John P. Hussman, Ph.D.
In recent months, we’ve observed a fairly neutral flow of economic data – not strong by any means, but offering a reprieve from the clearly negative momentum that we observed in late-summer. The following chart is presents a consensus of economic measures that we track as a composite (long-term chart here ), focusing on the past decade. Note the bounce toward zero that we’ve seen in recent months. New orders remain generally weak, but other measures are dead-neutral. Note that we saw a similar pop for a few months just as we were entering the last recession in 2007. Modest upticks in these measures – even if concerted – don’t carry much information.
The latest employment report presents a similar picture. Payrolls increased by a tepid 120,000, which is much less than would normally be required just to keep the unemployment rate steady. But the November unemployment rate actually “improved” to 8.6% last month, largely because 315,000 unemployed workers abandoned their search for work, thus dropping out of the count altogether. Overall the report wasn’t bad, but it was simply too tepid to carry much information.
Combining the average workweek with average hourly earnings for all employees provides a nice complementary measure of economic activity. The data below are deflated using the core CPI to better reflect real income. Again, we observe a modest improvement from the negative economic momentum of a few months ago, but very little evidence to suggest a sustained turn in direction. Indeed, we saw the same sort of pop just as we were entering the last recession.
In our view, it is very difficult to obtain useful views about economic direction using the standard “flow of anecdotes” approach that is the bread-and-butter of many analysts. The economic data reported daily are a mix of leading, coincident and lagging indicators, often noisy and subject to revision, and without any overall economic structure. Adjusting one’s entire economic views following each report, as if each somehow adds significant information, is a recipe for confusion. Treating economic data as a flow of anecdotes, without putting any structure around them, is why the economic consensus has failed to ever anticipate an oncoming recession.
We use a variety of methods to gauge recession risk. The most straightforward is to form fairly low-order indicator sets like our Recession Warning Composite (see November 12, 2007, Expecting A Recession ), that have a long historical record of accurately distinguishing recessions. These indicator sets are comprised of what might be called “weak learners” – conditions that do not in themselves have infallible records of identifying recessions, but that provide very strong signals when observed in combination with other recession flags.
Full article here-http://www.hussmanfunds.com/wmc/wmc111205.htm