Comstock Partners, Inc.January 27, 2011
Normal Recovery? No Way
The majority of economists and strategists are now telling anyone who will listen that the economic recovery is now normal and are trumpeting this view to jump-start the stock market. They are confidently asserting that "the new normal" concept popularized by Pimco is now a moot issue. In fact, there is nothing in the major economic indicators to indicate that the current recovery is anything other than anemic. We have taken eight major economic indicators and compared them to where they are now versus the economic peak 36 months ago. We did the same for the equivalent time periods for the prior two business cycles, using the official dates designated by the National Bureau of Economic Research. We did not use surveys, opinions or diffusion indexes, but relied instead on the major basic indicators measuring employment, income, consumption, production, housing and capital expenditures.
As was true when we did a similar study about four months ago, the results are very clear that the current recovery is far weaker than the prior two expansionary periods, which themselves were below the average of other post-war expansions. The results are summarized as follows.
1) GDP was up an average of 6.4% from the prior peak at this point in the last two cycles, and only 0.2% now.
2) New home sales were up 23% then; down 47% now.
3) Retail sales were up 14% then, 1% now.
4) Industrial production was up 2.5% then, down 5.6% now.
5) Non-farm payroll employment was down 0.1% then, down 5.2% now
6) Personal income was up 11% then, 4% now.
7) New orders for durable goods were up 6.2% then, down 2.2% now.
8) Initial weekly unemployment claims were down 8% then, up 22% now.
The facts speak for themselves. The current recovery is far weaker than the prior two across a broad array of major economic numbers, and the Fed apparently agrees. That is why they stated in Tuesday's release following the FOMC meeting that the economy has been growing "at a rate insufficient to bring about an improvement in labor market conditions. Growth in household spending....remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit ....investment in non-residential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to remain depressed."
That is why the Fed reiterated its policy of purchasing $600 billion of longer-term Treasury securities and repeated its previous statement that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate for an extended period." The current market action seems based on the same type of delusionary views that prevailed at the tops in early 2000 and late 2007, and therefore rests on a rickety foundation.