Sometimes a Blip Is Just a Blip

by: James Picerno December 04, 2008    
James Picerno

James Picerno

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One blip a trend does not make.

Yes, we're all eager for any sign of hope on the economic front, and so the slight upturn in our broad measure of the October data looks encouraging. But it's probably just noise — a refreshing bit of noise from the larger bearish trend, but noise just the same.

We're talking here of our proprietary CS Economic Index, which is an equal-weighted measure of 17 leading, coincident and lagging indicators that track the broad trend in the U.S. economy. Leading indicators make up nearly half of this benchmark's weight. As our chart below shows, October posted a small rise in the index — the first after four straight monthly declines. (The complete range of monthly economic data for any given month arrives at a lag, and so October's numbers were only recently complete as of last Friday.)

Alas, it's not the start of a rebound. A big part of the blip in October can be traced to lower interest rates, which register positively in our index. Normally, lower interest rates dispense a bullish tonic for economic activity now and in the future. Unfortunately, the times are anything but normal. Lower interest rates, although they look encouraging on paper, have lost a fair degree of their stimulative power in the real world at present.

The Federal Reserve, in short, is now pushing on a string, to quote the popular phrase. With fears of deflation and continued economic weakness in 2009, lower interest rates alone won't change sentiment, at least not for the foreseeable future. That won't stop the central bank from lowering rates to zero, but no one should expect something approaching free loans to suddenly reverse all that's befallen sentiment in the U.S. in recent months.

What, then, are we to make of the sharp rise in commercial and industrial loans in October? This lagging indicator rose strongly, which helped boost our CS Economic Index. C&I loans grew by more than 4% in October, and were higher by 15% compared with a year earlier, according to the Fed. As Richard Yamarone (director of economic research at Argus Research) explains in The Traders Guide to Key Economic Indicators, higher C&I loans "are an indication that businesses have a favorable economic outlook, and are willing to build and expand their operations, and finance these plans via loaned monies." True enough. Most of the time, that is. But in the current climate, higher C&I loans may not be the bullish indicator they otherwise would be.

A recent paper from two Harvard economists advises that fear may be driving the increase in commercial loan making of late ("Bank Lending During the Financial Crisis of 2008"). Companies are increasingly eager to have more cash on hand to fend off disaster, as opposed to investing for growth. As such, a jump in C&I loans may be a sign of distress for the time being. (Hat tip to Jon Hilsenrath of the Wall Street Journal for pointing out this research.)

What about the rise in industrial production in October? The 1.3% jump looks encouraging on its face. But that too is something of an illusion. A big chunk of the rise was tied to the restarting refineries and drilling rigs in and around the Gulf of Mexico after the shutdowns due to hurricanes Gustav and Ike. Factoring out the storms and a strike at Boeing, industrial output would have slipped by 0.7%, according to the Fed via Bloomberg News.

In short, the upward blip in our economic index is just a blip. Our leading index of economic indicators, which continued to fall in October, suggests as much. So too does the red ink in most of the other economic indicators for October. The temporary respite, it seems, will soon give way to additional economic retrenching.

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This article has 7 comments:

  •  
    Dec 04 12:33 PM
    I think it is far to early to start looking for positive data. What we need is to explore how deep this recession will be, and the worst is yet to come. Just look at yesterdays auto sales data.

    Check out this website freetradingquiz.com
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  •  
    Dec 04 01:15 PM
    Great article! Thanks for the well thought out thesis. I would tend to agree. The loans to the emerging economies that seem extremely likely to start defaulting by the truck load soon will be another nail in the coffin. I believe these will start showing up around Dec. 15. Early next year we may see the truck load. Fortunately the US is not overly exposed. However, Western Europe is hugely exposed, and the US is in turn exposed to Western Europe. You can see what I am thinking may happen. This is without even mentioning the currently increased expectations for US mortgage foreclosures in 2009 or the automakers problems, or the commercial loan problems.
    Thanks again for the great article.
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  •  
    Dec 04 01:22 PM
    Ray Charles could see that we're on the fiscal equivalent of flight 93; only in the fiscal example, the pilots are the terrorists and have coursed us straight to hell at full speed.

    Bravo to leadership -- bravo. Even Ray Charles could have landed us more gently than Congress or an industry plagued by incompetent self-preservationists.

    I hope the rich are finally happy while arrogantly watching their empire and children's future crumble.
    Reply | Link to Comment
  •  
    Dec 04 01:46 PM
    Fantastic article. I agree with author's views!
    Reply | Link to Comment
  •  
    Dec 04 02:04 PM
    It is impossible to fathom the stupidity and evil in both the government and investors today. We are NOT in a recession. It is much worse. We are in a GREAT DEPRESSION! It is sad to see people returning to the market so early. Here’s the important reason why: right now the TRUE state of the US is similar to that of most 3rd world countries and getting much worse. The figures shy away from the truth because investors are very intent to force out a false hope with unreasonable inflation in market values while they trying to quickly recover their losses quickly. But the figures obscure reality, one is with unemployment. The initial claims drop this month is HORRENDOUS NEWS. People aren’t beginning to claim unemployment this month because THEY WERE ALREADY LAID OFF and have been for over a year now. The government has already stated the recession began in 2007 but failed to label it as a depression. Instead, they should have looked at continued claims clearly up 200% and climbing, but even those figures lie since unemployment can only be claimed for up to 6 months, after that the government lies and removes you from the counts. The truth is, nearly everyone that lost there jobs last year are still without work, and those people that have kept their jobs are either working less hours or being laid off this month and won’t be included in the unemployment counts because they are ineligible to file for payment. Also not included in the counts are those that have lost their second job, since they too are ineligible for money. A realistic way to see those without work would be to compare job positions currently filled now vs those that were filled this time back in 2006 with corrections for population growth and credit for shorter work weeks and pay drops. THE TRUTH IS AT LEAST 15% OF THE NATION IS CURRENTLY UNEMPLOYED AND RISING! I would even expect it to reach some 25% by February with poverty reaching well above 40% very some also adding a steady increase in the cost of living when including energy price increases and food costs with the soon to return rises in oil. People have to take loans and use credit cards just to put food on the table on clothes on their backs. Why am I the only one realizes the system has broken when I have to flash my American Express business card to everyone else in line behind me at Wal-Mart?

    The only reason the market ever rises is because we treat it like a casino game, play until you win a little then cash out and go home or throw more money on the table until you have to pull out and take a loss, either way the casino still makes a killing but someone somewhere goes home happy with your hard earned cash. If only people would see through the blanket of lies then we would have a free fall of true value corrections where stocks actually reflect what they are worth instead of what they might be worth if they actually win the lotto, but even if they succeed for a time, every expanding business will bust the bubble at some point.

    People have forgotten stocks are just virtual items that carry no real worth, like coupons worth 1/1000th of a cent. Futures trailing on estimated earnings are a joke. Any company can only post more profit with a price increase or a cost drop, even if they were to make money at some point, then even a dumb manager would spend that gain on some expansion, then give himself a raise to offset any excess profit and keep the ball rolling. Such expansion is the only true way a business can succeed and overcome competitors in the long term. So price vs. value should always equal 1 to 1 otherwise it is overvalued. The free market is such a farce these days it makes me sick! Prices a 5 to 15 times trailing earnings, maybe you'll live long enough to see it, but at a realistic 5% gain per year?! Will you live to be 100?! Honestly! Wall Street must admit when stocks explode, it is just a bunch of lucky investors puffing hot air about hitting the triple 7 but don't be the one left behind when all the hype dies and prices make their corrections back to zero.

    In short, I agree with you completely.
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  •  
    Dec 04 02:46 PM
    Heard of shock-denial-anger-acc... stages...I think market is in denial right now
    Reply | Link to Comment
  •  
    Dec 04 10:07 PM
    markets in dream land....wait till it wakes up and sees the truth. Remember the Matrix?
    Reply | Link to Comment
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