Tuesday, February 9, 2016

Controlling the Greased Pig

Many important economic indicators are showing an obvious negative trend.  If you would have seen this trend in the past (before the Great Recession) you would have concluded a recession was imminent, and most times, you would have been correct.  Our current conditions point to recession under normal circumstances, but conditions are still far from normal.

For most of this recovery manufacturing has led the way, while services and housing have lagged.  Currently, some analysts are saying we are in a “manufacturing recession” but, at the same time, the service sector and housing are performing much better.  It should be noted that if we are in a manufacturing recession, it is currently a very mild one, with the ISM (purchasing managers) index just under the magic “50” neutrality number.

My index that tracks discretionary spending continues to show solid growth, no doubt helped by the “low gas price” dividend.  The Restaurant Performance Index shows that people are continuing to spend some of this “bonus” for dining out. So, even though certain sectors of the economy are on a downward slope, the economy is expected to continue to cycle within a restricted range. 

I believe this is how this restricted range works:

The economy was overheated and running wild in the run up to the Great Recession, then it spun out of control and started to do significant damage.  The government tried to grab hold of it, but it was like trying to catch a greased pig.  With all the turmoil and calamity, maybe it was more like trying to grab a slick wild boar.

The government was finally able to stop the damage by exerting extreme force over the economy, controlling interest rates, manipulating the money supply, huge bailouts, and, to some extent, regulating the entire financial system.  They then put the pig in a pen.  The pig can move around but is limited by the barriers surrounding it.  The pig never moves to the top or bottom of the pen very forcefully because of the limitations.  When the pig runs into to the top or bottom wall, it instinctively moves back to the middle of the pen.

They scrubbed the grease off the pig, they wrote new rules for the pig, and they nurtured and lectured the pig on proper behavior.  They basically have subjected the pig to the equivalent of helicopter parenting.  You could remove the pen and let the pig run free; however, you don’t know what would happen.  Would you get a nice, clean pig which exhibits proper behavior after years in the pen, or would the wild boar reemerge and start wreaking havoc like before?

This was a topic for debate in the last election.  One argument was to give the pig more freedom and incentive, the other argument was to keep him in the pen.  The pen strategy prevailed. You do tend to want to keep the pig contained, if you doubt your ability to manage it after it’s loose.

The good news is that the pig is prevented from going too far south; the bad news is that it is limited in traveling north.  So we sit in this cycle where the pig moves around, but never really goes too far in either direction.

Therefore, it appears that the economy is just experiencing one of its muffled down cycles.  We have this anemic 0.7% GDP growth for 2015Q4, but the Wall Street Journal Economists Panel is forecasting 2.4% in Q1, and 2.5% growth in 2016 (FTR is at 2.2%).  So, ho hum, nothing to see here, please move along.

A check of the Economic Cycle Research Institute (ECRI) Weekly Leading Index Growth Rate confirms this.  This indicator had been a very reliable predictor of recessions in the past.  This index did take a dip in January, just as it did in 2011, 2012, and 2014…and ECRI is not warning of a recession in 2016.

Of course, world economic turmoil could change this.  It would, however, be the equivalent of removing the south end of the pig pen.  Our government would then be challenged with recapturing the pig and would no doubt return it to the pen; because “you see what can happens if the pig is allowed to run free”.

Unfortunately, one of these times when the economy cycles down, it will not stop, but keep declining into a recession.  When that happens people will look at all the charts that were going negative beforehand and exclaim, “How could you have missed that? It was so obvious!” Yes, just as obvious as the numerous times during this recovery when the economy cycled down and then cycled right back up.

Recessions are very difficult to predict under normal conditions, the next one will be even more difficult to forecast.  We may not even find out about the next recession until after it has already ended.  I can confidently say we will not have a recession – until, of course, we do.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)