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A Rare Divergence for GDP Forecasts Highlights Uncertainties

July 19th, 2010 Michael McDonough Comments off

Taking a random sampling of 2Q GDP forecasts for Bloomberg we can see the uncertainty facing the release schedule for 7/30.  Weaker than expected trade and and inventory data are the primary culprits behind the uncertainty, and I imagine more banks will revise down their forecasts as we move closer to the release.  Presently, I believe the market will be lucky to see the q/q annualized growth rate exceed 3.0%, and anticipate the release will come in closer to 2.7%.

Source: Bloomberg

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Categories: GDP, US Tags: ,

An Old Radio Piece

July 13th, 2010 Michael McDonough Comments off

An older piece I did on Bloomberg radio discussing the correlation between garbage and GDP.  I am more putting it up here, so I don’t lose track of the file…

Bloomberg radio 6-11-10

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ECRI Weekly Leading Index Pointing Toward a Double-Dip

June 29th, 2010 Michael McDonough Comments off

Those looking for evidence of an upcoming double dip recession may have found their canary.  The Economic Cycle Research Institute’s (ECRI) Weekly Leading Index is pointing to serious trouble ahead for U.S. economy with the index falling seven consecutive weeks moving into negative territory.  According to Laksham Achutan, managing direction of ECRI, “The continuing decline in [the index’s] growth rate to a 56-week low underscores the inevitability of the slowdown.”  Looking at the historical relationship between growth and the ECRI’s index, Laksham’s views may not be unfounded.  Over the past several years the index has done a fairly robust job at predicting turns in the U.S. economy, and if you believe the current trend things are about to get much worse.  Unlike the Conference Board’s Leading Economic Indicator Index the ECRI’s Weekly Leading Index is timelier released on a weekly basis with only a one week lag.   The next release will be this coming Friday. 

 

Source: Bloomberg

 

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Preparing for Retail

May 14th, 2010 Michael McDonough Comments off

On the surface, a recovery in retail sales is not only a harbinger for stronger economic growth, but could prove to be the missing link for job creation (see chart).  Climbing out of the deepest recession since the Great Depression, consumption growth has been surprisingly tepid, at least partially due to companies’ lack of confidence in the current recovery.  This is best demonstrated by surging temporary employment—first in first out employees—while overall hiring is lagging.  While forecasted gains in April’s retail sales, released 8:30 a.m., (+0.2% m/m, +0.4% ex-autos) could help bolster confidence, concerns linger that these improvements may be artificial, fueled by temporary government stimulus, and not be broad based enough to support a genuine recovery.  Both sides of this argument likely have some merit, but I anticipate marginal gains in consumption will continue over the months ahead as consumer confidence strengthens, and as consumer credit levels revert back to their historical norms, after significant deleveraging.

Source: Bloomberg

Thinking quantitatively about this my mind displays Excel’s infamous ‘circular reference’ warning.  People need jobs to consume, and companies need sales to hire.  If companies don’t hire, then people have no income to consume.  While you may be familiar with the adverse feedback loops that helped bring down the market, this is an advantageous feedback loop, where higher sales or faster hiring will support the other factor.  The bottom line is, it will be important to watch whether or not April’s gains are limited to a small subset of sectors, or are more broad-based.  Strong broad based growth will have a much stronger impact on business sentiment, consumption growth’s sustainability, and the likelihood of job creation.

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GDP Growth’s All a Bunch of Garbage…

May 13th, 2010 Michael McDonough Comments off

I often analyze the volume of U.S. train car activity released by the Association of American Railroads, hoping to find some magical predictive power over equities, manufacturing, IP, etc…, but what I usually end up with is a mediocre coincident indicator.  While in some isolated incidents the index can exert considerable forecasting prowess, volatility and past false positives make interpreting these results extremely difficult.  Nevertheless, despite its shortcomings the data have a big advantage in that it is a weekly release, and unlike other indices cannot be impacted by speculative investors, as it tracks the actual volume of cars on track. 

The AAR breaks its data down into trains carrying various commodities, which can be an excellent tool to track developments in a specific sector.  But, for a moment I wanted to highlight a surprising correlation I found between trains carrying waste and U.S. GDP growth.  While a lot of the commodities these indices track are quite seasonal (not too much wheat to transport in the middle of winter) waste appears to track year over year GDP growth quite tightly, with a few clear exceptions in 2005.  As of 4/30/10 the volume of trains carrying waste hit its highest level since 2008, which given its relationship toward GDP is indicative of continued ‘robust’ growth for the second quarter.  Of course this series isn’t the missing link in GDP forecasting, but another mostly unpublicized index pointing toward the current strength of the U.S. economy.    

Source: AAR

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Could Higher Industrial Production Result in Less Hiring?

March 15th, 2010 Michael McDonough Comments off

February’s surprise 0.1% increment in industrial production came despite severe winter weather during the month that was expected to hamper production.  Amongst the index’s biggest gainers were computers and information processing equipment, which each rose roughly 1%.  As Bloomberg put it these increments ’signal the pickup in U.S. business investment is being sustained’.  However, could these gains come at the expense of job gains?  Afterall, one of the primary functions of computers and ’information processing equipment’ is to bolster productivity. And let us not forget, productivity gains have exploded since the onset of the financial crisis, while employment has fallen off a cliff.  It may be too early to tell, but the possibility exists that companies could be investing in new cheaper technology rather than investing in new expensive employees to support output and profits–a trend which could continue for a while…

U.S. IP y/y:

Source: Bloomberg

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One Month’s Not a Trend, But January’s Trade Data Could Point To A Slowdown in Global Trade

March 11th, 2010 Michael McDonough Comments off

Trade, the life blood of the global economy, has begun rebounding nicely since the trough of the global economic crisis.  But, January’s US trade data unexpectedly displayed a decline in both exports–the first decline in nine months–and imports, leading to a smaller US trade deficit, but also implying a potential slowdown in global trade.  As I said, one month does not indicate the start of a trend, but this is something that should be monitored moving forward.  The chart below illustrates the relationship between the U.S. trade deficit and the Baltic Exchange’s Baltic Dry Index (BDI).  As you can see the sharp decline in the US trade deficit during the economic crisis–indicative of a slowdown in global trade–coincided with a collapse in shipping rates as measured by the BDI.

US Trade Deficit (White Line) vs. the BDI (orange Line):

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ISM Disappoints, While Market Maintains its Gains

March 1st, 2010 Michael McDonough Comments off

The February’s manufacturing ISM slipped to 56.5, versus a 58.4 a month prior.  Disappointing the latest Bloomberg consensus forecast of 58.0.  Any level over 50 signifies expansion in the sector.  I continue to believe that as inventory restocking begins to slow the ISM manufacturing index will suffer as 2010 progresses.  That is without a new source of demand for manufactured goods, which does not appear to be on the short-term horizon.

Looking at the ISM’s components, prices paid fell to 67.0 from 70.0, the employment index climbed to 56.1 from 53.3, and the new orders index declined to 59.5 from 65.9. A jump in the employment index could bode well for this Friday’s employment report, which could be battered by weather related effects.

Manufacturing ISM & ISM Employment Index

Source: Bloomberg

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What To Look For This Week

February 22nd, 2010 Michael McDonough Comments off

This week I am going to keep a close eye on several housing reports, which include January’s new (Wed) and existing (Fri) home sales along with December’s Case Shiller HPI (Tue)–December is the first month after what would have been the expiration of the first time home buyer tax credit.  December’s home prices likely came under continued pressure, while January’s home sales data should show at least a modest bounce after their sharp declines in December stemming from the would-be expiration of the tax credit.

I will also be watching a slew of manufacturing releases including three regional Fed surveys–together these surveys can provide some insight on the month’s ISM–and the durable goods orders report (Thu).  I anticipate that all should be positive excluding the Richmond Fed survey.

This week’s biggest news will likely culminate in a flurry of Fed speeches culminating with Chairman Bernanke’s semi-annual monetary policy report to Congress (Wed).  But, given his recent House testimony, coupled with the FOMC minutes he may not have many surprises left to deliver in this week’s testimony.  Nevertheless, markets will be keeping a very close eye on what he has to say, and any comments related to the timing of tightening will likely impact the market.  There are also several other key important Fed speeches this week that could drive some headlines.

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Non-Manufacturing ISM Remains Subdued in January

February 3rd, 2010 Michael McDonough Comments off

Janurary’s non-manufacturing ISM release rose modestly to 50.5 versus 49.8 in December. This was just below the Bloomberg consensus forecast of 51.0. The employment index rose to 44.6 from 43.6, while the prices paid index climbed to 61.2 from 59.6.  The new orders index took a bit of a bounce in January moving to 54.7 versus 52.0 a month prior, which could help to bolster the index next month.  Growth in the service sector, unlike manufacturing, has been relatively subdued over the past six months with the index bobbing around the 50 break-even point since August.  This report is further evidence of uneven economic growth and the fragility of the current economic recovery.

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