Hope from the US?

Last night’s market action may have been worrisome for China (with metals crushed) and frustrating for Europe (going nowhere fast) but US data was excellent.

The Philly Fed Index, a guide to manufacturing in the north east, and the same Philly Fed that collapsed in August, rebounded at a record pace, blowing away all market expectations:

Responses to the Business Outlook Survey this month suggest that regional manufacturing is showing signs of recovering, following several months of decline. The survey’s broad indicators for activity, shipments, and new orders recorded positive readings after two months in negative territory.  Responding firms indicated that employment was slightly higher this month.  The broadest indicator of future activity remained positive and showed marginal improvement over its reading last month.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from ‐17.5 in September to 8.7, the first positive reading in three months. The current new orders index paralleled the rise in the general activity index, increasing 19 points and returning to positive territory.  The shipments index also recorded a positive reading, increasing from ‐22.8 in September to 13.6 this month.

The bureaucrat who wrote that modest assessment must have been smiling. This was the biggest jump the index’s history. Still, as the above chart shows, in reality it’s a snap back from the August pummeling that the index took on the debt-ceiling debacle. AS such, it is a bounce away from recession not into good growth.

But there are more reasons to be hopeful today. My base case for the US remains a recession next year (yes, even after today) but the core reason for that is the projected fiscal cuts resulting from the same August debt-ceiling debacle. Today from the Washington Post comes this:

With a Thanksgiving deadline fast approaching, a powerful congressional panel devoted to debt reductionis running in rhetorical circles, unable to break the impasse over taxes that has long blocked aggressive action to tame the national debt.

Though the committee’s 12 members have been meeting for nearly two months in closed-door sessions, lawmakers, aides and others involved in the process say they have yet to reach consensus on the most basic elements of a plan to restrain government borrowing.

There is no agreement on the scope of their ambitions: Should they aim to meet a savings target of at least $1.2 trillion over the next decade or “go big” with savings of $4 trillion or more? Nor is there agreement on a benchmark against which to measure those savings. And while individual ideas for savings abound, the committee has yet to assemble a comprehensive framework that would demonstrate its ability to produce a plan of any size before the Nov. 23 deadline.

It may seem a little odd to be hopeful that these talks bog down but consider, if these talks can drag on (and on) and the fiscal cuts be pushed out, then the US economy can by default reach the sensible outcome of sustained fiscal spending in the short term and longer term consolidation, when the housing market works through its imbalances. Alas, there is also this:

If the committee, comprising six lawmakers from each party, fails to reach an agreement that wins congressional approval by Christmas, $1.2 trillion in additional across-the-board cuts will be triggered in January 2013.

Democrats have argued that the trigger would force Republicans to the bargaining table over taxes because the automatic reductions would fall heavily on the Pentagon. But so far, that tactic has not worked. House Speaker John A. Boehner (Ohio) and other GOP leaders have yet to show any appetite for significant tax hikes in advance of the 2012 election, when they hope to campaign against Democrats on the issue.

OK, I’m might just be smoking the hopium on this one. The alternative scenario is that if no agreement can be reached, we’ll end up right back where we were in August.

The oscillation in the US data is nicely captured in a brief debate at the WSJ about the market versus the ECRI:

So is the Economic Cycle Research Institute, which emphatically forecast a recession the Friday before the market began its October rally, going to be wrong for the first time in decades?

Or will its managing director, Lakshman Achuthan, who unequivocally stuck his neck out and said recession is ‘’unavoidable,’’ have the last laugh?

My expectation is that ECRI will be proven right again, and that the stock rally we’re seeing now is a gift — and entirely in line with his forecast — ahead of a renewed collapse.

Consider that the last two times Achuthan leveraged his cycle research to make an out-of-consensus recession call were March 2001 and March 2008. After the first, the S&P 500 SPX +0.46%   rose 14% to its 10-month average in May before falling 32% over the next 16 months. After the second, the S&P 500 rose 9.8% to its 10-month average in May before collapsing by 42% over the next nine months.

…The reason for the lag is that ECRI’s calls come early. That’s why they are called “forecasts” rather than “observations.” If the past two examples provide any guidance, the current rally has a shot at rising to the 1,230 to 1,280 level of the S&P 500 before turning tail. On Wenesday, the index closed at 1,209 after falling by 1.3%.

As you might expect, Achuthan himself isn’t budging from his call. I caught up with him this week as he was expecting the birth of his second child.

“It really isn’t unusual for the consensus to recognize recessions many months after they have begun,” Achuthan said, “because most analysts are focused mainly on coincident indicators like GDP, retail sales and jobs, along with a couple of short leading indicators like the purchasing managers indexes and jobless claims.”

I remain onside with the ECRI. US manufacturing is slowly grinding out a recovery but so long as the Hill, Europe and China all weigh, I see no way out for the economy as a whole next year.


  1. If this is the best we can cling onto, in an environment of QE2 and ZIRP and enormous fiscal stimulus, there is no hope.

    • Cheer up, mate. The US is a remarkably flexible economy. And even though I do expect a very long, slow recovery, with repeated dips and recession risks, I do not expect the interminable decline of Japan.

      • +1, you do need to cheer up abit sherlock, lifes not that bad.

        but H&H “My base case for the US remains a recession next year” you might be right but this is risky base case i reckon.

  2. Boehner would like nothing more than for the automatic cuts to kick in. The neo-cons of the noughties cared about the Pentagon budget – the Tea Partiers don’t, and that’s the way the wind is blowing at the moment. If it hampers Obama’s ability to prosecute the end-games in Iraq and Afghanistan, all the better for the domestic politics.

    • darklydrawlMEMBER

      I would say that two unfunded and lengthy wars have done enormous damage to the US economy. The sooner they can wrap it up the better for all.

      I do agree with H&H though and feel the US is a flexible and powerful beast. It might be down and hurting, but I very much doubt it is out of the game and won’t come roaring back sometime in the next 2-5 years.

      • The wars have damaged their fiscal position. But three decades of ponzinomics has done the most damage. Ponzinomics is dead. If the US is to come “roaring back”, they need to find a new growth driver. It won’t be credit.

      • I don’t disagree that wrapping up sooner rather than later would be a better outcome, but doing it in a reasonable way that won’t just leave a state teetering on the brink is important, too – not just from a political angle but also from the compassionate, humanitarian view; these people have had their lives massively disrupted over the last decade, and deserve at least some measure of stability.

        The US was historically flexible, but I do wonder how much the degradation of the ability to compromise in politics (something we’ve seen more and more here, too) will calcify some of that. Bits of the US may go gang-busters regardless, but large swathes are likely to wallow for years to come. (all in my humble opinion, of course)

  3. re: Philly index

    Would like to point out here that I called this. 🙂

    Specifically the shocking numbers in August IMO coincided with the survey taking place at the height of the debt ceiling and S&P downgrade debacle. Since these are surveys rather than hard data it seemed like a spontaneous reaction to the surrounding hype that was dominating the airwaves.

    That view was rubbished at the time but now appears to be on the mark.

    • Nice call Carl. Am I to understand that the positive reading now was due to the recent bear rally and daily Euro debt hopes?

      Both are fizzling out which doesn’t bode well for future surveys as we could reach a new spike in pessimism soon.

  4. Look, almost every bit of commentary on the USA, misses the point that it is now almost as diverse a collection of disparate economic entities as the EU.
    The parts of the USA that are small government, low tax, pro business, low regulation; are the ONLY part of the world today that has any hope at all for the future. Southern and heartland USA is the only part of the world worth moving to, starting a business in, or investing in.
    If you removed California alone, from the statistics, the USA would clearly be the world’s strongest economy. If you looked at Texas as a separate country, it would be the world’s strongest economy by a wide margin. Rick Perry is right – the USA needs to be run like Texas, not like California or Illinois or Michigan or New York or New Jersey.
    The fact that almost ALL the “growth in employment” in the USA is occurring in Texas, is masked by the fact that people are flooding into Texas in their millions. The fact that unemployment is not higher in Texas, is testimony to the fact that these people are getting jobs, and the fact that Texas has never had house price inflation in the face of demand, proves the role of genuine free markets in urban development – not “planning” enabled rackets.
    Industry is now locating in Southern USA in preference to China or India because URBAN LAND is so much CHEAPER in outright dollar terms regardless of incomes being high. Add to that, clear property rights and political stability; and why would you think any other part of the world offers any future?

    • http://texanomics.blogspot.com/

      A must-read.

      So much for a global financial crisis being the result of “the failure of untrammelled free market principles”. The only parts of the world with any hope, are the ones where they actually HAD free market principles closer to being “untrammelled” than anywhere else.

      • Texas is an oil state. Norway is an oil country. Both are doing well despite have very different models of government and different tax levels.

        Norway is doing even better than Texas so I guess we should adopt their tax levels and government model.

      • This is true, but Macrobusiness have made a pretty good argument that the GFC was a combination of both issues. The housing asset bubble wouldn’t have happened if it wasn’t for both easy credit AND overly regulated development.

        What Texas shows us is that unregulated development stops housing bubbles regardless of credit. It would be interesting to see an analysis of an economy under a highly regulated credit, highly regulated housing market.

        What Texas shows is that ‘free-markets’ are not the culprit, just that unregulated financial markets along with highly regulated asset markets will end in disaster.

      • Of course that conveniently ignores the fact that Texas has has some of the most restrictive mortgage lending laws in the US…


        “There is no question that the home equity restrictions in Texas played a role during the boom years of mortgage finance,” said David Frase, president of the Texas Mortgage Bankers Association.

        In 1997, the Legislature decided to undo a 160-year-old prohibition on home equity lending, writing a constitutional amendment, which voters later approved, that contained unique restrictions to protect homeowners from getting overextended.

        Loans were capped at 80 percent of a home’s value. If the property has a mortgage, the combined debt couldn’t exceed the 80 percent threshold.

    • Ronin8317MEMBER

      A surplus must be matched by a deficit somewhere else, so it is impossible for everyone to run surplus at the same time. This is the dilemma of modern economics. The US Southern states are achieving growth because they can export to other states without any barrier. This cannot happen if Texas is a separate country.

      Texas’s unemployment rate stands at 8.5%. New York’s unemployment rate is 8%. The notion that Texas is better than New York does not stand up to scrutiny.

      • Since when was unemployment the only factor in measuring an economies performance? The main thing it shows is that labour is underutilised. It is only one of many possible symptoms of a weak economy.

        Surely if production, real incomes and real GDP are strong then high unemployment is an indicator that the economy is strong but not as strong as it could be?

  5. Wouldn’t we assume a solid surge in output to be not a spontaneous occurence in it’s own right but rather, a response led by a solid surge in demand? If this were the case, where is origin of the demand that stimulated the supply response. Have domestic conditions in the US suddenly and dramatically improved? Are US consumers spending strongly and freely once more? Or is it export-led?

    From calculated risk….
    “For the month of September, loaded inbound traffic was down 4% compared to September 2010, and loaded outbound traffic was up 12% compared to September 2010.

    Exports have been increasing, although bouncing around month-to-month. Exports are up from last year, but are still below the peak in 2008.

    Imports have been soft – this is the 4th month in a row with a year-over-year decline in imports. However, if the NRF is correct, imports will pick up in October to the highest level this year.”

    Domestic conditions in the US do seem to have improved somewhat but with the seemingly insolvable (politically) problems in the Eurozone, how long could an export-led recovery last?