Pangea Market Advisory

No question that the pace of job losses is slowing and the upward revisions only underscore the shift in trend to a better economy than the one we had earlier this year. But we haven’t yet moved to recovery, we have moved to a mild recession. That is what the Fed was telling us in its statement – resource utilization shows we are a long way from having to drain the punch bowl. The data continue to paint a picture of people out of work for a long time, a lot longer than in previous recessions, and the likely reason why an increased number of people have stopped looking for work. The frustration showed in the recent slippage in consumer sentiment.

The obvious truism is that turning monthly job losses into gains means getting firms to hire and the Diffusion Index shows that along those lines the number of firms adding workers has only managed to improve to levels equal to the lows of previous post-war recessions. The Index is the percent of firms surveyed adding workers plus the one-half of the percentage neither hiring or firing. As the chart below illustrates, employment growth begins when the diffusion index is over 50 and, as noted, the Index is a long way from there. In fact, after steadily improving in August and September the Index slipped to 33.8% from 37.5% last month. The government’s efforts managed to save the financial system and avert economic disaster. The efforts haven’t been enough to push the economy into recovery.

Even after accounting for government-program induced spending on cars and homes, there were enough positive signs in the data this morning to signal that a statistical end to the recession has occurred. The big jump in GDP will not, however, be repeated in the fourth quarter as the continued loss of jobs and income hold back sales and drop consumption under third quarter levels -- especially considering how many fourth quarter purchases were pulled into the summer months. Inventory liquidation also continued during the summer and there is every reason to believe that the fourth quarter will still see firms reducing their stocks. Inventory/Sales ratios are better but far from levels that suggest restocking and, more important, it really isn't clear to what level of sales inventories are being adjusted to.

A neutral fourth quarter for GDP growth would be nice, a negative number is more likely but that would set up for a positive first quarter and the beginning of a string of positive quarterly real GDP growth rates. Growth, however, will be too underwhelming to raise resource utilization of labor or capital  enough move to the Fed to drain the punch bowl. They will talk tough, and that probably begins with next FOMC statement but tough talk is just that.

We are all guilty of converting data into changes, percent changes or percent changes of the percent change for the purpose of identifying early a change in trend. I thought it would be a good idea today to just look at the dollar amount of new orders for durable goods without putting the series through a series of mathematical calisthenics (see chart below). Not being able to resist some sort of contortion I show the series in real dollar terms as well. Either way, the stark collapse in orders and the meager bounce from the bottom suggests what today’s consumer survey told us – the economy has bottomed but it isn’t bouncing.

Fed Chairman Ben Bernanke spoke today on "Asia and the Global Financial Crisis" at the Federal Reserve Bank of San Francisco’s Conference on Asia and the Global Financial Crisis, Santa Barbara, California. This call for balanced growth policies in Asia has been made before by Bernanke, Geithner, Summers and others. The call appears to be falling on deaf ears as far as Asian exporters are concerned. Here are some excerpts from today's Bloomberg News article "Won Crushes Yen as Dollar Substitute in Asian Rally" -- Read more...