December 2015 Economic Forecast: On The Low End Of The Growth Seen Since The End Of The Great Recession

Econintersect’s Economic Index declined – and remains in the low range of index values seen since the end of the Great Recession. The most tracked sectors of the economy generally showed some growth. Still our economic index remains in a long term decline since late 2014.

Our employment six month forecast discussed below continues to forecast weakening employment growth.

The consumer portion of the economy continues to outperform the business sector.

Income growth is finally exceeding expenditures. Still consumers continue to spend a historically high percentage of income – and there seems to be little room for improvement in the rate of spending growth. Note that the quantitative analysis which builds our model does not include personal income or expenditures directly.

Another data point – the correlation between retail sales and employment is in recessionary territory – even with the big employment number in October. Note that neither employment nor retail sales are part of our economic model.

Econintersect checks its forecast using several alternate monetary based methods – and all the checked forecasts show moderate to weak economic growth.

Note that all the graphics in this post auto-update. The words are fixed on the day of publishing, and therefore you might note a conflict between the words and the graphs due to backward data revisions and/or new data which occurs during the month.

This post will summarize the:

special indicators,

leading indicators,

predictive portions of coincident indicators,

review of the technical recession indicators, and

interpretation of our own index – Econintersect Economic Index (EEI) – which is built of mostly non-monetary “things” that have been shown to be indicative of direction of the Main Street economy at least 30 days in advance.

Special Indicators:

The consumer is still consuming. The ratio of spending to income is again over 0.92 – and has been elevated since Jan 2013. There have been only four periods in history where the ratio of spending to income has exceeded 0.92 (April 1987, the months surrounding the 2001 recession, from September 2004 to the beginning of the 2007 Great Recession, and for some occasions since late 2013). A high ratio of spending to income acts as a constraint to any major expansion in consumer spending.

Seasonally Adjusted Spending’s Ratio to Income (a increasing ratio means Consumer is spending more of Income)

The St. Louis Fed produces a Smoothed U.S. Recession Probabilities Chart which is currently giving no indication of a recession.

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)

Joe Sixpack’s economic position is better than the previous period (blue line in graph below). The Econintersect index’s underlying principle is to estimate how well off Joe feels. The index was documented at a bottom in the July 2012 forecast. Joe and his richer friends are the economic drivers. Joe’s position is above levels associated with past recessions. However, note that this index has falsely warned of recessions that never occurred – but its purpose is not to foresee recession, but to indicate stress on the consuming class. This index is updated every quarter. It could also be said that GDP has divorced itself from Joe Sixpack.

Joe Sixpack Index (blue line, left axis):

Econintersect reviews the relationship between the year-over-year growth rate of non-farm private employment and the year-over-year real growth rate of retail sales.This index is currently negative. When retail sales grow faster than the rate of employment gains (above zero on the below graph) – a recession is not imminent. However, this index has many false alarms.

Growth Relationship Between Retail Sales and Non-Farm Private Employment – Above zero suggests economic expansion

The growth rate of real gross domestic product (GDP) is the headline view of economic activity, but the official estimate is released with a delay. Atlanta’s Fed GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release. Econintersect does not believe GDP is a good tool to view what is happening at Main Street level – but there are some correlations. In the previous 30 days, GDPnow is forecasting a declining rate of growth.

Most economic releases are based on seasonally adjusted data which are revised for months after issuance. An actual contraction in a particular release may not be obvious for many months due to seasonality methodology which smooths the data. Special indicators are not particularly strong – and now shows a weaker economy.