Buh-Bye Goldilocks

On CNBC, the pundits are talking about how the most recent spate of data has put Goldilocks scenario in danger. I must admit to finding it amusing how much faith so many players had put into Goldilocks, a most unusual and unlikely scenario.

The latest data forces me to revise my 50% possibility of a recession in 2007/08 up to 60%. GDP for Q4 ’06 is likely to be between 0.5% – 1.5% (or worse, if Holiday sales keep trending softer).

As far as the Fed, this data suggests that the jawboning about inflation will remain just that — while we still expect the Fed to cut before 2007 comes to an end, the odds of a hike anytime soon have just dropped significantly.

Ism_1

Given the awful PMI and ISM data — they both broke the key "50" demarcation — one may be wondering how GDP data ended up getting revised upwards. The answer comes from the way GDP is constructed. But even more importantly, observe which the components that increased the revised GDP — these are symptomatic of a slowing economy:

Revised higher:

Government spending (0.05%)

Inventory Build (0.26%)

Imports (0.39%)

Revised lower:
Exports were revised 0.2% lower.

Consumption was revised 0.14% lower

Inventory build, government spending and imports, was responsible for virtually all of the 0.6% upward revision in GDP. Consumption, 70% of the US economy, is slowing.

Ism_kass_1

Why are Businesses inventories increasing? Some pundits have claimed this is a bullish sign, an "anticipation of increased demand." I doubt this. We have seen recent CEO surveys which point to major negative sentiment amongst the usually cheery Execs; Durable Goods tumbled 8%, and Housing and Autos are likely already in a recession. My guess is that Just-in-time-inventory is easier to ramp than it is to slow down.

And while Reuters reported that "Business spending on inventories rose, increasing sharply to a $58 billion rate from the $50.7 billion earlier estimated." Inventories builds have increased at a faster than usual pace — implying that this was  (whoops!) unintentional.

Given the drop in both Durables and Capex, I am somewhat incredulous over Business spending being revised upward to show a 7.2% gain (versus 6.4% advance)

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  1. Mike_in_FL commented on Dec 1

    Worst month for construction spending since 9/11 just reported, with nonresidential spending getting whacked in addition to residential … ISM at worst level since just after the Iraq War began … dollar turning into confetti before our eyes. Yep, looks like a nice, soft landing to me.

    http://interestrateroundup.blogspot.com

  2. Barry Ritholtz commented on Dec 1

    Bob Pisani: “The soft landing is in tact, only a little more tattered than it was.”

    Um, no.

  3. BOB commented on Dec 1

    What comes after Goldilocks???? THE THREE BEARS!

    Ouch…

  4. Aaron commented on Dec 1

    It’s funny how the grey and gloomy sky makes today seem peculiarly ominous.

  5. Michael C. commented on Dec 1

    I’d have to say, if this market comes back after this data, it will be the biggest bull trap in history.

    Any and every short would just have to throw in the towel after getting validating with recessionary data yet seeing the market hit a new high.

  6. calmo commented on Dec 1

    So is 0.6 an out-sized revision from 1.6 % reported in the ‘advance’? Is it to be taken seriously in light of the coming ‘final’ report on Dec 21? (I only have so much seriousness to go around, you?) Is this a variation on the them ‘the worst is over’? (the advance was worse and this is better, ergo TWIO)
    I am not seeing the dent that the housing slowdown (ok, decline, dropoff, plunge) should be making on this report. Autos get specific mention as do computers, but surely housing deserves more respect, yes?

  7. Jacobs commented on Dec 1

    My Uncle who works at the Texas Instruments Fab here in Stafford, texas , told me last week over thanksgiving dinner that they have high inventory and the company has already let go all contract workers and they are planning to cut permanent staff too. He said the inventory started going up in the last 3-4 weeks.

  8. joe commented on Dec 1

    I can’t wait to look back on the “goldilocks” commentary from ’06 and laugh the same way I do at Cramer’s and other idiots “new economy” commentary from late ’99 and early ’00.

  9. S commented on Dec 1

    The woman from Federated wanted to come on CNBC to assure us all that ISM falling below 50 is positive since it means the FED won’t be hiking any time soon. Amazing how the long only guys always have a creative way to spin what is clearly negative for equities into a positive.

    Can’t blame them for wanting to preserve those assets under managment. That’s how they eat.

    My guess is, it’s in everyone’s best interest to try desperately to hold the market up until year end. The hedgies will all get their big fat gluttonous performance bonuses and the mutual funds will hold onto their AUM. Then a major flush in 1Q.

  10. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  11. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  12. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  13. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  14. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  15. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  16. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  17. tj & the bear commented on Dec 1

    Barry, you still haven’t answered my question. To paraphrase…

    “Whose definition of ‘recession’ are you using?”

  18. wcw commented on Dec 1

    Semis generally are yet again building too much capacity. Dunno what the fab in Stafford makes, but I could look it up. DSPs?

    While the data definitely are (finally) tilting more towards flat growth, I’m not ready to join Roubini and our host in a greater-than-fifty-fifty recession call, yet — but then my portfolio should outperform in either a slowdown, flat production or an actual recession. The one thing that would kill me would be a growth rebound.

    If nothing else, this PMI should keep the markets from rallying as if growth is back.

  19. The Bear commented on Dec 1

    USD Descending Triple Bottom Breakdown

    King George II …the peasants will be revolting soon lol

  20. advsys commented on Dec 1

    It seems that part of the Goldilocks “fairy tale” is that as soon as the bad data piles up too high, everyone falls back on being saved by the Fed. Lower rates as some kind of magic bean.

    That this somehow all by itself will bring growth?

    I don’t buy it. I would be very curious what other folks think?

  21. Michael C. commented on Dec 1

    The come back kid is at it again.

    This one has more stamina than a pitbull in heat.

    There is just no indication yet that any data points are causing a shift in big money allocation.

    What will it take to trump performance anxiety? From “I gotta catch up to this market” to “I gotta protect my capital?”

  22. bob commented on Dec 1

    My opinion on definition of recession: the definition itself is secondary. It is always obvious when recession comes.

    If one of the existing definitions somehow miss a recession it should not be used.

    Best way is to use the different definition every time – pick the one that will give the timeframe that matches the obvious timeframe.

  23. tired-bear commented on Dec 1

    dow will be positive soon so what!

  24. Bluzer commented on Dec 1

    Fairly high oil prices despite a US slowdown, thanks mainly to Asia, coupled with a falling dollar will increase inflation further. This, alongwith concurrent recession, will result in stagflation.

    We’ll be lucky if we merely have a recession, me thinks (infrequently and often incorrectly – me thinks nonetheless).

  25. someguy commented on Dec 1

    “What comes after Goldilocks???? THE THREE BEARS!”

    That is a great line !

    I’ve been sitting in cash since October watching this go on. Yes, I missed a big rally, but it didn’t make sense to me to see all the housing stuff going bad and yet have a rally in the stock market. I’m shocked the market isn’t reacting stronger to this. My sense is that the market won’t react at all until it hits EARNINGS. Then it will really react !

  26. A Dash of Insight commented on Dec 1

    Negative Spin on Normal Data

    Some market observers, including our favorite bear, Barry Ritholtz, seem intent on forcing a negative interpretation on data that are perfectly consistent with GDP real growth of about 2%. Check out Barry’s take on the numbers. A slowing economy is

  27. Michael C. commented on Dec 1

    I can’t believe some of these home building stocks. All green today, and breakout out to multi-month highs.

    They are basically pissing and shitting on the construction data today.

    Maybe this is true from a commentary on RM from Aaron Task though he is a reporter not an analyst.

    ===============================

    “Amid all the dour economic data and commentary, it’s interesting to note the ECRI’s U.S. weekly leading index rose 1.5% for the period ending Nov. 24, marking the fourth-straight week of increases.

    This string of gains did follow a streak of over a dozen declines, but the index’s recent upturn could signal (maybe) the data we’re seeing now will prove to be closer to the end of the slowdown vs. the beginning. ”

    ===================================

  28. RW commented on Dec 1

    As I recall, ECRI’s leading economic indicator has a significant lead time (8 months or more IIRC), so it’s recent upturn is saying nothing about first half ’07 although it is encouraging to think a downturn may not last longer than that. Historically though, downturns preceded by credit expansion and real estate inflation tend to be more prolonged than not, so I guess we get to see whether ECRI or history wins out this time.

  29. cleanupDSNY commented on Dec 1

    too many shorts out there for the market to go down. they will hold it up til year end at least.

  30. JoeyB commented on Dec 1

    Michael C…

    Thanks for pointing out the ECRI index rise. Don’t count Goldi out yet folks…

    Do you get recessions with the stock market near highs, unemployment so low, tight credit spreads, and a robust CP market?

  31. jjr commented on Dec 1

    cleanupDSNY, you seem to lack a basic understanding of how shorts participate in the market. Shorts only hold up the market with covering. When they get emboldened by technicals and economic data (as they are now), shorts are not covering. They’re shorting more. That has exactly the opposite effect of propping up the market. When they get scared, they cover, and that holds up the market. That’s what happened to close out the autumn. With too many shorts having covered, it actually removes a lynchpin of support as the market drops, since they aren’t there to cover into declines.

    What’s propping up this market are the dip buyers and the Santa Rallyers. They’ll break. Trader Mike pointed out yesterday an incipient ‘falling three methods’ that seems to be spot on today. That’s a rather bearish formation. This market is toast. It’s helped by the fact that nobody wants to sell now and book taxable gains, but that will change. Come Jan 2, look out below as all that postponed tax selling kicks in.

  32. Macro Man commented on Dec 1

    Well noted on the ECRI. In addition, no one seems to have noted that the most comprehensive house price index, the OFHEO, suggested that house prices in aggregate rose againin Q3, albeit at a modest 0.9% q/q pace.

    This is consistent with the housing slowdowns observed over the past few years in other countries.

    While the stock market probably is due for a reasonable shakeout, IMO it is too early to say sayonara to the soft landing scenario. Given the much-discussed troubles in Detroit, it hardly comes as a shock that manufacturing has stagnated. However, the vast bulk of economic activity in the US is in non-manufacturing industries which continue to grow.

    The corporate sector remains in good shape, though profit growth will probably slow. And funny enough, when consumption slows, the trade deficit improves, which is additive to GDP.

    Even with this week’s revisions, income growth remains fairly solid, and lower energy prices have produced a nice bump in disposable income.

    Inventories have risen, but inventory/sales rations remain at historically low levels.

    None of this is particularly suggestive of a hard landing, thougn of course things may change. But vis-a-vis the homebuilders , isn’t it possible that they were oversold in the early autumn? How much of a housing calamity is it appropriate to discount? I mean, if this is the ‘wrong’ price, what is the ‘right’ price?

    Furthermore, what would the recession-callers need to see before abandoning their view? I ask this out of genuine curiosity, not out of any wish to be a troll.

    Personally, I am in the soft landing camp. What I would need to see to abandon that view is a) a more significant rise in inventory/sales ratios caused by a sharp decline in sales; b) a sharp deceleration or outright decline in profits; c) evidence that consumers will rebuild savings more aggresively than they have to date; d) ISM sub 47 and non-manufacturing ~50.

    Until at least a couple of these come to pass or appear likely to, I’d suggest that while Goldilocks may have a cold, rumours of her death may be greatlky exaggerated.

  33. theroxylandr commented on Dec 1

    I was heavily shorting yesterday (actually investing into double-inverted nadaq QID). Damn, it was risky, it was my first short position in 3 years.

    I was mostly looking at jump in claims yesterday morning and dollar decline. I was expecting that employment is in sync with drop in housing starts, so construction must be weak.

    I won. Will I cover? Maybe as far as 2 years from now.

    Btw, trackback from my blog to here from:


    http://theroxylandr.wordpress.com/2006/12/01/recession/

  34. calmo commented on Dec 1

    MM, is this pitch

    How much of a housing calamity is it appropriate to discount? I mean, if this is the ‘wrong’ price, what is the ‘right’ price?

    a screamin fast ball or a juicy soft lob –given Toll principals unloaded hundreds of millions of dollars of Toll Bros stock last year?
    What we (recession-callers and general nervous nellies) need to see is a hand-off from the housing industry to nanotubes, picotubes, pinkotubes (absolutely anything) and preferably to more than an American consumer who, having run out of cash, is burning his house down feeding his habit.

  35. winjr commented on Dec 1

    “What I would need to see to abandon that view is a) a more significant rise in inventory/sales ratios caused by a sharp decline in sales; b) a sharp deceleration or outright decline in profits; c) evidence that consumers will rebuild savings more aggresively than they have to date; d) ISM sub 47 and non-manufacturing ~50.”

    By the time you see this, it will be too late. Everybody else will have seen it, as well.

    What you need to decide now is whether or not this is where we’re headed.

  36. Macro Man commented on Dec 1

    calmo

    So what is the right price for TOL? Zero? 5 cents? 5 bucks? If these prices are wrong, what, then, is the right price?

    winjr

    In postwar US economic history, there has never been a recession that has not been flagged at least a year in advance by a declining corporate profit share of GDP. In Q3, that share reached a new high. My bet is that this time is not, in fact, different.

    This doesn’t mean that the stock market is bulletproof; quite the contrary, I expect global equities to correct lower for a few percent. However, I am willing (and planning) to bet that any corection is just that, a correction, and that markets will be comfortably higher this time next year.

    The recession that seems obvious to many posters on this site does not seem obvious to me. Perhaps that puts me behind the curve, but in financial markets your P/L is the best and easiest way to keep score. In that vein, it doesn’t matter whether you get the economic call right a year or a day before the market begins to price it.

    In many ways, it’s easier to make money by getting it right the day before, as the last six months’ rally has demonstrated to the recession hawks.

  37. wcw commented on Dec 1

    winjr, if everyone will have seen it by the time it becomes likely enough to place a bet, then you’re saying MM is right, but that markets are efficient and we should all just index. If you think he’s wrong, tell us how and why. I disagree with him on the likely course of the housing market, but I think he’s more right than wrong on the economy.

    MM, you are not the only one who likes the HPI or believes the data are not pointing to a likely recession quite yet, though a few more data points like the last few (PMI, construction, claims) and I’ll start to worry.

    However, I do not believe affordability measures at extended levels coupled with new-home supply (understated by the methodology in cancellation-heavy markets) and existing inventories congrue with, “housing slowdowns observed over the past few years in other countries.” If you have any data, though, I would love to see it.

    Your view of homebuilder price action is facially true. The stocks have bounced, so the only arbiter that matters, the market, has already pronounced that they were oversold. The real question is whether the market was right to rally them, or to sell them in the first place. Even the market can’t have it both ways. To my mind, the “right price” in a true housing shakeout is ~0.7x book after writedowns in a stabilized market. That gives you enough of a cushion as an owner. If current inventory and vacancies mean prices are not market-clearing, then today’s book is overstated even even for careful builders like HOV who already wrote down assets, since the market has not stabilized.

    The real risk to the bear case is if the market has not just stabilized, but is actually still growing. Stabilization still leaves all that inventory.

    FD: short, not in size (whew) since summer

  38. wcw commented on Dec 1

    ..there I was saying such nice things about your thinking and you had to use the word “never”. Absolutes are dangerous.

    A quick check of that indicator and the NBER cycles shows the following recessions not flagged a year ahead of time:

    • the ’37-’38 recession was preceded by increased corporate profit share
    • a year before the beginning of the ’48-’49 recession, corporate profit share was still expanding year-over-year at a healthy clip
    • a year before the beginning of the ’60-’61 recession, corporate profit share was still expanding year-over-year at a healthy clip
    • a year before the beginning of the ’73-’75 recession (now that was a doozy), corporate profit share was still expanding year-over-year

    Now, corporate profits are a great tell. Their share dropping YoY led the 2001 recession by 5 quarters, ’90-’91 likewise and the ’80-’82 double-recessions by 3-4Q. That’s great.

    Missing ’73-’75 and these others, however, is not “never”.

    Like you I do not see the market crashing soon. Profits are fat, dividends-plus-buybacks yields best bonds and individual and institutional investor valuation confidence is high. However, watching corporate profits alone may not warn you off if the economy is indeed turning down.

  39. Macro Man commented on Dec 1

    wcw

    I defer to your superior knowledge on the homebuilders. I have not meant to imply that I believe that the current price of these stocks is the ‘right’ price, simply that a ‘right’ price must exist, and that I severely doubt that it is zero.

    As for affordability, I would refer you to the website below, which summarizes an apples-for-apples comparison of housing affordability in the five Anglo-Saxon markets. It is almost a year old, but I think we can all agree that over the last twelve months, US house prices are unlikely to have risen more than in other countries, so the braod conclusions are likely still valid.

    http://www.finfacts.com/irelandbusinessnews/publish/article_10004604.shtml

    “All the major urban property markets of New Zealand are severely unaffordable, as is the major city of the Republic of Ireland, Dublin. Of the Australian urban markets, six are severely unaffordable, with two being seriously unaffordable. The United Kingdom has just one moderately unaffordable market, with the other eleven being severely unaffordable. Canada has three affordable, four moderately unaffordable, one seriously unaffordable with Vancouver being severely unaffordable. The huge and diverse United States has twenty one affordable markets, eighteen moderately unaffordable markets, eight seriously unaffordable and twenty severely unaffordable urban markets.”

  40. Macro Man commented on Dec 1

    Guilty as charged on the use of the word never. My data only goes back to 1952, so the late 40’s may be the exception. I’d stand by the sentiment, however, though the second half of the double-dip in the early 80’s could be an arguing point. Click my name to see what I am getting at.

  41. winjr commented on Dec 1

    “If you think he’s wrong, tell us how and why. ”

    WCW, be a bit more specific.

    Wrong on exactly what issue? That 2007 will not see 2 quarters of negative GDP?

    Regarding the immediate point, I disagree that markets are effecient. I believe that bets will be placed, and are being placed now, on a recession. The market could sell off next week by 300 points, and many will consider it as just a correction when, in fact, it’s possible that those selling are pricing in a recession.

    Isn’t this exactly what happened beginning in 2000? All the way down, a large bloc of market participants (see: JJCramer, Abby Joseph Cohen, et. al.), clung to the belief that fundamentals were fine. It was only when it was obvious that fundamentals were not fine that the market finished it’s plunge to the bottom, and those looking to short at that point missed the biggest portion of the downturn.

    It’ll happen again. This will be a push me – pull you battle of bear v. bull, and in the process somebody is going to lose even before it becomes clear who the eventual winner is.

    It will be difficult to make any significant money shorting, by waiting until it’s clear that the market should be shorted. That call has to be made now, not when it’s obvious that corporate earnings are declining.

  42. winjr commented on Dec 1

    “In postwar US economic history, there has never been a recession that has not been flagged at least a year in advance by a declining corporate profit share of GDP. In Q3, that share reached a new high. My bet is that this time is not, in fact, different.”

    I could say the same about new home sales (with the exception of the 2000-2001 recession, which was a business recession, v. consumer). New home sales turned down more than 6 months ago.

    I could also say the same about new car sales that decline more than 2% YOY, which flags a recession within just a few months.

    I could also say the same about percentage YOY running declines in the ISM.

    As far as I’m concerned, I’m considering myself as having already been adequately warned.

    And with the data flowing the way it is, who’s to say that we have not already entered a recession? Housing is clearly in a recession. The automobile industry is already in a recession. Now it appears as if the manufacturing sector has entered a recession. Consumer spending is weakening by the month, and commercial construction may have topped.

    I personally don’t believe that 4th Qtr. GDP will be negative. Consumer spending will probably be good enough to keep the U.S. above zero. But it wouldn’t surprise me if that proves incorrect, and I’ve seen enough already to convince me that Goldilocks has been served up for dinner.

  43. wcw commented on Dec 1

    Thanks for the link to multiples. They do present a nice apples-to-apples comparison.

    My thinking, for what it’s worth, isn’t that house prices are so high they “have to” come down. Affordability is just a data point. If incomes keep rising and rates stay low, then prices can rise in line with incomes without budging my measure. Inventories and vacancies also put pressure on house prices, but are similarly inconclusive: all these measures remained extended through the late ’80s until that property market finally cracked. It is my bet that we are watching this market turn, but I would be unshocked, if surprised, were I wrong.

    It might be 1986 again. I happen to think it’s 1989.

    On recessions, great chart. I think there are two issues. One is dating. The NBER says the ’73 recession start that November, and I have corporate profits peaking in 73Q1, while your chart seems to have 72Q4. I’m not sure where the discrepancy is; we’re probably looking at different things. I’m looking at share of national income. The other, of course, is another apples-oranges moment. I thought ‘declining share’ meant YoY growth, you were talking about any decline.

    Here I think there is a nonzero risk (seat-of-the-pants, maybe 10-30%) of an atypical recession starting in 07Q1 or Q2. If it happens, it will be led by housing: if prices stagnate and rates stop falling and construction continues to slow, you may have enough of a crimp in consumption actually to pull us below 0% real production growth.

    Quite honestly, I hope I am wrong and it is 1986. My portfolio can handle a few homebuilder losses. Life is always better during economic growth.

  44. wcw commented on Dec 1

    wj, thanks for the reply. You do have a point: if you want to top-tick a bear market that leads a recession, you have to lead the indicators. By the time the ’73 recession started, S&P prices had already dropped -10%. You didn’t miss much by waiting, though: the bulk of the index losses happened in ’74, down -30% or so more. Not wanting to put words in MM’s mouth, I think that was his point: you don’t lose much by waiting for the data to speak clearly.

    FD: I may believe this because I was six to twelve months early buying puts into the 2000 bear market. It was pretty painful, and I can live without repeating the experience.

  45. The Theroxylandr in Flame commented on Dec 1

    First day of recession

    Bad, but expected, news are that came today. Welcome to the first day of the next U.S. economy recession. Buh-Bye Goldilocks!

    The manufacturing ISM index posted the first contraction since April 2003. Thats when FED rate was at 1%, you remember…

  46. winjr commented on Dec 1

    “FD: I may believe this because I was six to twelve months early buying puts into the 2000 bear market. It was pretty painful, and I can live without repeating the experience.”

    I hear you.

    All of my puts expire 1/08 or 01/09. I can be a terrible timer, so when I become convinced of something I act accordingly but do my best to allow as much time as possible. I could lose everything but it won’t affect anything — my kid will still go to college. :)

  47. toon commented on Dec 1

    Next week will be very big down following our dollar.
    Market never crashed without a melt up. Now we had a eally. It is time.
    I loaded a big line of qqqq Jan and march puts in the last 2 weeks.

  48. toon commented on Dec 1

    Next week will be very big down following our dollar.
    Market never crashed without a melt up. Now we had a rally. It is time.
    I loaded a big line of qqqq Jan and march puts in the last 2 weeks.

  49. Pappy commented on Dec 2

    Having seen so many historical charts that predict recession in H1 2007 including housing, trucking shipments, manufacturing, durable goods and autos, I am interested in exploring the corporate profits leading indicator that suggests a recession may be further away. I wonder if extremely high MEW/debt and slow wage growth mixed with higher than average productivity are the primary reasons for recent record profits. Consumer spending is 70% of our economy, wages are 70% of corporate expenses and productivity adds a multiplier effect. However, all 3 of those critical factors appear to be trending negatively which would suggest corporate profits would be slowed more quickly than historical averages. For instance, MEW and consumer spending stayed relatively strong during the 2001 recession thereby making corporate profits a far-leading indicator. This time around it may be nearly a coincidental indicator. Thoughts?

  50. Eclectic commented on Dec 2

    A few responses:

    “What will it take to trump performance anxiety? From ‘I gotta catch up to this market’ to ‘I gotta protect my capital?’ ”

    ***it won’t ever happen regardless of boom, bust, expansion, recession, hard or soft landing, employment or unemployment, or anything else… until such time that the great majority of market participants (common investors: Moms and Pops) withdraw their investment proxies from money managers in all forms. This hasn’t happened in quite some time but it will eventually happen again.

    “Furthermore, what would the recession-callers need to see before abandoning their view? I ask this out of genuine curiosity, not out of any wish to be a troll.”

    ***for me personally, I’d probably be convinced with a beginning of huge sustainable domestic cap ex, followed by new job creation considerably greater than the margin of error in BLS reports; that is, greater than 430K m-o-m for a statistically significant number of months.

    “Personally, I am in the soft landing camp. What I would need to see to abandon that view is a) a more significant rise in inventory/sales ratios caused by a sharp decline in sales; b) a sharp deceleration or outright decline in profits; c) evidence that consumers will rebuild savings more aggresively than they have to date; d) ISM sub 47 and non-manufacturing ~50.”

    ***how about job contraction amounting to greater than 430K job losses m-o-m for a statistically significant number of months, associated with steadily declining GDP?

  51. Hapsburger commented on Dec 2

    Macro Man –

    thanks for the chart on Corporte Profits.

    For my edification how are you defining ‘Corporate Profits’?

  52. Macro Man commented on Dec 2

    Eclectic

    The problem with the payroll data is that the underlying trend of employment growth (and, in the event of recession, the likely rate of payroll decline) is well below the margin of error for statistical significance. The unemployment rate, by virtue of being a trending, serially correlated series, is a better indicator than payroll growth, though naturally it is not a leading indicator. An upturn back towards 4.9% would concern me greatly.

    Hapsburger

    The series I use in the chart is current-dollar corporate profits with inventory and capital consumption adjustments from the NIPA accounts. These comprise the profits of all US corporations, not just large, publicly listed ones.

    A click on my name will take you to the St. Louis Fed website, which shows the same data in various forms. My chart shows the profits data as a percentage of nominal GDP.

    PS How’s the lip?

  53. Eclectic commented on Dec 2

    Macro Man:

    You asked a question (paraphrasing): “What would it take to convince recession-callers to abandon their recession-calling?”

    I answered you that, for me, an increase in domestic cap ex followed by growth in employment by greater than 430K per month would do it.

    The macro breaks that occur in employment from growth to recession (and the reverse) are always likely, for at least a time, however short, to present data at minima and maxima of exponentially smoothed curves which are below a statistical significance in either direction.

    However, you can’t bind me to your notion that employment trends are destined to remain below significance. You can’t ask me to tell you what it’d take to convince me that morning has broken, and then deny me the answer: sunrise.

    Yes, it’s true that you may be right about needing to have a primary focus on unemployment instead, and Mr. Bernanke just this week explained his own reasons why he might be inclined to agree with you.

    I linked his speech and quoted him completely in the pertinent part where he described his reasons. His primary focus was on a demographic slowing in the growth of the labor force because of anticipated Baby Boomer retirement, and that it would heighten the confusion (my derivation of his comments) of attempting to measure job creation.

    But nothing said so far indicates that employment changes beyond statistical significance couldn’t happen.

    In fact, you can be absolutely sure that they will eventually.

  54. Macro Man commented on Dec 2

    Eclectic

    Nothing indicates that employment changes of statistical won’t happen except the weight of empirical evidence. I have counted three payroll reports since 1996 that registered an absolute value in excess of 430k (all positive, by the way.)

    The last of these, in one of life’s little ironies, was in I March 2000- the month the dotcom bubble reached its apex and began its descent, thereby paving the way for the last recession.

    Alas, empirical evidence suggests that waiting for statistically significant job losses may be little different from waiting for Godot. I count one month of job losses in excess of 430k over the last thirty years (that being a loss of 431k in May 1980.)

    Three recessions have come and gone since the last statistically significant monthly job loss. The last statistically significant job gain was followed by recession a few quarters later.

    Feel free, of course, to maintain your exacting statistical burden of proof. And say hi to Godot for me when he arrives.

  55. Eclectic commented on Dec 2

    Okay, Mac Man.

    I’m not exactly waiting for Godot, but I won’t offer him lunch if he shows… He’ll have already spent a rather long lunch meeting with Mr. Bernanke by then.

  56. rudolpho commented on Dec 4

    Last year, about this time, you were convinced there would be a recession because of the inverted yield curve.

    Does Christman just depress you?

    C’mon admit it.

  57. Barry Ritholtz commented on Dec 4

    Actually, last year, about this time, I wrote in Business week that I expected the Nasdaq to rally to 2620, the Dow to go to 11,800 and the SPX to got to 1350 prior to any correction.

    I know that makes it more difficult for the Perma bulls to argue against me, but its in print here:
    The BusinessWeek Market Survey: Where to Invest 2006

    and here:

    Cult of the Bear III: (see “Before the Fall”)

    I generate enough content that you can cherry pick what suits you — but the reality is in B&W.

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