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business newsReflexivity and the Stall in the Economic Data
By
James Kostohryz
Feb 26, 2010 10:45 am
Being short at current levels has its advantages.
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Analysis of Recent Economic Disappointments
Let’s start by analyzing potential significance of the durable goods figure. Standard business-cycle theory posits that coming out of the trough of a recession, durable goods order growth should lead consumer demand by a few quarters. Therefore a pause in durable goods orders isn't what you want to see if you're looking for a sustainable economic recovery.
Monthly durable goods numbers are notoriously volatile, so not much can be made of the January report in isolation. However, this number in addition to several other data points in recent weeks give me some reason to suspect that something could be going on.
And this something-going-on might be a scenario I predicted in considerable detail back in a series of articles in August 2009 that included Solving the Consumer Demand Dilemma, What Does Employment Mean for the Market?, and The Real Impact of Deflation. In those articles I posit that a strong inventory correction could be accompanied by faster-than-expected improvements in employment in the short term (mid to late 2009). However, I warn that likely weakness in final consumer demand could halt the inventory building process and concomitant improvement in labor markets by late 2009 or early 2010.
Are the disappointing durable goods number and the disappointing employment number evidence that my predicted "stall" scenario could be playing out? Furthermore, could disappointments in the demand for housing and the precipitous decline of consumer confidence announced in the last couple of days be related to the disappointing durable goods and employment news?
The Stall Pattern: Parallels Between Europe and the US?
I think it's possible that the US economy could be falling into a pattern that I hypothesized about several months ago. The pattern goes like this:
Inventories of durable goods became depleted to record low levels by late 2008 and early 2009. This severe depletion was due to temporary factors related to panic psychology combined with the dramatic liquidity crunch that severely restrained companies' working capital and their ability to hold inventories. The stock drawdown became so severe that inventories reached unsustainable levels at the height of the financial crisis.
As a result of this atypical situation, after the general sense of panic subsided and credit conditions for working capital were normalized, there was a one-off inventory-building “kicker” incorporated into the inventory-building activity observed in the past few months. This one-off inventory-building “kicker” temporarily “juiced” GDP and various other indicators of economic activity, including employment.
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