Weekly Review: Is Negative Economic View Warranted?

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Being negative about the USA's economic future prospects is common bloggers' fodder. Only a fool would think the immediate future is bright even based on less negative and more realistic interpretation of the data.

There are a lot of headwinds - unresolved issues such as Greek and other sovereign debt, growing deficit in the USA, questions about growth in Asia, prices for commodities (price inflation), etc. Knowing how these issues will be resolved would allow adjustments from all quarters and sectors to occur.

Even terrible solutions can be positive for planning because uncertainty is one the most severe constraints for the economy.

The economy has not broken the shackles of the Great Recession of 2007. I have argued that the economic effects of the 2001 recession have lingered and the ghosts of those years still haunt us. For the most part, growth is sickly and the economic growth witnessed in the 1990's will remain the good 'ole days, whether the current economic period is called a depression or "recovery"

My view is that the economic future is likely the same as today - "muddling along" as John Mauldin coined. Tomorrow will be roughly like today.

Yet one piece of data does not support this view - treasury yields. The 10 year yield this week has been running around 3% and still not reacting to the end of QE2. You would think that buyers would stay away believing that the major treasury buyer disappearing would reduce demand and force yields up.

Worse, with the CPI currently at 3.6% - this makes the real 10 year treasury yield a negative 0.6%. This would indicate current buyers of treasuries are saying the price inflation rate of the CPI is temporarily high, treasury yield of 3% is a relatively good profit potential for the next 10 years against other investments, and/or the ending of QE2 will have little effect on treasury yields.

It seemed like the risk-on trade kicked into high gear this week, and the treasury yields seem to be saying tomorrow will be worse than today.

Economic News this Week:

Econintersect’s economic forecast for June 2011 indicates growth in June will be less good.

This week the Weekly Leading Index (WLI) from ECRI declined from a downwardly adjusted 3.6% to 2.9%. This level implies the business conditions six months from now will be approximately the same compared to today. This index is eroding and clearly in a downtrend. If the current trend line holds, this index will be in negative territory in less than 2 months.

Initial unemployment claims grew this week 9,000 to 429,000 but remain elevated, and the real gauge – the 4 week moving average – remained "unchanged" at 426,250 because of backward revision (it is really up 1,500 as last weeks data was revised upward). Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge. Historically, claims exceeding 400,000 per week yields employment gains less than the workforce growth. Translation: the unemployment rate is drifting upward.

initial claims 6-23-2011

We are continuing to see terrible April and May 2011 data - an exception this week was durable goods for May. Durable goods accounts for a small portion of the employment in the USA economy.

Econintersect’s previous economic forecasts predicted a growing economy but at a sub-cycle peak. The data being released continues to indicate we are on the downside of a cycle peak – with the cycle peak likely being in March or April 2011. However, this is most likely a sub-cycle peak and not the next "big one." The data is less good, but not contracting.

A lot of the information that has attracted much attention comes from surveys and Econintersect does not count surveys as data, nor believes they accurately forecast or reflect current economic conditions. The opinion surveys lead the real hard data by 1-2 months so we still have a way to go to complete May hard data and to get much of any for June, except, of course, for the troubling weekly initial unemployment claims.

Bankruptcy this Week: LocatePLUS Holdings

An interactive version of the following table with active links is available here.

weekly table 6-24-2011

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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