of 14 economic and financial indicators still point toward growth. This view via the data offers yet another reminder that it’s dangerous to draw hard and fast conclusions about the state of macro from a handful of numbers using monthly comparisons.
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The optimists got a break today. This morning’s economic updates brought encouraging news via initial jobless claims and the flash estimate of Markit’s US Manufacturing Purchasing Managers Index (PMI). The PMI report was particularly strong. It’s too soon to write off the weak numbers that have been harassing the macro profile lately, but the data du jour at least breaks the recent run of discouraging reports. In turn, it’s a bit easier to entertain the theory that a thaw in the weather will juice the business cycle in the weeks ahead.
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It’s not a crash, but it sort of smells like one. Housing starts and newly issued residential building permits dropped sharply in January, the Census Bureau reported this morning. The declines, which came in well below expectations, follow a pattern of late: disappointing economic news for the US. But once again there’s also the routine of analysts telling us that the unusually harsh winter weather is temporarily weighing on the data and so better numbers are just around the corner. Perhaps, but for the moment there’s a new dose of ugly numbers to review.
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The sharp drop in confidence among home builders this month adds another disappointing number to the growing list of troubling economic updates. “Unusually severe weather conditions across much of the nation along with continued concerns over the cost and availability of labor and lots caused builder confidence in the market for newly-built, single-family homes to post a 10-point drop to 46 on the National Association of Home Builders/Wells Fargo Housing Market Index,” NAHB reported yesterday.
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Housing starts are expected to total 997,000 in tomorrow’s update for January, based on The Capital Spectator’s median econometric forecast (seasonally adjusted annual rate). The projection represents a slight decline vs. the previously reported 999,000 for December. Meanwhile, the Capital Spectator’s median estimate for January is moderately higher vs. a trio of consensus estimates based on recent surveys of economists.
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The Arab Gulf is hot, and we’re talking more than weather. The leading stocks listed on the western slice of the Persian Gulf (primary the United Arab Emirates, Qatar and Kuwait) are sizzling. The equities in the major markets of Europe are doing quite well too when we slice up the planet’s stock markets by regional definitions.
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The US economic trend has rebounded a bit in February after a soft start in the new year, based on a markets-based profile of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 10.8% on Friday, Feb. 14–a level that suggests that business cycle risk remains low. The current 10.8% value is moderately above last month’s low of roughly 8%. More importantly, MMRI is still well above the 0% danger zone. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply that economic growth will prevail.
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