Friday, April 30, 2010

Updates On Economic Indicators

Here are various indicators that are supposed to predict and/or depict economic activity. These indicators have been discussed in previous blog posts:

The April Chicago Fed National Activity Index (pdf) (last updated 4/29/10)

The Consumer Metrics Institute's Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

an excerpt dated 4/29/10:

"The April update of the USA TODAY/IHS Global Insight Economic Outlook Index shows moderate growth in real GDP, at a six-month annualized growth rate, through late summer. The forecasted April growth rate of 3.6% is expected to slow to 3.0% - 3.1% for June through September. Tight credit, high debt burdens and the government's monetary and fiscal stimulus programs coming to an end will temper consumer spending, keeping the growth rate solid but moderate."

The ECRI WLI (Weekly Leading Index) : Last updated 4/16/10:

The WLI is at 133.0

Fortune's Big Picture Index:

-I was unable to locate updated values for this index-

The Dow Jones ESI (Economic Sentiment Indicator):

As of 3/31/10 the Indicator was at 39.4. An excerpt from the release:

""Although the rise is modest, it is better than the stagnation of recent months,” Alen Mattich, Dow Jones Newswires "Money Talks" columnist, said. "If repeated in April it could indicate that the economy is starting to haul itself slowly upwards again."

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index

Here is the latest chart, updated through 4-24-10:

The Conference Board LEI (Leading Economic Index) and CEI (Coincident Economic Index): (pdf)

As of April 19, the LEI was at 109.6 for March, and the CEI was at 100.2 for March. The chart shows a continuing large disparity between the two measures.

From the Press Release: "Adds Ken Goldstein, economist at The Conference Board: "The indicators point to a slow recovery that should continue over the next few months. The leading, coincident and lagging series are rising. Strength of demand remains the big question going forward. Improvements in employment and income will be the key factors in whether consumers push the recovery on a stronger path."

"New Financial Conditions Index"

I had a post of this index on 3/10/10. There is currently no updated value available.


I post various indicators and indices because I believe they should be carefully monitored. However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

SPX at 1206.26 as this post is written

Thursday, April 29, 2010

Four Confidence Survey Charts

Here are four charts reflecting confidence from the site. They provide a longer-term historical timeframe, which I have found to be rare.

Here are the charts. Each is plotted vs. the S&P500:

Conference Board Consumer Confidence, last updated 4/27/10:

University of Michigan Consumer Confidence, last updated 4/16/10:

ABC News Consumer Comfort Index, last updated 4/16/10:

NFIB Small Business Optimism, last updated 4/16/10:

The above NFIB chart is particularly useful in conjunction with the April 15 post that discussed the latest NFIB results.

The four above charts certainly seem to indicate that "this time is different" - at least from the perspective of "confidence."

SPX at 1205.20 as this post is written

Wednesday, April 28, 2010

Home Prices Vs. Gold

On April 23, had an interesting chart, shown below, that compares the median home price vs. the price of Gold:

Traditionally, houses have been viewed as "hard assets." However, as one can see above, their recent (from a long-term historical perspective) price pattern seems more geared to that of a "paper asset" - i.e. strong performance during the '80s and '90s, while significantly underperforming Gold for roughly 7 years.

There are many other observations and interpretations that can be made from this ratio as well. It certainly "frames" home prices in a different light, especially from an investment standpoint.

Going forward, it will be interesting to see how this ratio evolves...


SPX at 1189.38 as this post is written

Monday, April 26, 2010

Two Quotes From Alan Greenspan

As an extension of the last post concerning bubbles, here are two of Alan Greenspan's past comments that I find particularly relevant given our current environment:

This is from a September 26, 2005 speech he gave in which he speaks about how negative "shocks" may impact the economy. I find this quote interesting as it is an example of, among other things, how one can overlook the severity of embedded risks in a bubble environment:

“How significant and disruptive such adjustments turn out to be is an open question. Nonetheless, as I have pointed out in previous commentary, their economic effect will, to a large extent, depend on the flexibility inherent in our economy. In a highly flexible economy, such as the United States, shocks should be largely absorbed by changes in prices, interest rates, and exchange rates, rather than by wrenching declines in output and employment, a more likely outcome in a less flexible economy.”

This next quote is from his "The Crisis" paper, p. 45:

"'…history has not dealt kindly with the aftermath of protracted periods of low risk premiums.'"

SPX at 1217.28 as this post is written

Sunday, April 25, 2010

Mishkin's Previous Comments On Bubbles

On April 8 I commented upon William C. Dudley's "Asset Bubbles" speech.

In that speech, he refers to Frederic Mishkin's speech of May 15, 2008. It should also be noted that Mishkin offered similar thoughts in a Financial Times op-ed of November 9, 2009.

There is much I can comment about in each of Mishkin's commentaries about bubbles. For now, I will limit myself to the following:

Here is a passage from the aforementioned 2008 speech which I found most interesting:

"...monetary policy should not try to prick possible asset price bubbles, even when they are of the variety that can contribute to financial instability. Just as doctors take the Hippocratic oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good. Instead, monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation, then adjusting policy as required to achieve maximum sustainable employment and price stability. This monetary policy response should prove sufficient to prevent adverse macroeconomic effects of some types of asset price bubbles."

I interpret this (and other points in his speech) as (in effect) saying that monetary policy shouldn't be used to prevent bubbles, but it should be used to "clean up the mess" should they "pop."

This "mindset" seems to be prevalent now among policy makers.

I believe this overall "treatment" of bubbles is frightfully perilous, has already created immense damage, and will end very badly.

It appears as if not only are we (as a nation) downplaying the risks of bubbles, but also are continually unable to identify their existence.

As I wrote on March 29: "I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about....While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity."

SPX at 1217.28 as this post is written

Friday, April 23, 2010

Pricing In Our Current Environment

Pricing is a very complex discipline even during periods of economic growth and stability. With the onset of increased economic uncertainty and volatility over the last few years, pricing's complexity has significantly grown.

Of course, it is impossible to characterize all firms as having the same pricing issues, as each industry and firm has a different set of circumstances. As well, any substantive discussion of pricing, especially in today's economic environment, would be exceedingly lengthy and complex. However, there appears to be enough commonality among past and future pricing issues as to allow for some general comments.

Many aspects of today's economic environment are negatively impacting pricing and profitability. Among these are outsized excess capacity and generally weak, if any, revenue growth. As well, many firms are encountering customers unwilling, and/or unable, to pay previously acceptable prices. Inventory issues (mentioned in the last post), forecasting complexities (discussed in this article), and recent steadily increasing commodity costs further complicate the situation. While many larger firms have been reporting strong profits, much of this profitability has been attained through cost-cutting and other related measures. As such, it is not necessarily profitability derived through "pricing power" and increased gross margins.

Many firms have responded to the current economic environment by reducing prices. Much of the heavy discounting and promotional activity appears rather indiscriminate in nature.

Although cutting prices is perhaps the easiest way to attain revenues, this tactic likely holds even greater danger now than in the past. Gauging the effectiveness of pricing decisions is often complex, especially when viewed in a strategic sense encompassing multiple time horizons. While pricing decisions made now can appear proper, continued economic volatility and uncertainty can serve to undermine the effectiveness of such pricing. In essence, what may appear to be a proper pricing decision now may radically change with changing economic conditions. The odds of inadvertently managing a firm into some type of adverse pricing situation (or trap) like a "price war" or other various profitability-depleting scenarios is increased with greater economic uncertainty as well as customers who are increasingly price sensitive.

Although the current economic environment holds significant peril for pricing and profitability, there is upside to the situation. Those firms that can effectively manage pricing in such an economic environment stand to gain significant competitive and strategic advantage across many different business functions - not to mention significantly increasing revenue and profitability when viewed against a scenario of ineffective pricing management.

SPX at 1208.67 as this post is written

Thursday, April 22, 2010


One of the key questions with regard to economic activity is the extent to which it is being driven by inventory replacement. As seen in the CalculatedRisk blog of March 12, "the contribution to GDP in Q4 from 'Change in private inventories' was 3.88 of the 5.9 percent annualized increase in GDP."

Here are two charts that give a historical perspective...

This one is from the aforementioned CalculatedRisk post of March 12, in which he states: "...clearly most of the inventory adjustment is over." :

Here is another look at inventories, from of April 15, 2010, in which it says "...clearly most of the inventory adjustment is over.":

Another key question is whether current inventory levels are appropriate given the future sales environment.

SPX at 1192.38 as this post is written

Wednesday, April 21, 2010

Recession Measures - Two Charts

As an additional note to the last post, on April 12 the CalculatedRisk blog had an interesting post titled "Recession Measures." In it, he discussed key measures that the NBER uses to determine recoveries.

In the post he shows four charts, constructed in a "percent of peak" fashion. Here are the two that I find most notable (the other two not shown: employment and GDP/GDI):

Industrial Production, Percent of Previous Peak:

Real Personal Income Less Transfer Payments, Percent of Previous Peak:

SPX at 1207.17 as this post is written

Monday, April 19, 2010

NBER BCDC Member Robert J. Gordon Comments

On April 12 Robert J. Gordon, a member of the NBER Business Cycle Dating Committee, wrote of the reasons why he believes that "It is obvious that the recession is over."

There are many noteworthy items in his article, and I could extensively comment on his arguments. Needless to say I disagree, fully or partially, on many of his points.

I will highlight four items. First, I found this to be interesting, and it underscores the initial severity of the downturn:

"There was a powerful economic downdraft that started with the failure of Lehman in September 2008 and extended into the winter and spring of 2009. Everybody panicked. Firms laid off employees by the millions, and real gross private domestic investment declined between 2008:Q3 and 2009:Q2 at an unprecedented annual rate of -41.6 percent, even faster than at any time during the Great Depression."

Second, this is highly notable:

"Thus the American economy is enjoying strong upward momentum that is evident every day in the announcements of retail sales, service sector production, and almost everything else. There are no negatives in the actual data, but rather the negatives reside in doomsayer worries that consumers are too weak to spend or that the economy will collapse after the Obama stimulus dollars have been spent."

I strongly disagree with this above statement. While there have been signs of "strong upward momentum" - as he suggests - there are also many signs of pronounced weakness, broadly seen across many measures. Various posts on this blog discuss these measures and weaknesses.

Third, he states, "A double dip, i.e., two quarters with negative real GDP growth, is extremely implausible at any time over the next year."

Fourth, he states, "There are no plausible shocks that would suddenly push real GDP below its trough value of 2009:Q2 in the next year or two."

Those familiar with this blog know that I view this purported economic recovery as unsustainable, due to a variety of factors. Needless to say, I don't agree, for a variety of reasons, with his two above assertions concerning the durability of economic growth.

SPX at 1192.13 as this post is written

Sunday, April 18, 2010

Three Unemployment Charts

This post provides updated charts to the "Three Unemployment Charts" post of January 12.

As I have commented previously, most notably in an October 6 post, in my opinion the official methodologies used to measure the various job loss and unemployment statistics do not provide an accurate depiction. However, I believe that the following charts provide an interesting perspective of the officially-stated employment situation from a long-term historical perspective.

The first two charts are from the St. Louis Fed site. Here is the Median Duration of Unemployment:

Here is the chart for Unemployed 27 Weeks and Over:

Lastly, a chart from the Minneapolis Federal Reserve site. This shows the employment situation vs. that of previous recessions (as characterized by severity):

As depicted by these charts, our unemployment problem is severe. Unfortunately, there do not appear to be any "easy" solutions.

Back in July 2009 I wrote a series of blog posts titled "Why Aren't Companies Hiring?"

SPX at 1192.13 as this post is written

Friday, April 16, 2010

The April Wall Street Journal Economic Forecast Survey

The April Wall Street Journal Economic Forecast Survey contained a couple items of interest.

First, an interesting quote in the survey:

""The Fed dropped the funds rate to near zero due to a fast and sharp decline in economy. Having avoided a 1930s-type scenario, is a 0% policy rate still justified?" said Joseph Carson of AllianceBernstein. "We criticize banks for offering teaser rates to buy homes, but the Fed is offering a teaser rate for the entire economy."

Second, to the question "What effect will the overhaul have on the growth of nationwide health-care costs over the next 10 years compared to what would have occurred without it?" - only 15% indicated it will slow cost growth.

Also, for those unaware, about the survey:

"The Wall Street Journal surveys a group of 56 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared."

Otherwise, the detail indicates little change in economist expectations among major economic measures such as 10-Year Treasury Yield, GDP, CPI, etc. This continues a many-months trend of little changes in economic expectations. There was, however, a notable change in the expectation of the price of Crude Oil, with the new year-end price forecast of $82.94 vs. the previous month's year-end forecast of $79.52.


I post various economic forecasts because I believe they should be carefully monitored. However, as those familiar with this blog are aware, I do not agree with the consensus estimates and much of the commentary in these forecast surveys.

SPX at 1211.67 as this post is written

Thursday, April 15, 2010

NFIB Small Business Optimism - A Few Comments

On April 13, the NFIB put out a notable press release.

Although the entire press release is worth reading, here are some notable excerpts:

"The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”


"Plans to make capital expenditures over the next few months fell one point to 19 percent, three points above the 35-year record low."


"The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved 1 point to a net negative 25 percent. Widespread price cutting continued to contribute to reports of lower nominal sales."


"“What small businesses need most are increased sales, giving them a reason to hire and make capital expenditures and borrow to support those activities,” said Dunkelberg."


The lack of increased revenues during our current phase of the purported recovery is very disconcerting. I have previously written of this condition among larger firms, the most recent post of which was on January 29.

Another widespread facet which is disconcerting is the amount of discounting and pricing pressures.

In aggregate, many firms are finding this economic environment to be challenging, if not exceedingly so. Of course, this stands in stark contrast to such economic measures such as strong GDP growth and robust financial markets.

I believe that many firms will continue to face very challenging conditions, and many will ultimately fail, unfortunately. I base this belief on a number of factors including my overall economic assessment as well as business-specific factors.

Early in 2009 I wrote an article about the extreme conditions businesses are being subjected to and how they can adapt. The article is titled "The Value of Business Analysis During This Economic Malaise."

SPX at 1210.65 as this post is written

Wednesday, April 14, 2010

Tax Increases - Cumulative Impact

It strongly appears as if many taxes will increase at all levels (Federal, State, Local) in the near future.

We, as a nation, are in a quandary as taxation needs to increase if we hope to narrow deficits and debt; yet at the same time the adverse economic effects of these increases may be large, quite pernicious, and difficult to forecast.

I've previously commented upon various complex facets of the taxation situation given our current economic situation. This can be seen in the February 23 post ("Tax Increases And Our Economic Situation - Follow Up") and the "America's Trojan Horse" article.

One would hope that some upper-level policy maker would be assessing the impact of having so many tax increases coming "online" at once. The cumulative potential tax increases will likely be outsized and potentially staggering.

Of course, it is conventional economic wisdom that tax increases should not be done during a time of economic weakness. This thinking is supported by research on the economic suppression caused by increased taxation (tax multipliers).

SPX at 1197.30 as this post is written

Tuesday, April 13, 2010

BusinessWeek Article: "The Case For More Stimulus"

The April 19 BusinessWeek has a story titled "The Case for More Stimulus," along with this interesting accompanying chart (pdf), "Stimulus That Makes a Difference."

Of course, those familiar with this blog know that I tend to disagree with this type of article on various fronts.

One question (among many) that supporters of further stimulus should be asking is if stimulus is working (and there is solid evidence it is not, as seen in many of my blog posts), then why is further stimulus necessary?

SPX at 1195.05 as this post is written

Monday, April 12, 2010

Food Stamps

I came upon some statistics with regard to food stamps. The program is called "Supplemental Nutrition Assistance Program," or SNAP.

The figures are impressively large, unfortunately. As well, the growth rates are brisk.

Here is a table showing the Number of People Participating; as of January the figure is 39,430,724 up 22.4% from year-ago levels.

Here is a table showing the Number of Households Participating.

Of course, what is particularly disconcerting is not only the extent of participation in these programs, but the fact that this is yet another notable statistic that is getting worse well after the purported end of the recession.

SPX at 1194.37 as this post is written

Thursday, April 8, 2010

Asset Bubbles Speech By William C. Dudley

Yesterday William C. Dudley, President and CEO of The Federal Reserve Bank of New York, gave a speech titled "Asset Bubbles and the Implications for Central Bank Policy."

Although there are many parts of this speech with which I disagree, I found this speech noteworthy and interesting.

I could make exhaustive comments about many parts of this speech. However, for now, I will comment on two aspects:

This speech continues the trend of other Federal Reserve (as well as a general widespread perception) statements that imply that there is an institutional belief at The Federal Reserve that there are no asset price bubbles in existence now, or at least not in the United States. Dudley does say that "I am going to be a bit of a heretic and argue that there is little doubt that asset bubbles exist and that they occur fairly frequently." However, he does not name any that are currently in existence - he just talks of those in the past.

Our societal inability to spot and prevent asset bubbles is problematical. As I have stated before, there are many bubbles in existence now, and they represent a grave danger to our economic system.

Another interesting statement that Dudley makes is the following, which is very noteworthy not only to investors but to others (including policy makers) as well:

"...a bias toward optimism may also play an important role. Studies have found that most people believe that they are above average in terms of their acumen, be it as investors, car drivers or in other activities.5 This overconfidence may cause some people to keep investing in the asset, even when they are skeptical about its valuation because they are overly confident that they will anticipate the end of the bubble and be able to get out in time."

Dudley's speech also references a 2008 speech by Frederic Mishkin of which I may comment upon later.

SPX at 1176.38 as this post is written

Tuesday, April 6, 2010

The Threat Of Rising Interest Rates

As seen on the following 10-year daily chart, the 10-Year Treasury Yield has been rising as of late:

chart courtesy of

There is very little general expectation for a significant rise in interest rates. In fact, the average economist forecast (as seen for the March 2010 Wall Street Journal Economist Survey) for the 10-Year Treasury Yield for December 31, 2010 is 4.24%.

I believe that there is high potential for interest rates to rise faster than expected, and the economic implications of such, should it happen, can hardly be understated.

Falling interest rates over the last 20 years have been an "enabler" of much of our current day economy. These falling interest rates are seen in the 20-year monthly chart shown below:

chart courtesy of

Of course, a significant rise in interest rates would have adverse effects on many different economic areas, and would likely serve to impair and/or derail any hopes of an economic recovery. Some areas that would be impacted by rising interest rates would include: real estate, all facets of lending, the bond market, corporate profitability, etc. The list is virtually endless.

Furthermore, consumer spending would likely be impaired, as would the government's ability to rather cheaply (and easily) fund the outsized deficits and debts. As well, the government's ability to "stimulate" the economy through deficit spending could largely be impeded.

I've previous mentioned (in a December 2nd post) that I believe that U.S. Treasuries are in a "bubble." While some have expressed the same view, it doesn't appear as if there is recognition of the perilousness of such a condition.

SPX at 1187.44 as this post is written

Monday, April 5, 2010

Productivity - A Few Comments

Over the years, the topic of productivity has often been mentioned.

I've had thoughts on the matter for years. An example is this "Letter To The Editor" I wrote concerning a BusinessWeek story back in 1995 (3rd letter down).

Here is a March 31 Washington Post story on productivity. As the article says, "One of the great surprises of the economic downturn that began 27 months ago is this: Businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek.

That means high-level gains in productivity..."

Of course, increasing productivity is often a favorable situation to businesses. However, it can also be a misconstrued statistic, as rising productivity can have various side effects that are less than desirable.

My issue with coverage of the issue is that increasing productivity is often hailed unequivocably as a favorable occurrence, with no discussion as to the negative side effects.

Here is a simple example: A high-level employee who, because of extensive layoffs at his firm, is now forced to perform entry-level tasks critical to the firm because if he doesn't perform them, no one else will. Of course, the firm is more "productive" after the layoffs because it is maintaining sales with fewer employees - but obviously having a high-level employee doing entry-level work is inefficient. As well, think of all of the responsibilities and activities this high-level employee has to put off or ignore at his higher level so he can perform the entry-level tasks - as well as other deleterious issues arising from this gain in productivity.

I could write extensively about productivity, as it is complex, very important and far-reaching in many ways to what is currently happening in American business...

SPX at 1178.10 as this post is written

Thursday, April 1, 2010

Stock Market Capitalization As A % Of GDP

Recent statistics indicate that the stock market capitalization as a percentage of GDP appears to again be over 100%.

This is an elevated level from a historical perspective.

I've written of this metric before in an article titled "Does Warren Buffett's Market Metric Still Apply?"

I feel that for many reasons this is an important gauge of stock market valuations.

SPX at 1180.01 as this post is written