“The 2 consecutive quarters of GDP contraction is not the only metric for identifying recessions. According to the econo-geeks at the National Bureau of Economic Research, a recession is defined as a "significant decline in economic activity spread across the economy, lasting more than a few months." Here's their specific language: 

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‘Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, ‘a significant decline in economic activity.' Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.'

Hence, if we follow what the people who actually determine what is and isn't a recession say about the matter, and not just limit our analysis to GDP, then it's pretty clear we are now experiencing an economic contraction.”

Real (inflation-adjusted) retail sales have been flat for the last six months. Incomes are stagnant. Consumer spending is showing every sign of slowing even more. Unemployment is rising (see more below). Consumer sentiment is at 25-year lows. You can count on it that the NBER will show a recession starting the fourth quarter of last year and continuing at the least through the first quarter of this year. This one could last another six months. I still think long and shallow with a very slow recovery.

One last point. The US population grows by about 1% a year. Thus economic growth should increase by at least 1% for the US to stay even on a per capita basis. Thus, at least with regard to GDP per capita, the US is definitely in a recession. And if you use real-world inflation data, we are also in a mild recession.

Honey, I Blew up the Employment Numbers

Long-time readers know the problems I've demonstrated with the monthly employment report. It's one of the most revised reports released by any government agency, and for some reason the market seems to react to it like it means something immediate.

Let's take last week's release. It showed a drop of only 20,000 jobs, well above the more negative consensus. The market immediately rallied, taking the thought that the economy may be on its way to recovery. But when you look at the numbers, that optimism evaporates.

The birth/death ratio is the BLS's attempt to figure out how many jobs were created by small businesses that don't show up in its survey of established businesses. It's a simple estimate based on past trends. You have to have this estimate to have any hope of getting the actual number right. And most of the time, the estimates are pretty good. Over time the numbers are revised and in a few years will be pretty close. But in times when the economy is slowing down, the birth/death ratio tends to overstate job growth because the trend is backward-looking. This month's birth/death number was particularly egregious.

April, for whatever statistical reason, has shown the highest number of birth/death jobs for any month. In 2007, the BLS estimated that 262,000 were created in April that it could not account for in the survey of businesses. Somehow, the spreadsheets at BLS had it add 267,000 jobs in April of 2008. That number includes an estimated 45,000 new jobs in construction! And this in a time when both residential and commercial construction are contracting. The actual survey results showed that construction jobs fell by 61,000.

And somewhere, the BLS estimates that 8,000 new jobs in finance were created. As Philippa Dunne notes: “It may be that the gains in our old friend, bars and restaurants, are the [birth/death] model's creation; it added 83,000 to the leisure and hospitality sector. With vacation plans at near-record lows, and restaurants reporting reduced traffic, many of these job gains could disappear in the next benchmark revision.”

Without that addition from the birth/death number, total private employment would have dropped by 296,000. Now, if that had been the headline number, the market would have tanked. Now, I have no doubt that the economy did create a lot of new jobs last month. But when the final revisions are in, we will see that job losses were well south of 100,000. If memory serves me correctly, the BLS had to add about 800,000 jobs that it missed during the recovery in 2003-4. (The birth/death model misses job growth during recoveries, the opposite result of the miss in slowing periods.) The BLS did this just last year, in a major revision of the data. We'll see the same type of revisions in 2010, only this time it will be downward.

And even the BLS says that the birth/death numbers have little statistical meaning. The following is from its website (courtesy of Dennis Gartman) [emphasis obviously mine]:

“Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate... The components are not seasonally adjusted separately because they do not have particular economic meaning in and of themselves.”

Unemployment supposedly dropped last month by 0.1%, to 5%. How could a loss of jobs mean a rise in employment? Because the statistics mask a rather disturbing trend. The number of people working part-time is rising rapidly, and they are counted as employed. Again, From Philippa Dunne of The Liscio Report:

“Almost 3/4 of the gain in non-agricultural household employment [from the household survey] came from those working part-time for economic reasons, and another 83% came from what used to be called ‘willing' part-timers. Yes, that adds to more than 100% – 154% to be precise – because fulltime employment declined by 375,000. The increase in those working part-time for economic reasons was at the 93rd percentile of all months since the series began in 1955; the decline in fulltime employment was at the 90th percentile.”

This employment report was ugly, when you look at the numbers under the headline statistics. It is no wonder consumer sentiment is down.

A Black Swan in Food

Donald Coxe, chief strategist of Harris Investment Management and one of my favorite analysts, spoke at my recent Strategic Investment Conference. He shared a statistic that has given me pause for concern as I watch food prices shoot up all over the world.  

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