U.S. Leading Indicators Rise For AFifth Straight Month And Signal Economic Recovery

The Conference Board's Index of Leading Economic Indicators continued to suggest a pending economic recovery with a 0.6% August increase that was close to expectations. The rise in the composite index of leaders was the fifth in a row and the 4.7% increase during those five months was the strongest since early-1983. The index itself was at the highest level since January of last year. The leading index is based on actual reports for eight economic data series. The Conference Board initially estimates two series, orders for consumer goods and orders for capital goods.

Perhaps tempering the outlook was that the 0.6% August increase in the leaders was the weakest of the last five months. Moreover, a slightly diminished 60% of the index components rose. Higher stock prices and a steeper interest rate yield curve, along with a slower speed of vendor deliveries, made the largest positive contributions to the latest overall increase in the leaders. However, the real money supply fell for the fourth month in the last five and average weekly factory hours worked were unchanged as were new orders for consumer goods & materials.

Continuing to suggest that the rate of decline in the economy is slowing were the coincident indicators. They were unchanged during August after a slim 0.1% July gain. While hardly indicative of a robust economy, these declines compare with monthly shortfalls of 0.6%-to-1.1% dating back to September. Fostering the turnaround have been slight increases in industrial production and real personal income as well as diminished monthly declines in payrolls.

Wringing out past economic excesses is needed for real economic recovery. In a further sign that excesses in the U.S. economy are diminishing, the lagging index fell for the eight month in the last nine. To that point, C&I loans outstanding fell sharply for the ninth straight month and consumer credit versus personal income was off for the fifth month this year. Regardless, the average duration of unemployment shortened and the change in CPI for services eased. The ratio of coincident-to-lagging indicators (a measure of economic excess) also continued higher for the fifth straight month to the highest level since November.

The Conference Board figures are available in Haver's BCI database. Visit the Conference Board's site for coverage of leading indicator series from around the world.

Beyond Inflation Targeting: Should Central Banks Target the Price Level? from the Federal Reserve Bank of Kansas City is available here.

How Will Unemployment Fare Following the Recession? also from the Federal Reserve Bank of Kansas City can be found here.

Each quarter, the Federal Reserve Bank of Philadelphia surveys a group of professional forecasters to gain perspective on the outlook for the U.S. economy. In the August survey, the panel expected the recession to have reached its end, though the recovery is expected to be subpar. That subpar nature is expected to keep unemployment high but it is not expected to prevent inflation and interest rates from rising.

Just 2.4% growth in real GDP is expected during the current quarter to be followed by growth at about that rate into next year. That follows the 3.9% y/y drop in real GDP through last quarter, which was the deepest decline since the Great Depression. Indeed, this recovery is subpar compared to prior periods of severe recession. Following the 1973-75 recession, when GDP fell at a peak y/y rate of 2.3%, growth shortly rebounded to 6.2%. Similarly following the 1981-82 recession, when GDP fell 2.7% y/y, a snapback came quickly at near an 8% rate.

The subpar nature of the coming economic recovery stems very much from the consumer who remains burdened by excessive levels of debt.

A swing towards inventory accumulation also should play a part in the pending economic recovery, yet here again it's not a huge part. Accumulation at near a $20 billion annual rate is expected by the end of next year. Certainly that is improved from the peak rate of decumulation of $141 last quarter, and the dollar swing is impressive. But as a percentage of the economy's overall real size it amounts to barely half the swing after prior severe recessions. As for the foreign trade deficit, recent improvement has helped forestall an even deeper decline in U.S. GDP during this recession. However, that improvement is expected to now end with little or no improvement through next year as foreign economies remain weak.

Weak economic growth is expected to do little reduce unemployment. The unemployment rate is expected to average 9.9% and then dip just to 9.6% by next year's third quarter. These rates are the highest jobless rates since 1982-83 and reflect little or no growth in expected employment. Pricing power is thus expected to be severely constrained. The y/y growth in the overall GDP price deflator is expected to drift up to 1.5% from its low of 1.0% this year. Perhaps not-so-surprisingly, forecasters expect that lift to stem from a liquidity-driven rise in core consumer prices to 1.6% from a low of 1.1% being reached now. Ten-year Treasury yields are expected to rise in tandem to highs near 4% by the middle of next year.

The full Third Quarter 2009 Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia is available here

French orders were up by a solid 2% in July as foreign orders surged by 14%. In Italy orders jumped by 3.2% on foreign order strength of 15.6%. Both Italy and France as seeing strong orders in the new quarter (Q3, one month in) led by huge gains in orders from abroad.

Both Italy and France show recovery patterns of order growth but order levels that remain just a bit less than 25% below year-ago levels.

Europe- Europe continues to show economic recovery. But with the G-20 set to meet in the re-made but old US industrial city of Pittsburgh, the OECD, the IMF and a German think-tank have taken this opportunity to highlight the risks to the future of this recovery. The OECD is very concerned about the health of banks and that there could be some backsliding and troubles with capitalization. The IMF is concerned that German employment could rise sharply over the next year, pushing unemployment to over 10.5% and creating weak growth under 0.5% in 2010. This would clearly become a problem for growth in the rest of the e-Zone. Not to be outdone by this sort of sour outlook, the German think-tank IWH Institute warns of a credit crunch highlighting the potential for a double dip as government stimulus programs come off the books.

Pessimism shuns trends: Despite some very strong current indicators that spread across the major EMU economies there remains in Europe, much like in the US, a core of pessimism about the risks. Unlike after other recessions apparently this recovery cannot be trusted to bottom and begin to rise and for that upswing to be self-sustaining. The abnormal degree of and scope of early government help that will eventually be rescinded is one of the common culprits in both US and European pessimism. If that is so what ever do it in the first place?

Professional pessimists: While we expect the main international regulators and oversight agencies to be less than cheerleaders and to be wary of risks, the extent to which private sector naysayers have piggy-backed on that tact is surprising. For now we are left with the reality of an upswing and one that is looking quite nice and consistent across EMU nations. Meanwhile, the outlook sours as we speak. While the future may still hold risks, one must wonder if they are as great as is being said or if lowering expectations has been taken to a new extreme by politicians who in the end are chastened by their own role in this crisis by seeing it develop and watching powerlessly, aware that it is a disaster that occurred on their watch.

Preliminary data suggest that the Russian Gross Domestic Product, fell 0.5% in the second quarter, a marked improvement over the 9.0% decline in the first quarter. (These figures are based on the series that have been seasonally adjusted by Haver Analytics.) August data on production, construction, and retail sales have been disappointing. Production and construction declined in contrast to increases in July and retail sales showed a smaller increase in August than in July. The unemployment rate, however, was 8.6% in August 2 basis points below July.

In spite of the July hiccup particularly in industrial production, the prospects for increased activity in Russia have brightened. Oil prices are up, the Reserve Bank has steadily lowered the refinancing rate from 13% in March to 10.5% in September. Inflation, though still high, was 11.6% in August, down from 13.15% in April. Recent data for these aspects of the Russian economy are shown in the table below.

The Purchasing Mangers Survey published by Markit Economics in London reported earlier this month that the GDP indicator for Russia reached the expansion stage in August (above 50) for the first time since September, 2008 as shown in the first chart. Finally, the Stock Market has increased 44% from the recent low point reached on July10 and 1208 today is 139% above the low reached on February 2, 2009. The decline and rise in the stock market is shown in the second chart.