Since the last post my brain has had many ideas but I’ve been struggling with putting them together into a cohesive structure, plus the inclination to do the necessary data analysis has gone walkabout. I think it’s a sign that I need to take a short break, which I’ve been doing in the last couple of weeks.
However, I thought I would throw out a few of my standalone thoughts, i.e. stuff that can stand on its own without a heap of narrative.
Confusion & diffusion
There is increasing confusion evident in markets at present, which I take as a good thing and typical of this stage of the cycle.
So many people have been negative on the outlook for the economy & markets to the point of speculating on a market fall that it has allowed the stock market the ability to remain elevated. Additionally, the economic data that has come through has still appeared, on the surface, to be not so bad. On top of that, there has been mixed data, which has allowed bearish people to select the data that suits them and the same applies to the bulls. This is evening out the previous bearishness, which creates for the longer-term bear move to continue … even if it might not appear immediately.
I’ve said before that the economy is an excruciatingly slow moving beast such that people become impatient or, more likely, get distracted while waiting for it to do its thing. I myself have had to shrug & just sit patiently, biding my time because I thought we might see more action before now.
Anyhow, I noticed some people online had selected various individual U.S. manufacturing diffusion indexes and posted them. I decided to collect a range of these and normalize them so that they can be put on the same chart with the same scale - just for fun, and to see if they, collectively, tell us a story.
Notes:
a value below 50 (the grey dotted horizontal line) means activity is contracting and above the line means it’s expanding (growing)
all the data is survey based, so technically it’s not ‘hard’ data, but it’s hard in the sense that it is businesses reporting on their current conditions. In that context, the only ‘soft’ data is the Philly Fed future activity line, which is the golden dotted line and extends into the future (this data series also uses a different axis [not shown] that I have scaled so that it matches the amplitude of the PMI data)
the bright green line is a normalized average of all the datasets
These charts show that, while you may not be feeling recessionary at present, the recessionary trend is in place.
Demographics matter
I’ve long mentioned on this site the role of demographics in relation to the economy. Fundamentally, economics is a human affair (the financial interactions of a population), so it only makes sense that the greater the number of economic agents in the system, the greater the economic growth, because GDP is a measure of all the transactions in the economy (money changing hands).
The productive component of the economy - the working age population - has been shrinking for several years. Over the last year it jumped again, but that was only a 1-year phenomenon and will roll off next month. To prove it, I have created the following chart that shows the working age population growth rate on a year-over-year basis (12 months) and also for 11 months. You can see the sudden drop that is about to occur.
These brief spikes are interesting to observe. They are the result of people feeling both wealthy and horny during previous economic cycles (look back approximately 16-17 years prior to each spike for what was happening then). When times are good (economically speaking) people have sex - no surprises there - but it’s the sort that results in babies. The current spike in the chart above is the result of people thinking they were getting rich enough to afford children during the housing bubble circa 2005-2006 … which means, over the next few years, we are also about to experience the lack of population growth resulting from the feeling of being poor after that bubble burst.
Jobs & Retail Spending
The financial media has been writing about retail sales holding up and strength in the job market, but I question their analysis.
Retail sales needs to adjusted for inflation so that you can see whether people are spending more because they have money to burn, or whether prices have risen forcing them to pay more for less. Turns out it’s the latter because Real retail sales are negative on a year-over-year basis, and that looks like recession behavior.
Likewise, the job market is wobbling. Year-over-year growth in job openings and people quitting their jobs are also negative, which aligns with recessionary trends.
There are certainly challenges for businesses finding workers at present and that is likely to continue for a few years while we go through a transitionary phase. That transition also occurred in Japan. It is the confluence of an aging population, when more older workers leave the workforce than new entrants (as per the working age population data above, i.e. negative growth), and a failure to understand that the economy NEEDS to contract to a level appropriate for the smaller population. Once the current recession has done its work, the economy will need to grow back, but not to the same level that we have known.
It is interesting to note that during shrinking population periods that unemployment is always low. By contrast, during a growing population bubble like we saw in the 1970’s, there is higher unemployment. But first we need to experience the coming economic shock.