Recession Signals Still Blinking

Last Week
We had a few pieces of somewhat more-positive economic news last week. Existing home sales rose from June to July, according to a preliminary estimate from the National Association of Realtors, with the sales rate reaching the highest annualized level since February. Sales of newly built homes also increased in the latest month, but only after falling to their lowest level in 17 years in June. The Chicago purchasing managers' survey pointed to faster expansion in manufacturing activity in the Midwest, but it should be noted this index can bounce around a bit on a monthly basis. On the consumer front, the Conference Board's consumer confidence index rose for the second consecutive month, and the University of Michigan's consumer sentiment index rose for the third consecutive month. Both of these measures had declined sharply in the past year, however, and remain at recession-type readings.

The week was perhaps most notable, at least from a data standpoint, for the updated estimate for second-quarter GDP growth. Real GDP rose at a seasonally adjusted annual rate of 3.3%, according to this "preliminary" first revision to the "advance" estimate. This is a solid growth rate, on the surface, and well ahead of what people who try to predict these things were expecting.

Was economic growth really accelerating in recent months? Nope, far from it. We've likely been in a recession this year, or something close to it. Stimulus payments to households boosted consumer spending in the second quarter, and a wide range of sectors worth looking at for recession signs have been signaling bad news.

• Nonfarm payroll employment has fallen for seven straight months. We've never had a string of consecutive declines like this since World War II without a recession also being under way. Temporary help services employment continued to decline at a faster rate than the overall total, and this sector is a good area to watch as a leading indicator.
   
• We've had marked weakness in housing activity and residential construction. The decline in the residential fixed investment component of overall GDP in the past year has been at least as bad, or worse, than previous recessionary experience. Housing weakness impacts a wide range of economic activity, including consumer spending on durable goods such as appliances.
   
• Light-vehicle sales are another example of discretionary/postponable big-ticket consumer spending, and they have been declining sharply in the past year or so. The decline is coming at an accelerating pace lately, especially for heavier light vehicles. The recent weakness is as bad or worse than in past recessions. The latest total reported last week was for July, and at 12.5 million units, the reported sales rate was at its lowest level since the early 1990s.

• Bankruptcy filings rose nearly 30% in the U.S. in the first half of 2007, according to a courts report last week. Businesses are only about 5% of the overall total, but those filings rose 40% over the first half of 2007.
   
• Inflation has been rising in the past two years, and inflation tends to lead, not follow, economic growth. The annualized rate of increase in both the Consumer Price Index and the Producer Price Index has risen above 10% in recent months. These 1970s-type readings may not persist in the short run, given recent declines (to still-high levels) in oil and other commodity prices. But purchasing manager and other survey evidence foreshadowed the recent acceleration in the official inflation statistics, and they continue to warn of persistently high inflation in line with our 1970s experience. The recent inflation data also call into question the apparently robust real GDP growth reported last week for the second quarter of 2008, as they depended on a deflator that apparently rose at its lowest annualized rate in the past five years.
  
  Inflation indicators bear watching closely in coming months for clues to possible recovery in real economic growth, if not equity market returns.

The Week Ahead
The Institute for Supply Management releases the national purchasing managers' survey on Tuesday; we will see if the surprisingly robust reading from the Chicago survey last week follows through in the national level. In turn, the latest (and newer) ISM survey of purchasing managers in service industries arrives on Thursday.

Two private readings on labor markets arrive Wednesday in the Challenger, Gray & Christmas report on job cut announcements and the ADP employment report, but the biggest numbers of the week arrive on Friday with the BLS national employment report for August.

North of the border, the regular Bank of Canada monetary policy announcement is on Wednesday; we will see how they view the Canadian economy holding up in light of weakness in their largest trading partner, the United States.