All of this, of course, adds to the curtain of gloom that seems to be descending on us. It seems at odds with our belief that we are not yet on the precipice of another recession, so a discussion of what is guiding our current thinking is in order.
There is little doubt that the economy is experiencing a growth recession, which if sustained, increases the chances of an outright recession. The economy is currently trending close to a tipping point, but there are a number of factors to consider before pronouncing another recession imminent. Not all data point to a recession, and as such what's known as "high frequency data" gains importance, in our view, when assessing the economic outlook. These data series include weekly chain-store sales, initial jobless claims, and consumer confidence, among others.
Believe it or not, thus far consumer spending has been holding reasonably well. The latest week's retail sales are up 4.1% year over year according to the Johnson Redbook, and this data is verified by the International Council of Shopping Centers weekly data, which shows a year over year increase of 3.4%. Keep in mind that these measures are very volatile, but the trends are positive. A less volatile measure is Jobless Claims.
Jobless Claims have a long and accurate track record in forecasting recessions. If you can recall our writings a year and two ago, we discussed thresholds for recessions and recoveries, and we believe that we will need to see sustained Jobless Claims above the 450k range to support a recession. Currently, claims are around 420k.
Similarly, corporate profitability sees a steep decline just before a recession, and corporate profits are certainly not close to a steep decline. Niether capital expenditures nor inventory restocking data are also not supportive of impending recession.
Lastly, the index of Leading Economic Indicators (LEI) is not currently forecasting recession. There is typically a sustained downturn in the LEI leading up to a recession. That is the LEI needs to turn negative and stay negative to forecast recession, and in August the LEI rose 0.3%, which was the fourth monthly gain in a row, and the 13th increase in the last 14 months. It is important to note that the LEI has never given a false upswing. That is, it has not had a recession following an up month, or an uptrend.
Naturally, our current thinking can change if we see the data turning negative, and it is possible this could happen. It's also possible that circumstances outside of the US can influence the data negatively, but right now the idea of another recession seems to be based on feeling rather than fact.
Next week we will be watching Monday's ISM Manufacturing Index report, Tuesday's speech by Ben Bernanke, Wednesday's ADP Employment Report, and Thursday's Jobless Claims.