Mixed Signals

January 28, 2010

The wire service headline observed that the Fed statement used the word recovery for the first time.  Market behavior suggests a darker and more complex landscape.  In less than six full trading sessions since closing at 10,725 on January 19, the Dow has dropped 6.0%, more than its 3.6% drop in the an equivalent interval after Lehman Brothers failed.  The annualized 92% drop of the DOW since the 19th exceeds its annualized decline of 68% between the Lehman bankruptcy and the market trough six months later on March 9, 2009.  One lesson of the Great Recession is that markets respond to expectations about the economy, but the economy likewise reacts to changes in the market.  It’s a two-way street of cause-and-effect. 

It is the nature of economic data that such become very mixed around business cycle turning points.  Erratic and inconclusive data can unfortunately also characterize a temporary non-sustaining improvement within a falling business cycle.  Fourth-quarter economic growth of more than 4%, which is likely to be reported tomorrow, should not be accepted as a guarantee against further recessionary conditions.  From the second quarter of 1981 to the third quarter of 1982, U.S. GDP traced the following sequence:  down 3.2%, up 5.0%, down 4.9%, down 6.4%, up 2.2% and down 1.5%.

U.S. data today provided both good and bad signs.  Orders for non-defense, non-aircraft durable capital goods, a leading indicator of future U.S. business investment, jumped 1.3% in December on top of an even larger 3.1% advance in November.  However, jobless insurance claims printed at a much-higher-than-forecast level for the second straight week and over the past four weeks averaged 456.25K, similar to the mean of 460.25K over then previous four weeks to December 26.  The Chicago Fed index of nationwide activity meanwhile worsened to minus 0.61 in December from minus 0.39 in November, while the Kansas City Fed index improved to 13 in January from a downwardly revised score of 7 in December.

Euroland’s tea leaves were likewise mixed today.  Economic sentiment printed at a 20-month high of 95.7 in January, up from 94.1 in December and an average score of 91.9 in 4Q09.  On a more dour note, retail PMI readings were sharply lower in January.  The score for the whole euro area was at a 10-month low of 46.5, 3.8 points less than in December and below quarterly averages of 49.7 in the fourth quarter of 2009 and 47.7 in the third quarter.  Snowy, cold weather depressed the German and French readings to 42.7 and 43.9 in January, far beneath the 50 level that separates expansion from contraction.

A ton of monthly Japanese figures get released tonight, including household spending, unemployment, consumer prices, industrial production, housing starts and construction orders.  They too are likely to provide a confusing mixture of good and poor results.  The message from the whole barrage of G-7 indicators is that the recovery of advanced economies is at best fragile and moderate.  The business cycle remains susceptible to shocks.  Some could be real events.  Others could emanate from financial markets, whose recovery in 2009 was propelled by very cheap money and impatience with alternative returns of no more than 1%.  It’s easy for investors to find excuses to cut and run.  China’s tightening, advanced economies in time will have to follow suit, and Greece is only one among many discussed nations with public finances far out of whack.  Geopolitical dangers are always lurking, and the democratic political process is failing at the job of solving problems in an age of globalization and high-speed dissemination of information.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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