Economic News: Psychology vs. Economic Reality

Can we think our economy into a recession? While it is true that psychology does have an impact on economic conditions, its impact would not be this dramatic or sustained. The reality: We live in challenging times, which is reflected in these economic indicators. Speculation is that we are headed for a “double-dip recession,” and while we can debate what a double dip might look like, the European and U.S. economies are trending down. The “50 State Leading Economic Index” consistently predicts a recession every time it falls below zero. The chart below shows the index racing to zero. Note this chart only reflects June economic data and does not include July’s poor economic numbers or market volatility. 50 State Leading Indicator

A decline in the June 2011 CPI-U was followed by a sharp 336% increase in July 2011. (Actually, a vertical leap, see chart.) CPI-U went from a negative -2.64% to a positive 6.22% annualized inflation rate. This whiplash effect in inflation matches actual price increases consumers have witnessed. This change has not been reported by our media. The Federal Reserve may have successfully achieved their goal, stopping deflation. Grade: D-

Full Title: All Urban Consumers - (CPI-U): U.S. city average: All items: 1982-84=100
Definition: Monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.
Goods & Services Covered by CPI: The CPI represents all goods and services purchased for consumption by the reference population i.e. Urban, BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

A quarterly indicator, Personal income (PI) is still trending in a positive direction, but increases are slowing substantially. Growth in PI went from a 1.96% annual rate in Q1 2011, dropping to 1.02% in Q2 2011. Lower income (PI) combined with inflation (CPI-U) is never a good combination. When the best that can be said is that an increase is always better then a decrease, your argument is weak. Grade: D+

Personal consumption expenditures (PCE) has slowed to a Q2 2011 annual rate of .09%, dropping from a Q1 2011 annual rate of 2.09%-- a single quarter drop of over 95%. The spending brakes have been “slammed.” Now we simply need to avoid an out-of-control skid. Grade: D+

Full Title: 1) Personal consumption expenditures: Real Personal Consumption Expenditures by Major Type of Product, Chained Dollars: Billions of chained 2005 dollars; seasonally adjusted at annual rates (quarterly. 2) Personal consumption expenditures: Percent Change from Preceding Period in Real Personal Consumption Expenditures by Major Type of Product: Percent; seasonally adjusted at annual rates (quarterly) Definition : Personal consumption expenditures (PCE). The goods and services purchased by persons.

Unemployment continues at historically high levels. When it was last at this level (9.2%, 1983), it was headed down, not stuck. It bears repeating, “Unemployment has not been this high for this long since the Great Depression of the 1930s.” Reduce uncertainty to increase employment. Grade: D-

Definition : Civilian unemployment rate comes from a survey designed so that person age 16 and over that are neither in an institution nor on active duty in the Armed Forces is counted and classified in only one group. The sum of the employed and the unemployed constitutes the civilian labor force. Persons not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years and over. (There is no upper age limit.)
Definition – American workers are classified as underemployed it they are either unemployed or working part-time but wanting full-time work. These findings reflect more that 18,000 phone interviews with U.S. adults aged 18 and lover in the workforce, collected over a 30-day period.

With GDP, the numbers keep getting worse. The initial Gross Domestic Product estimate for Q1 2011 was 1.91%, but this was restated all the way down to an annual rate of 0.4%. Now Q2 2011 has been restated down from a disappointing 1.3% to an even more disappointing 1% annual growth. Still the only thing good to be said is that anemic growth is better than no (or even negative) growth. Grade: D-
GDP

Full title: 1) Gross domestic product: Real Gross Domestic Product, Chained Dollars: Billions of chained 2005 dollars seasonally adjusted at annual rates (quarterly). 2) Quarterly Growth in real GDP at annual rates, as a percentage change
Definition : Gross domestic product (GDP) price index. Measures the prices paid for goods and services produced by the U.S. economy and is derived from the prices of personal consumption expenditures (PCE), gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.

Industrial production is climbing back. IP reached 94.2 % of its 2007 level, reversing a downward trend started in April. The July rate is the highest rate so far this year and may presage continued growth. While this is great news, a single ray of light gets lost in the dark clouds of what is shaping up to be a serious economic storm. Grade: C+

Full Title: Industrial Production Index: Index 2002=100: SA
Definition : Industrial production (IP) includes output, capacity, and capacity utilization in the U.S. industrial sector, which is defined by the Federal Reserve to comprise manufacturing, mining, and electric and gas utilities.

The price of oil, as measured by the WTI, dropped to $86.70 from its July price of $96.80 per barrel. The lower price reflects reduced demand, resulting from a slowing economy and the expansion of supply by the withdrawal of 60 million barrels from the Strategic Petroleum Reserve (SPR) over a 30-day period starting June 23rd. Still the August 2011 price is up 12.9% over last August’s price. Grade: C-

Full Title: Price of West Texas Intermediate Crude; Monthly NSA, Dollars per Barrel
Definition : West Texas Intermediate (WTI) crude oil is of very high quality and is excellent for refining a larger portion of gasoline. WTI is the major benchmark of crude oil in the Americas. WTI is generally priced at about a $5 to $6 per-barrel premium to the OPEC Basket price and about $1 to $2 per-barrel premium to Brent, although on a daily basis the pricing relationships between these can vary greatly.

The steep vertical growth of M1 accelerated again in July 2011. It moved up 1.96% over June 2011 and headed for an annual rate of 23.5%. Look at the near vertical increase starting in late 2008. This started with TARP, Bailouts, Stimulus, QE1 and QE2. We have successfully increased the money supply. Grade: D

Full Title: M1 Money Stock: Billions of Dollars: Not Seasonally Adjusted (NSA)
Definition : M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

It looks like a large portion of the new money supply remains on the sideline. M2 Money Supply, the savings rate, grew at a monthly rate of 1.7% in a single month-- producing a 20.4% annual rate. With consumers and corporations accumulating large pools of cash, the potential exists for strong economic growth and inflation. Remove the uncertainty and look out. Grade: B

Full Title: M2 Money Stock: Billions of Dollars: Not Seasonally Adjusted (NSA)
Definition : M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

Let me know if you have any comments, questions, or suggestions.
Write David W. Weatherholt at david@bnewsviews.com

Definition from the Bureau of Economic Analysis (BEA)

Definition from the Bureau of Labor Statistics (BLS)

Definition from Gallup®

Definition from the Bureau of Economic Analysis (BEA)

Definition from the U.S. Energy Information Administration

Board of Governors Federal Reserve System