Global Recession Tugs At U.S. Economy
This recent release of the manufacturing and industrial production data added further support to our previous commentary regarding the search for the much touted economic recovery. Unfortunately, it has yet to manifest itself. The latest data showed that manufacturing in January fell back but after strong gains in December and November. However, it is important to remember that the gains at the end of 2012 were driven by the effects of Hurricane Sandy and the "Fiscal Cliff." That ramp up in November and December is likely to leave a void in demand in the coming months - so January's weakness is likely a return to a more normalized trend. Also, most of the production gains in the previous two months came from motor vehicles as replacements were needed post the hurricane flooding. For the month of January industrial production decreased 3.2% after a gain of 2.9% in December and rise of 5.9% in November.
Industrial production is one of the four major components of economic strength, or weakness, so the direction and trend of the industrial production data is key to our macroeconomic and investment outlook. The chart below shows the annual rate of change in industrial production going back to 1920. For the most part, when the annual rate of change in industrial production has been below zero - the economy has been in a recession. Currently, the annual rate of change is 2.1%, which is down sharply from the 7.5% rate of change seen at the peak of the economic growth cycle in 2010, clearly shows an economy that is not currently in recession. However, that could be just a function of time given the fairly steep decline that is currently in progress.
The concerns over economic growth are important, both domestically and internationally, as it directly affects corporate profit margins and valuations. The belief, currently, is that the economy in the U.S. can decouple from the rest of the globe and act as an island of economic prosperity. With 40% of corporate profits tied to international exposure it is unlikely that the U.S. can remain decoupled from the rest of the global community for long.
The chart below shows U.S. industrial production as compared to the Eurozone. It is clear that the drag from the Eurozone is weighing on domestic output.
Dwaine Van Vurren from RecessionAlert.com picked up on this fact in his recent article:
"With the disappointing initial GDP releases for Q42012 from Europe out, the 'world' as defined by 41 OECD countries across the globe, has plunged into recession. We define 'recession' through two alternative definitions for our comparison, either the presence of a single negative quarter-on-quarter growth or the more traditional two consecutive negative quarterly growths. Whichever way you look at it, the number of countries in expansion plunged dramatically between 3Q2013 and 4Q2012 as shown below:
It is clear the U.S is faring far better than most, but one has to question how long she can remain above water with the drag of her economic peers weighing upon her economy. "
There are three important points to be made here:
1) The economic data that is used by the NBER in determining economic recessions is subject to heavy backward revisions. This is why the NBER never announces a recession in advance of its occurrence. Due to the massive amounts of artificial intervention currently in the system - it is highly likely that the majority of models will fail to predict the onset of the next recession.
2) The drag on the Eurozone recession will continue to impede economic growth in the U.S., and;
3) The current reads on economic data as stated above, have been skewed due to the influences of the "fiscal cliff", Hurricane Sandy and an exceptionally warm winter. It is likely that the reversion to more normalized data trends in months ahead will show a more marked pullback in the domestic economic growth story.
What is clear, however, is that the economic data is not markedly improving. While monthly data points will remain volatile it is the trend of the data that is most telling about macroeconomic future. Currently, that outlook remains one of a "struggle through" environment at best.