When I was growing up I had a tendency to want to run faster than my feet could carry me which was generally about the time I would get a good yank on my collar with my dad telling me to “slow down”. Well, the market has been running quite a bit faster recently than the underlying fundamentals will support which was evident with today’s release of the Chicago Fed National Activity Index (CFNAI).
While the index did come in at a slightly improved, but still negative, -22 from last month’s downwardly revised reading of -59 the 6-month average is still in recessionary territory which tells you a lot about the overall trend. If you will remember the Chicago Fed National Activity Index (CFNAI) is a monthly index designed to better gauge overall economic activity and inflationary pressure. The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. Since economic activity tends toward a trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend. Currently, this index is trending toward a below trend growth rate.
With Europe’s combined services and manufacturing PMI index sliding to its lowest level since July 2009 and with the National Association of Business Economics (NABE) survey showing that U.S. hiring plans have been cut to the lowest levels since December of 2009 there is little to be excited about with the economy going forward. The underlying weakness in the economy will likely reassert itself in the next couple of months as we move into the retail shopping season. With real retail sales declining in September, when you strip out the largest seasonal adjustment in the last 3 years, and the brief inventory restocking spurt due to the Japan crisis now behind us; it is likely that consumer “frugality” will present an untimely arrival just when retailers need it the most.
We said in previous missives that with the market deeply oversold in September that it was likely that the markets could bounce in October. We also said that when this happened the media bulls would be out in force stating that the recession had been avoided and the buying opportunity for investors was here. We didn’t have to wait long for that to happen. Already headlines are stuffed with calls for economic recovery. While in the process of dismissing recessionary calls and focusing on a first estimate of 3rd Quarter GDP at 2.5% what is being overlooked is the massive draw down in personal savings to support the consumption push. If you strip that out there was virtually no growth in the economy last quarter.
Also, don’t forget that the economy was chugging along at nearly 3% in the 3rd quarter of 2007 just before the recessionary plunge began just one quarter later. Furthermore, if the economy was doing so well why is the White House in a rush to provide another bailout program for housing, the Fed even discussing asset purchases (QE 3) and Europe scrambling to put together a Eurozone bailout fund? If the economy was doing so well why are we hiring temporary workers for the seasonal holiday shopping season and holding a 9.1% official unemployment rate and nearly a 20% real unemployment/underemployment rate? If the economy is doing so well then why are companies still holding off hiring plans and beginning another round of layoffs while more than 45 million Americans are on food stamps?
The point here is that it is critical not to confuse a signal economic number or an oversold bounce/short covering rally in the market with an actual economic/market recovery. As the real economy weakens it will show up in the numbers. Maybe, this why two thirds of the companies that have released guidance so far this earnings season have reduced them. Don’t take your eye off the ball – the real crisis is in Europe and there is no solution on the table that will stop that crisis from evolving into critical mass. Since Europe makes up 20% of our exports, and grwoth in the U.S. is already extremely weak, the impact of the fallout from the crisis in Europe will show up quickly on our economic shores.