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.