Succinct Summation of Week’s Events April 1 2016
Succinct Summations for the week ending April 1st
2016
Positives:
1. Nonfarm payrolls came in at 215k, better than the 210k expected. Last month revised up +3k;
2. Average hourly earnings rose 0.3%, above the 0.2% expected increase;
3. S&P 500 rose 1% for the sixth time in the last seventh week;
4. ISM manufacturing very strong at 51.8, up from 49.5;
5. Pending home sales rose 3.5% — better than the 1.5% expected rise;
6. S&P Case-Shiller home prices rose 0.8% m/o/m, 4th straight monthly rise;
7. Chicago PMI came in at 53.6, up from 47.6 previously and above expectations;
8. Consumer confidence remains strong, coming in at 96.2 vs the 94 expected;
9. MBA purchase applications rose 2% w/o/w.
Negatives:
1. Consumer spending rose just 1%, with last month’s 0.5% increase revised down to 0.1%;
2. ADP employment came in at 200k, with last month’s reading revised down to 205k, from 214k;
3. Personal income rose just 0.2%;
4. Construction spending fell 0.5% m/o/m;
5. Unemployment ticked up slightly to 5% (but still very strong)
Overestimating Recession Odds
My Sunday Washington Post
Business Section column is out. This morning, we look at why so many
pundits overstate the odds of economic weakness: What are the chances of a recession? Not what you’d think.).
Here’s an excerpt from the column:
“Historically, we see recessions occurring every 59 months (on
average) over that period. This means the economy has been in a recession 18
percent of the time, with the average recession lasting a little more than a
year. The post-World War II era — known as the great moderation — has
experienced shorter and less frequent recessions. The amount of time the
economy was in a recession has decreased. Occasional devastating financial
crisis aside, the United States has matured to become a more advanced and
(mostly) more stable economy.
All too
many pundits seem to forget that. When we see a bad retail sales number in the
midst of a blizzard, or a soft new-homes start number, the recession callers
take to the airwaves. Their own terrible track records never seem to give them
any pause.”
A review of recession forecasts over the
past 5 years is (as always) hilariously wrong.
Source:
What are the chances of a recession? Not what you’d think.
Barry Ritholtz
Washington Post, April 3 2016
wapo.st/1M8JM38
What are the chances of a recession? Not what you’d think.
Barry Ritholtz
Washington Post, April 3 2016
wapo.st/1M8JM38
What are the chances of a recession? Not
what you’d think.
For at least
five years, we have been hearing that the United States is on the verge of
slipping into a recession.
Of course, it
hasn’t — and probably won’t anytime soon. I’d like to talk about why that is
and in the process look at how economic expansions end.
The National Bureau of
Economic Research — the entity that determines the official
start and finish dates of economic contractions in the
United States — defines a recession as a “significant decline in economic
activity spread across the economy, lasting more than a few months, normally
visible in real GDP, real income, employment, industrial production and
wholesale-retail sales.”
Lakshman
Achuthan of the Economic Cycle Research Institute (a
friend and occasional lunch partner) adds an important qualifier to help
understand the context of this economic data: He notes that for an indication
of recession to occur, data must be “pronounced, pervasive and persistent” —
not merely a temporary shortfall in one indicator or another.
I looked at the
data going back to 1926. Historically, we see recessions occurring every 59 months (on
average) over that period. This means the economy has been in a recession 18
percent of the time, with the average recession lasting a little more than a
year. The post-World War II era — known as the great moderation — has
experienced shorter and less frequent recessions. The amount of time the
economy was in a recession has decreased. Occasional devastating financial
crisis aside, the United States has matured to become a more advanced and
(mostly) more stable economy.
All too many
pundits seem to forget that. When we see a bad retail sales number in the midst
of a blizzard, or a soft new-homes start number, the recession callers take to
the airwaves. Their own terrible track records never seem to give them any
pause.
We read that
recession is “imminent” or “100 percent guaranteed in 2016” as two pundits
declared recently. The language is not designed to inform or to describe
probabilistic, data-driven models of a complex and nuanced global economy;
rather, it is “look at me” talk and nothing more than marketing.
What are the
supposed causes of this imminent recession? A few months ago, it was
“illiquidity in the high-yield credit markets.” The next thing we heard was a
China debt bomb, which was trotted out after China’s economy slowed and its
market crashed. (Still no recession.) And then, earnings contractions and a
strengthening U.S. dollar (last year, it was peak earnings and a weakening
dollar). Let’s not forget the “Brexit” (British exit from the European Union),
which apparently is this year’s version of the “Grexit” (Greece’s exit from the
E.U.), which neither occurred nor caused a recession. We’ve had high oil
prices, followed by low oil prices, each of which was supposedly fatal to the
economic cycle (I guess for opposite reasons?). As of late, the biggest
economic fear we hear about is the “rising political risk” of a Trump
presidency.
All of it makes
for great cocktail-party fodder but ignores how economic contractions typically
occur:
All economies
are cyclical; they start from the humble roots of the end of the prior
contractions. They begin to expand when no one is looking and often ramp up
despite widespread disbelief. The expansion slowly widens, affecting more
regions and industries. It becomes modestly larger, slowly at first, then more
robust, and while it should be increasingly difficult to deny that an expansion
is occurring — at least judging by the data — plenty of people still manage to
live in denial.
Maybe the
economy stumbles once or twice before it picks up steam, reducing unemployment
rolls to the bare minimum. Eventually, companies can no longer find new needed
employees, so they begin raising wages to compete for workers. That leads to a
leg up in hiring, bigger salaries and retail sales.
Most important
of all to the cycle is the start of inflation. Once we see a few consecutive
quarters of higher prices, the economy begins to overheat. This forces the Fed
to pay attention and eventually to act. Fear of inflation scares the Fed into a
tightening cycle; typically, it will tighten at three, four or even five
meetings in a row. This reduces available credit, makes the credit that is
available more expensive, and — voila! — a recession occurs.
We can create a
basic checklist to tell when an economic expansion cycle has begun to have run
its full course:
● Full
employment (check)
● Wage gains
(hardly present)
● Inflation
(1.7 percent is far below recession levels)
● And last, an
aggressive Federal Reserve tightening that takes interest rates too high. We
are now at a mere 0.25 percent, perhaps going to 0.50 percent — hardly
soul-crushing rates.
Thus, while we
can easily imagine the necessary conditions for the beginnings of a recession,
they are for the most part simply not present.
Not that these
minor facts stop the doomsaying forecasters. Regular readers know the disdain I
hold for most predictions, but to demonstrate this, try Googling “recession in
2015.” It generates these “scary” headlines and phrases:
● Fortune (Oct. 28,
2014): “The case for a global recession in 2015”
● Bloomberg (Nov.
10, 2014): “Predictors of ’29 crash see 65 percent chance of 2015 recession”
● CNBC (March 11,
2015): “Plunging oil prices and a strengthening dollar could force the United
States into a recession by the end of 2015”
● The Economist (Sept.
9, 2015): “Global recession is the ‘most likely’ outcome for 2015.” (That
followed an earlier headline (June 13, 2015) that said, “It is only a matter of
time before the next recession strikes.”
Doing the same
for “recession in 2014” yields the following:
● Reuters (Dec.
7, 2013): “Nobel economics winner Fama says risk of global recession in 2014”
● Politico (Oct.
4, 2013): “Recession looms in 2014”
●You can find
similar terrible forecasts for 2013 and prior years. It is beyond me why these
folks still have jobs.
One day in the
future, wages will increase, prices will begin to rise and, eventually, a Fed
rate hike cycle will go too far. That is when this economic expansion cycle
will end. In the meantime, the economy is expanding, housing is recovering, we
are near full employment, and we are just starting to see some modest signs of
wages moving higher. That suggests more savings and investment and perhaps an
increase in retail spending.
Enjoy the
economic expansion; it will end — just not as soon as the doomsayers believe.
Ritholtz is
chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, The Big
Picture. On Twitter: @Ritholtz.
Barron’s: Whose Better for Investors, Kasich, Cruz or Trump?
From the “here we go again” files: This week, Barron’s (sort of) endorses Ohio Governor John Kasich, as the only adult amongst all of the GOP nominees.
We looked at a very similar issue (again courtesy of Barron’s) with Trump v. Clinton, back on March 5 of this year.
Longtime readers already know my thoughts on this: We have no idea in advance who — as President — will be better for the economy or the stock market. And as history teaches us, it probably matters much less (short term, anyway) than we imagine.
As a reminder, the ideologues used stock market fears to scare people about Obama — you know, the Muslim/Kenyan/Socialist who was going to destroy the Dow — just before the market tripled. And before him, George W. Bush was going to blow out the deficits, kill employment, and cause other problems (some of which actually happened) but — and here is my key point — the market nearly doubled anyway.
So much for those advocating we make our investments based on political considerations.
Here is this week’s Barron’s about the third place GOP delegate vote getter:
“Kasich (rhymes with basic) outshines [both Trump & Clinton]. And in the event of a contested convention, he has a powerful advantage: He’s the only GOP candidate who beats Clinton in a head-to-head contest in the polls. “With John Kasich, you have a candidate who lines up almost perfectly with many investors,” says Chris Krueger, a Washington strategist with Guggenheim Securities. “He has a track record as a pragmatist from his time as governor, and he knows the markets from his stint as an investment banker at Lehman Brothers.”Unlike Clinton, Kasich has a sensible across-the-board tax-cutting agenda for corporations, individuals, and investors. And as a Republican president working with a presumably GOP-controlled Congress, he would be a more effective leader. After all, he spent six years as the chairman of the House Budget Committee, so he knows how to broker a deal.”
To which I reply, “Yeah, yeah, yeah.” Politics may be the only sport where participants actually believe theirs is the only one that matters. Not to be too cynical, but for the most part, it looks like a bunch of self-aggrandizing ideological monkeys nakedly pursuing power for its own sake.
You know what my views are; make up your own minds . . .
Previously:
• Barron’s: Whose Better for Investors, Trump or Clinton? (March 5, 2016)
• Why politics and investing don’t mix (Feb 6, 2011)
• Was the ’00-03 Crash Bush’s Fault? ’09 Obama’s? (March 5, 2009)
• Ideology Is Killing Your Investment Returns (Feb 10, 2014)
• Politics and Investing Don’t Mix (Feb 17, 2016)
Source:
Kasich: The Best Pick for Markets and the Economy
Governor’s plans on taxes, spending, trade, and other issues are far more sensible than Trump’s or Cruz’
John Kimelman
Barron’s April 2, 2016
bit.ly/1Su07vI
Kasich: The Best Pick for Markets and the Economy
Governor’s plans on taxes, spending, trade, and other issues are far more sensible than Trump’s or Cruz’
John Kimelman
Barron’s April 2, 2016
bit.ly/1Su07vI
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