Recessions are like Pornography

Obviously the election has drowned out every other topic, including economics and markets. That’s why you could be forgiven for not noticing a Wall Street Journal survey of economists, which found that the odds of a recession occurring within the next four years at nearly 60 percent. Before you add recession to your list of worries, you should know that this is hardly a bold prediction. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is the official arbiter of when recessions begin and end. Despite the oft-referred to rule of thumb that a recession occurs when there are two consecutive quarters of economic contraction, the Dating Committee does not have a fixed definition of a recession. In this way, defining a recession is like defining pornography: you know it when you see it!

The Committee examines and compares the behavior of various measures of broad activity: real GDP, real income, employment, industrial production, and wholesale-retail sales, in order to determine the highs (peaks) and lows (toughs) of the business cycle. “A recession is a period between a peak and a trough…during a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.”

According to NBER, the so-called Great Recession began in December 2007 and lasted until June 2009. At 18 months, it was the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months. Since 1945, there have been eleven recessions, which lasted an average of 11.1 months.

So what should we make of the current prediction of a recession within the next four years? The current expansion, which began in July 2009, has lasted 87 months through September. That may seem like a long time, but it is not crazy. The previous three expansions (1982-1990, 1991-2001 and 2001-2007) lasted 92, 120 and 73 months respectively. That said, making a prediction that we could see a recession over the next four years does not seem particularly like going out on a limb.

And yet, economists are not particularly good at predicting when a recession might actually occur. In his book The Signal and the Noise: Why So Many Predictions Fail--but Some Don't, Nate Silver interviewed Jan Hatzius, the chief economist of Goldman Sachs, to find out why so many economic predictions miss the mark. “Nobody has a clue. It's hugely difficult to forecast the business cycle. Understanding an organism as complex as the economy is very hard.” The reason it is so hard is that statistics can be noisy, the economy is always changing and the data on which forecasts are based can be flawed.

MARKETS:

• DJIA: 18,138, down 0.6% on week, up 4.1% YTD
• S&P 500: 2133, down 1% on week, up 4.4% YTD
• NASDAQ: 5214, down 1.5% on week, up 4.1% YTD
• Russell 2000: 1212, down 2% on week, up 6.8% YTD
• 10-Year Treasury yield: 1.80% (from 1.72% week ago)
• British Pound/USD: 1.2188 (from 1.2243 week ago)
• November Crude: $50.32, up 1.1% on week (fourth consecutive week of gains, longest weekly winning streak since April.)
• December Gold: $1,255.50, up 0.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.26 wk ago, $2.30 a year ago)

THE WEEK AHEAD:

Mon 10/17:

Bank of America, IBM, Netflix

8:30 Empire State Mfg Survey

9:15 Industrial Production

Tues 10/18:

Goldman Sachs, Intel, J&J, Yahoo

8:30 CPI

10:00 Housing Market Index

Weds 10/19:

American Express, eBay, Morgan Stanley

8:30 Housing Starts

2:00 Fed Beige Book

Thursday 10/20:

Microsoft, Verizon

8:30 Existing Home Sales

10:00 Leading Indicators

Friday 10/21:

General Electric, McDonald’s

Will Fed Wait Until Dec to Raise Rates?

Seven years ago, the recession officially ended. According to the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, the organization responsible for declaring the beginning and end of U.S. expansions and contractions, June 2009 was the nadir of the worst recession since the Great Depression. Yes, employment bottomed out six months after the official end date, but that NBER says that is to be expected, because a recession “is a period of diminishing activity rather than diminished activity.” In other words, although the economy was still weak after June 2009, with lingering high unemployment, it had expanded considerably from its trough 15 months earlier. Where does that leave us today? The U.S. has seen a sluggish recovery, but the economy is far better off than it was seven years ago, by almost every objective metric. That said, a seven year expansion seems ripe for a breather, which is why so many are worried about the next recession. Adding to the concern was a report last week from the World Bank, which downgraded global growth estimates. “Overall growth remains below potential” and “looking ahead, the prospects of global growth remain muted.”

As expected, the commodity exporters have been hit particularly hard, but even advanced economies are stymied by sluggish growth. U.S. GDP is likely to be about 2 to 2.2 percent this year, consistent with the pace experienced over the past few years and the last few jobs reports have shown deceleration.

Amid this environment, it’s hard to see how the Federal Reserve could possibly raise interest rates when it meets this week. Although many central bankers went on a speaking junket in May, telling us that the U.S. economy had shown enough progress that a rate hike would be appropriate in the “coming months,” but the recent jobs data, combined with the dour World Bank assessment, makes it nearly impossible for the Fed to budge this week.

Instead, it’s back to parsing the Fed’s accompanying statement, the updated FOMC projections and Chair Janet Yellen’s press conference, for any signals of when the next rate hike might come. The answer, according to Capital Economics, “depends on whether the weakness in payroll employment in not just May but April too was a temporary blip or the start of a more serious downturn.”

If hiring picks up and the U.K. votes to remain within the European Union on June 23rd, the next Fed meeting at the end of July could be a possibility, but it would be a long shot. The more likely possibility would be the September meeting. If not September, it’s hard to fathom Fed action in November, just days before the presidential election. Unless there is a big uptick in economic activity, the last policy of the year on December 13 and 14, the one-year anniversary of the first rate hike of this cycle, may be the first and only Fed rate increase of 2016.

MARKETS: As U.S. indexes flirted with all-time record levels, the real action was in the bond market. The yield of the 10-year U.S. treasury tumbled to 1.639%, the lowest close since May 2013. Additionally, yields of comparable bonds in Germany and Japan, fell to all time lows, as investors bet on the continuation of sagging growth and low inflation and found solace in the overall safety of the bond market.

• DJIA: 17,865 up 0.3% on week, up 2.5% YTD
• S&P 500: 2096 down 0.2% on week, up 2.6% YTD
• NASDAQ: 4894 down 1% on week, down 2.3% YTD
• Russell 2000: 1164, flat on week, up 2.5% YTD
• 10-Year Treasury yield: 1.639% (from 1.7% a week ago)
• July Crude: $49.07, up 0.9% on week
• August Gold: $ 1,275.90, up 2.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.38 (from $2.35 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 6/13:

Tues 6/14:

FOMC Meeting Begins

6:00 NFIB Small Business Optimism

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Weds 6/15:

8:30 PPI

8:30 Empire State Mfg Survey

9:15 Industrial Production

2:00 FOMC Decision

2:00 FOMC Economic Projections

2:30 Janet Yellen Press Conference

Thursday 6/16:

8:30 CPI

8:30 Philly Fed Business Outlook

10:00 Housing Market Index

Friday 6/17:

8:30 Housing Starts

Snails’ Pace Growth to Keep Fed on Sidelines

There are now dueling economic growth forecasts by regional Fed banks. The Atlanta Fed’s GDPNow model forecast for Q1 GDP growth is 0.3 percent and the Federal Reserve Bank of New York’s recently unveiled Nowcast model anticipates that GDP will expand by 0.8 percent. Forgive us if we are not that interested in the half of a percentage point differential, because either way, we are talking about snail’s pace, sub-one percent growth.

In the seven years since the end of the recession (the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) said the recession ended in June 2009), the expansion has been sluggish, averaging between 1.5 and 2.5 percent. While so-so growth is typical of recoveries that follow cataclysmic, near-death experiences like the financial crisis and the 18-month Great Recession, the reality is that progress has felt like one step forward, one step back.

It appears that Q1 will be one of the “one step back” periods--we will see when the government releases its first estimate of growth for January-March this week. The good news is that the report is already history and the current quarter could see a step forward. Analysts at Capital Economics “anticipate a rebound in the second-quarter and expect annual GDP growth will be slightly above 2 percent for 2016 as a whole, which would be broadly in line with the trend during this recovery.”

Although economic conditions are looking up, the data have not be strong enough to encourage the Fed to raise interest rates at its upcoming policy meeting this week. The central bankers will likely tell us about the improvement in financial conditions, stabilization of oil prices and diminishing fears over China’s economic outlook and its ripple effects on emerging market currencies, but none of that will prompt action. The big question, according to Capital Economics, “is whether the improvement in financial conditions and the slightly better global outlook persuades the FOMC to drop the language in the statement that ‘global economic and financial developments continue to pose risks’?” If the Fed opts to change its language, it could be preparing markets for a June increase, something investors are not yet anticipating.

MARKETS: Although earnings have fallen over the past year, results have not been as bad as feared and large stocks have been able to edge up. Both the Dow and S&P 500 are 2 percent or less below their 52-week intra-day highs.

• DJIA: 18,003 up 0.5% on week, up 3.3% YTD
• S&P 500: 2091 up 0.6% on week, up 2.3% YTD
• NASDAQ: 4906 down 0.7% on week, down 2% YTD
• Russell 2000: 1146, up 1.4% on week, up 1% YTD
• 10-Year Treasury yield: 1.9% (from 1.75% a week ago)
• June Crude: $43.73, up 4.8% on week (up 67% from Feb lows)
• June Gold: $1,230, down 0.4% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.13 (from $2.11 wk ago, $2.49 a year ago)

THE WEEK AHEAD:

Mon 4/25:

Haliburton

10:00 New Home Sales

Tues 4/26:

3M, Apple, Chipotle, Twitter

FOMC Policy Meeting Begins

8:30 Durable Goods Orders

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 4/27:

Boeing, Facebook

10:0O Pending Home Sales Index

2:00 pm FOMC Meeting Announcement

Thursday 4/28:

LinkedIn, Amazon, UPS, Ford, MasterCard, Conoco Phillips

8:30 Q1 GDP – 1^st estimate

Friday 4/29:

Chevron, Exxon Mobil

8:30 Personal Income and Spending

8:30 Employment Cost Index

9:45 Chicago PMI

10:00 Consumer Sentiment

Leap Day for Investors

Leap Day (Feb 29) occurs every four years, so will this year’s be more like 2012, when the US economy grew by 2.3 percent or the more ominous 2008, when it contracted by 0.3 percent? I’m guessing that it will be a 2012 kind of year. To recap, anxiety over a global growth slowdown, a precipitous slide in oil, an increasing US dollar and a potentially over-aggressive Federal Reserve has increased the recession chatter this year. The latest round occurred last week, after it was reported that world trade in 2015 dropped to the lowest level since the financial crisis, due in large part to the slump in China and other emerging economies.

Even with a slight revision higher, Q4 US growth was at a still-paltry 1 percent annualized pace, close enough to zero to make even the most ardent bull nervous. But according to economist Joel Naroff, “It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services.  More importantly, households can keep up the pace, as income growth was robust.”

There will be fresh data on the labor market, when the government releases the February employment report. The consensus sees an uptick in job creation to 185,000 from January’s lower than expected 151,000. The unemployment rate is likely to remain at 4.9 percent and with labor market conditions tightening (jobless claims remain low and job openings are high); hourly wages should rise by 2.6 percent from the prior year. If that’s the case, then consumers should keep spending at a moderate clip, which would help propel growth in the first quarter to at least a 2 percent annualized pace.

Despite the economy’s middling progress, it’s hard to see a widespread recession developing in the near term. As a reminder, the National Bureau of Economic Research's Business Cycle Dating Committee is the organization that keeps track of business cycles. While there is no fixed definition of economic activity, the Committee draws on various measures of broad activity, which Morgan Stanley has defined as “The Four D’s”:

• Deceleration: Every classical business cycle slows before it contracts, so look for a pronounced slowdown first. While Q4 looked weak, there is ample evidence that there will be a recovery in Q1.
• Diffusion: The weakness must be widespread across industries. Outside of energy and manufacturing, activity in the rest of the economy appears to be OK
• Depth: Broad indicators such as employment, income, production and sales need to contract by at least 1.5 percent from their cyclical peaks.
• Duration: The NBER looks for a period of at least six months of contraction in the economy to be convinced that the episode was a recession

MARKETS: US stock indexes have rallied more than 6 percent from their lows reached on Feb. 11, narrowing year-to-date declines.

• DJIA: 16,640 up 1.5% on week, down 4.5% YTD
• S&P 500: 1948 up 1.6% on week, down 4.7% YTD
• NASDAQ: 4590 up 1.9% on week, down 8.3% YTD
• Russell 2000: 1037, up 2.7% on week, down 8.7% YTD
• 10-Year Treasury yield: 1.77% (from 1.61% a week ago)
• Apr Crude: $32.78, up 3.2% on week
• Apr Gold: $1,223, down 1% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.74 (from $1.72 wk ago, $2.37 a year ago)

THE WEEK AHEAD:

Mon 2/29:

9:45 Chicago PMI

Tues 3/1:

Dollar Tree

Motor Vehicle Sales

9:45 PMI Manufacturing Index

10:00 ISM Mfg Survey

10:00 Construction Spending

Weds 3/2:

8:15 ADP Private Jobs

Thursday 3/2:

Costco

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Survey

Friday 3/3:

8:30 Feb Employment Report

Financial Thanksgiving 2014

Thanksgiving is a time when we can give thanks for all of the blessings in our lives, like health, loving spouse, a wonderful family and amazing friends. But this is a money column, so this week, I would also like to give thanks to all of the amazing people and resources that have improved our financial lives. The Financial Planning Coalition: The collaboration of the Certified Financial Planner Board of Standards (“CFP Board”), the Financial Planning Association® (“FPA”), and the National Association of Personal Financial Advisors (“NAPFA”) continues to work on behalf of consumers to make the fiduciary standard the gold standard for financial advice-givers.

The Employee Benefit Research Institute (EBRI): The mission of EBRI is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI has also developed an easy to use retirement calculator, which I wholeheartedly endorse.

Life Happens: While I have been a critic of some of the practices of the insurance industry, this nonprofit, founded by seven producer organizations, is dedicated to helping Americans take personal financial responsibility through the ownership of life insurance and related products, including disability and long-term care insurance. Of particular interest is the Life Happens Insurance calculator.

Mark Kantrowitz/FinAid.org: Mark created this terrific web site for education funding in the fall of 1994 as a public service. It is the quintessential resource for every would-be college student, providing informative, objective and valuable advice for students and their families, who are looking for ways to finance their education.

SSA.gov: I know that everyone complains about the Social Security system, but the government’s web site is a great tool. You can manage your account online and use the estimator to determine your future benefit.

Jack Bogle: When he was a junior at Princeton University in 1949, Jack Bogle decided to use the concept of index funds as the topic of his senior thesis. That decision eventually led to the creation of the modern index fund. In 1976, The Vanguard Group – then a new mutual fund company – rolled out the First Index Investment Trust, which ultimately became the Vanguard 500 Index Fund. The fund, which was originally referred to as “Bogle's Folly” has become the single best friend to retail investors.

AnnualCreditReport.com: In the aftermath of the credit boom and bust, there were singing pirates and a myriad of online offers to help consumers take control of their credit histories, but there was only one official site, guaranteed by Federal law, where you can obtain a free credit report annually.

Consumer Financial Protection Bureau (CFPB): The CFPB was created out of 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB consolidated most Federal consumer financial protection authority in one place and focuses on one goal: watching out for American consumers in the market for consumer financial products and services. Although various regulators had consumer divisions, none has the sole focus of keep an eye out for us. The CFPB works to give consumers the information they need to understand the terms of their agreements with financial companies. They are working to make regulations and guidance as clear and streamlined as possible so providers of consumer financial products and services can follow the rules on their own.

Ann Marsh: Since we have just celebrated Veterans’ Day, I would like to highlight the work of Financial Planning Magazine’s Senior Editor and West Coast Bureau Chief. Ann’s phenomenal work highlighted how financial problems are weighing on our servicemen and servicewomen, and in some cases, contributing to suicide. Please read her article and if you are interested in supporting our veterans, please check out www.giveanhour.org, which is in the process of considering launching a financial planning arm of its services and www.psycharmor.org, which is putting together a new network of private sector professionals to help soldiers and vets, including financial planners.

The Recession is Over: Long Live the Recession!

According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the recession ended five years ago this month. You may be excused for not feeling like a big celebration, since wide swaths of the country remain mired in the aftereffects of the worst contraction since the Great Depression, but there has been progress on most fronts. Let’s start with a refresher on how the NBER determines the onset and conclusion of recessions. Despite the oft-referred to rule of thumb that a recession occurs when there are two consecutive quarters of economic contraction, the Dating Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity, including: real GDP, real income, employment, industrial production, and wholesale-retail sales. According to NBER, the so-called Great Recession began in December 2007 and lasted until June 2009. At 18 months, it was the longest of any recession since World War II.

Here’s where we stand in some big categories since the Great Recession Ended:

Jobs: In June 2009, the unemployment rate was 9.5 percent, on its way up to a peak of 10 percent in October 2009. The rate now stands at 6.3 percent and total employment is just a tenth of a percent below the pre-recession peak. As of April, there were 113,000 fewer total jobs, which will likely be recaptured when the Bureau of Labor Statistics releases the May Employment report on Friday.

Still, the progress is murkier on other fronts. There are still 9.8 million Americans who are unemployed and 3.5 million long-term unemployed, who have been out of work for more than six months. Unfortunately, only about 10 percent of the long-term unemployed find jobs each month, a metric known as the “job-finding rate” - among those unemployed six months or less, the finding rate is nearly 25 percent.

Also, the participation rate, which measures those in the labor force and those actively seeking employment, has dropped to 62.8 percent, three percentage points below the June 2009 level and the lowest since 1978. Part of this is the effect of boomers retiring (probably about half of the reduction) but a big chunk is due to workers who leave the labor force because they are discouraged.

There has also been concern about quality of jobs created, which have been heavily concentrated in lower-wage industries. The food services and drinking places, administrative and support services (includes temporary help), and retail trade industries are leading private sector job growth during the recovery. These industries, which pay relatively low wages, accounted for nearly 40 percent of the private sector employment increase since the recession ended.

Income: For those lucky enough to have jobs, the financial crisis and recession put a dent in median household income. According to Sentier Research, April 2014 median household income 2014 was $53,043, 4 percent lower than the median of $55,261 in June 2009.

Economic growth: In the second quarter of 2009, Gross Domestic Product contracted by 0.3 percent, but in the third quarter of 2009, the economy actually grew by 1.3 percent. Growth has averaged just over two percent for the past four years, making this recovery sub-par, compared to the annual average post World War II growth rate of 3 to 3.5 percent.

Stocks: On May 29, 2009 the S&P 500 closed at 919. On Friday, the index closed at a new all-time closing high of 1923, more than doubling over five years.

Housing: While stock market indexes bottomed in March 2009, it took the epicenter of the crisis, the housing market, far longer. House prices peaked in 2006, then reached bottom in early 2012. National house prices are up 25 percent from the post-bubble low, but still remain down 17 percent from the peak. Additionally, homeowner equity as a share of household real estate continues to move up with rising house prices and falling mortgage debt, although it still remains about 8 percentage points below its 1990 to 2005 average, according to the Financial Stability Oversight Council’s (FSOC) annual report.

Debt: The FSOC report also noted that Americans have reduced their overall loan burdens. As a result, they have steadily become more current with their debt repayments. “Since 2009, the percentage of household debt that is delinquent has decreased from 12 percent to 7 percent, but still remains significantly above pre-crisis levels."

Bottom Line: Slow, tepid, lukewarm, weak…take your pick…any are appropriate words to describe the five-year period since the end of the recession.

MARKETS: Despite the lackluster recovery, US companies are still profitable. According to Capital Economics, the ratio of domestic profits after tax to gross value added (GVA) in the US non-financial corporate sector hit its highest level in 63 years in Q1. That profitability, combined with an accommodative Fed, pushed stocks higher for the week and the month.

• DJIA: 16,717, up 0.7% on week, up 0.8% on month, up 0.85% YTD
• S&P 500: 1923, up 1.2% on week, up 2.1% on month, up 4.1% YTD (closing high)
• NASDAQ: 4,245, up 1.4% on week, up 3.1% on month, up 1.6% YTD
• 10-Year Treasury yield: 2.47% (from 2.52% a week ago)
• June Crude Oil: $102.71, down 1.6 % on week, up 3% on month
• August Gold: $1264, down 3.5% on week, down 3.9% on month
• AAA Nat'l average price for gallon of regular Gas: $3.67 (from $3.61 a year ago)

THE WEEK AHEAD: Just like clockwork, it’s time for another jobs report! Analysts expect 220,000 jobs were created in May and the unemployment rate will tick up to 6.4 percent from 6.3 percent.

Mon 6/2:

Apple Worldwide Developer Conference

10:00 ISM Manufacturing

10:00 Construction Spending

Tues 6/3:

Motor Vehicle Sales

10:00 Factory Orders

Weds 6/4:

8:15 ADP Private Sector Jobs

8:30 International Trade

8:30 Productivity

10:00 ISM Non-Manufacturing

2:00 Federal Reserve Beige Book

Thurs 6/5:

ECB/Bank of England rate decision

8:30 Weekly Jobless Claims

12:00 Federal Reserve Flow of Funds Report

Fri 6/6:

8:30 June Employment Report

3:00 Consumer Credit