Commercial paper bounced back this week

The latest weekly Federal Reserve report on Commercial Paper showed a sharp bounce-back in the amount of commercial paper outstanding. This was after three consecutive weeks of declines. This will still result in a decline for the month, but less than half as large as a week ago.

Even asset-backed commercial paper showed a healthy gain after four consecutive weeks of decline.

Non-financial commercial paper outstanding is at its highest level since the middle of the Summer.

Commercial paper is a key component of the credit market and is evidence that the credit market is not as "dead" as so many people insist.

One reason for strength in commercial paper is that money market funds thrive on it and due to its very short-term maturity it has a very low interest rate.

Another factor driving the commercial paper market is likely the tremendous turmoil in the auction rate secutities (ARS) market where rich people had previously been stashing their cash. Money market funds and actual commercial paper are now a much more attractive haven for parking of cash.

-- Jack Krupansky

Federal Reserve could cut by 0.75%

People are gloomy enough about the economy so that many market participants are betting that the Federal Reserve will cut its fed funds target rate by 0.75% at the March 18, 2008 FOMC meeting, if not before.

The April fed funds futures contract is priced at $97.6700, indicating a target rate of 2.33%, or a cut of 0.67%. That indicates a 100% chance of at least a 0.50% cut and a 68% chance of a 0.75% cut.

By my way of thinking even 68% is still not a "slam-dunk" certainty of a 0.75% rate cut. If the economy deteriorates further, yes the 0.75% cut will become a slam dunk. But... if the economy holds steady or even improves marginally over the next three weeks, all bets are off, even for the 0.50% cut.

On a positive note, weekly chain store sales actually rose last week, as reported on Tuesday. That is not enough to establish a clear trend, but certainly indicates that the economy is not completely gloomy.

-- Jack Krupansky

Unemployment insurance initial claims still not recessionary

Unemployment insurance initial claims did rise moderately this week, but still not to a level associated with a recession. In fact, the more-reliable four-week moving average of initial claims actually declined modestly. Net-net, there is still no sign of recession on the weekly unemployment insurance initial claims front, the front line for workers losing jobs.

Yes, the economy is quite sluggish right now, but we are still not as clearly in a recession as so many people insist.

-- Jack Krupansky

Personal income holding up fine

Despite the incessant chatter about recession, the latest Personal Income and Outlays report, for the month of January, indicates that real incomes, which are one of the key components for determining whether we are in a recession or not, actually rose, albeit very modestly (+0.1%.) Real expenditures were flat relative to December, but that is certainly not the recessionary outcome that so many people are talking about as being "here."

Yes, the economy is quite sluggish right now, but we are still not as clearly in a recession as so many people insist.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises slightly but still suggests high risk of recession

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.18% vs. -0.69% last week) and the six-month smoothed growth rate rose moderately (to -9.6 from -10.2 last week), but is well below the flat line, suggesting that the economy will be struggling in the months ahead.

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed.

I will keep my personal assessment of the chance of recession at 60% based on the magnitude of the negative level of the WLI smoothed growth index and the mixed nature of the data. The economy still has a fair chance of avoiding an outright recession, but only if we can repeat the improvement we saw this week.

According to ECRI, "Despite this latest uptick, WLI growth remains deep in negative territory, underscoring the continued danger of a recession."

To be clear, there is no certainty as to whether we are currently in a recession. It will take another four months to confirm, if we are in fact in a recession.

Give the economy another month or so to see if the the weakness starts to "snowball." Without "snowballing" we will simply have a slowdown and not a true recession.

-- Jack Krupansky

GDP report offered no really new information

Some people seemed to get excited or depressed by the GDP report today, but there was honestly no really new information in it. Overall real GDP growth was the same as the advance report a month ago (+0.6%). Exports were a tad higher and inflation was a tad higher. No net change.

That said, the GDP report is ancient history and does not tell us what was really happening in December as opposed to October and November, and it certainly doesn't tell us anything about January or February, let alone the state of the economy going forward.

About the only thing it does tell us is that those watchers and hand-wringers who had expected that Q4 was going to mark the beginning of a recession will have to wait at least a quarter.

-- Jack Krupansky

Euro finally breaks out of its narrow trading range

Finally, this week we see the euro break out of its narrow $1.43 to $1.49 trading range. As I write this, March euro futures are sitting at $1.5195, compared to $1.4492 three weeks ago.

The prospect that the Federal Reserve will continue cutting interest rates is one factor pushing the U.S. dollar down against the euro, but much of the "action" against the dollar is speculation.

A major portion of the recent move was most likely short covering by counter-trend speculators who saw the modest renewed strength of the dollar since November as an indicator of more dollar strength to come. In fact, probably quite a number of speculators took that bet, but when too many speculators move in the same direction too fast and hard, you can usually bet that a counter-move is soon to come.

The short-term trend is anybody's bet. Some people are absolutely convinced that a recession is here, but that belief does not necessarily make it so.

-- Jack Krupansky

Hooray for higher oil and gasoline prices

Although higher energy prices are certainly seen as a very dark cloud hovering over the economy, it is a cloud with a very bright silver lining. Higher crude oil, gasoline, and heating oil prices are a very clear economic signal to consumers and businesses everywhere: cut back on your energy consumption.

Conservation and efficiency are our friends. If you as a consumer or business are not taking positive actions to conserve your energy use and to switch to more energy-efficient appliances, vehicles, and other equipment, then you deserve to suffer the consequences. You have no right whasoever to whine or complain about high energy prices. They are a clear economic signal. Pay strict attention to all economic signals.

Strong economic signals, such as dramatically higher energy prices, are just the kind of medicine we need to get us to re-focus our human energy on dramatically improved conservation and efficiency measures.

-- Jack Krupansky

Mortgage limits for Fannie Mae and Freddie Mac finally raised

Although the congressional fiscal stimulus legislation had raised the price limits for conforming mortgages that Fannie Mae and Freddie Mac could buy, it wasn't until today that the regulators for Fannie and Freddie finally raised the limit for the total dollar volume of mortgages that Fannie and Freddie can hold. Fannie and Freddie had been unable to buy additional mortgages since they were bumping into that limit.

Mortgage rates had risen moderately in the past two weeks, probably because banks were relectant to continue holding mortages unless the rate of return was higher, but soon those banks will be able to sell mortgages to Fannie and Freddie, so I would expect mortgage interest rates to decline somewhat.

This is really positive news for the mortgage and housing markets, but we will have to see how it plays out over the coming weeks and months.

-- Jack Krupansky

Trip to San Francisco?!

I had been hoping to take a short trip down to San Francisco in recent months and even had a trip budgeted for this month, but my decision to resign from my position at The Evil Empire effective Monday and start some part-time work on Tuesday for a stealth startup essentially eliminates the prospects for a visit to San Francisco for the foreseeable future. Sure, I have plenty of cash on hand and technically can afford the trip, but I really need to transition into a tighter budget mentality to avoid feeling pressure to up my hours just to pay for non-essential expenses.

For now, a visit to San Francisco remains a hope for the indefinite future.

-- Jack Krupansky

Redoing my budget for part-time independent software development consulting/contracting

Monday is my last day as a full-time employee at The Evil Empire. Tuesday I will start doing some part-time work as an independent software development consultant/contractor for a "stealth startup" back East -- which I of course can not talk about. This should still give me plenty of time and energy to get involved in other projects of my own. Alas, going from full-time to part-time work does have a dramatic impact on my budget. I have done a rough recalculation in my head and do believe that I can in fact "get by" on part-time work only. Unfortunately, doing that means that my monthly savings rate will fall to roughly zero. The flip side is that my non-financial quality of life will rise dramatically.

Over the next week I will be considering a number of options for how to rearrange my budget.

One decision is whether to use a moderate chunk of my rainy-day fund to payoff my remaining IRS back taxes so that the monthly installment plan payment does not eat up a sizeable chunk of my new and smaller budget. It could work either way. Paying off the back taxes is clearly a financial win, but shrinking my rainy-day fund has potential risks should I run into income difficulties down the road, especially in a weak economy. In some sense this is a tough call, but in the final analysis it probably does not matter which path I choose. I am leaning towards paying off the back taxes simply because it will give me the feeling of a fresh start without any baggage.

My apartment lease runs through May, so I'll stay put at least until June. I may move East, maybe even to New York City again, but only if my new budget will permit it. A move might be contingent on lining up additional part-time work.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls moderately and still suggests high risk of recession

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately (-0.60% vs. -0.26% last week) and the six-month smoothed growth rate fell sharply (to -10.2 from -9.2 last week), well below the flat line, suggesting that the economy will be struggling in the months ahead.

The bottom line is that the ECRI WLI is "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed.

The Philadelphia Federal Reserve Business Outlook Survey declined in a worrisome manner and mortgage applications declined, but the weekly unemployment insurance initial claims number is still not showing any more than a hint of sluggishness. One of the difficulties here is that unlike the predictable nature of the traditional manufacturing economy, the larger services economy seems to have a mind of its own and continues to be relatively inpenetrable to traditional economic analysis.

I will keep my personal assessment of the chance of recession at 60% based on the magnitude of the negative level of the WLI smoothed growth index and the mixed nature of the data. The economy still has a fair chance of avoiding an outright recession, but only if we can repeat some of the better news that the WLI saw two weeks ago.

According to ECRI, "With WLI growth deep in negative territory, due mainly to weakness in the financial and construction sectors, the U.S. economy is on the verge of a recession. However, due to unusual factors affecting the manufacturing sector, it may still be possible for quick stimulus to avert a recession."

To be clear, there is no certainty as to whether we are currently in a recession. It will take another four months to confirm, if we are in fact in a recession.

Give the economy another month or so to see if the the weakness starts to "snowball." Without "snowballing" we will simply have a slowdown and not a true recession.

-- Jack Krupansky

Do I need to worry about my money market funds?

In short, no, you do not need to worry about your retail money market funds.

Some commentaters are suggesting that difficulties with auction rate securities (ARS) or floaters is somehow evidence that even retail money market funds are now at great risk. That simply is not true. Although the risk with retail money market funds is not absolutely zero (as a very quick glance at the fine print clearly tells you), the risk is very low compared to ARS and some of these other "cash management vehicles" that supposedly "qualified" and "high net worth" investors have been using to try to buy themselves a free lunch. Put simply, you absolutely do not need to lose any sleep over "cash" that you have in well-known retail money market funds.

ARS are extremely complex products and are at their core bond funds and not even short-term bond funds at that. Retail money market funds are by definition and by regulation based on short-term debt securites, with a maximum maturing of 397 days and an average maturity of no more than 90 days.

If you are still anxious about your money market funds, simply shift your money into the larger funds such as Fidelity and Vanguard. Or in some cases there are still bank deposit CDs or money market accounts that offer competitive yields.

One word of caution... although banks do offer FDIC protection, it is only up to a limit of $100,000 (or $200,000 for joint accounts and $250,000 for IRAs), so if you were to shift more than that limit from a money market fund to a bank deposit account, and the bank were to fail, you could actually lose more money (the amount above the limit) than if your money market fund had had a modest loss.

Institutional money market funds and "enhanced cash" products may have added risks, but that is outside of my financial "league."

It is doubly ironic that people who entrusted their "cash" to investments in ARS put their money at greater risk than if they had invested that money in "troubled" Countrywide Bank. Right now, Countrywide is offering a yield (APY) of 4.50% for their FDIC-protected (up to the usual limits) "savingslink" money market deposit account. That rate is not guaranteed to last if the Fed keeps lowering rates, but you can get a 6-month CD from Countrywide with a yield of 4.45% APY.

-- Jack Krupansky

Bought my plane ticket for the EntConnect conference

Since the EntConnect 2008 Entrepreneurial Connections Conference does not start until Thursday, March 27, I wasn't planning on buying my plane ticket for another two weeks or so, but I figured I should check the prices to get a handle on my budget. I was even thinking of using the "Name Your Own Price" feature of Priceline to get an even cheaper fare. I checked Expedia to get a ballpark view of air fares from Seattle to Denver. I could get a round-trip for a decent schedule for $247. Priceline is a little cheaper, typically about $5, and came in at $243 (tax and fees included) for the same flight schedule times. With prices this cheap, it hardly seemed worth the trouble to get involved in a bidding process that would likely end up with schedule times that would not be optimal for me and I figured prices would probably move up over the next week or two. So, I went ahead and booked the flight directly on Priceline at their published price of $243. Actually, Priceline showed me a fare of $221, but then told be it was no longer available. Ditto for $241 and $242. Then it finally gave me the fare for $243. This morning I see that my flight is priced up in the $270 to $290 range.

My flight from Seattle is very early, at 7:20 a.m. I will just barely be able to make it taking the earliest bus at 5:09 a.m. that gets to Sea-Tac airport at 5:46 a.m. I usually do not like to cut flights that close, especially since even a modest traffic problem can cause a significant delay, but at that hour there is unlikely to be any significant traffic issues on the way to the airport. The flight arrives in Denver at 11:00 a.m. I haven't decided whether I will wander around Denver for the afternoon or go up to Boulder for a few hours. My plan was to go up to Boulder on Friday.

My return flight is on Monday morning, at 4:07 p.m. That allows me to enjoy Sunday afternoon and evening and part of Monday in Colorado and take my time getting to the airport. I may in fact go to the airport a little early and then hang out in the Continental President's Club to catch up on email and news with their free Wi-Fi (and breakfast as well.) Monday is another possibility for my desired visit to Boulder if I choose alternate plans on Friday.

Now on to the hotel reservation. The conference hotel has a very cheap conference rate of $75, so it is simply not worthwhile looking around and getting a hotel that is less convenient.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls slightly but still suggests high risk of recession

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell slightly (-0.09% vs. +1.83% last week) and the six-month smoothed growth rate fell sharply (to -9.1 from -7.9 last week), well below the flat line, suggesting that the economy will be struggling in the months ahead.

The bottom line is that the ECRI WLI is "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator.

As I suggested last week, I will raise my personal assessment of the chance of recession from 55% to 60% based on the magnitude of the negative level of the WLI smoothed growth index. The economy still has a good chance of avoiding a recession, but only if we can repeat some of the better news that the WLI saw a week ago.

According to ECRI, "WLI growth is at recession-area readings, consistent with ongoing contractions in the financial and construction sectors. However ECRI's leading indexes for the manufacturing and non-financial services sectors have yet to confirm recessionary conditions."

To be clear, there is no certainty as to whether we are currently in a recession. It will take another four months to confirm, if we are in fact in a recession. The current, weekly, high-frequency economic data strongly suggests that we are in fact not in a recession.

Give the economy another month or so to see if the the weakness starts to "snowball." Without "snowballing" we will simply have a slowdown and not a true recession.

-- Jack Krupansky

Auction rate securities (ARS) were never "as good as cash"

My sincere condolences to anybody who was gullible enough to buy into the Wall Street "story" that auction rate securities (ARS) were ever "as good as cash." In addition to being quite complex (big red flag there), ARS are really long-term bonds with a bunch of twists that sometimes mimic the liquidity of cash and money market funds.

The good news is that retail money market funds were never permitted to buy into ARS since their true maturity is greater that the 397-day regulatory limit for holdings in money market funds.

I had to personally update the Wikipedia to add Auction Rate Security to the ARS "disambiguation" page. To be honest, two months ago I had never heard of ARS. Lucky me. Ignorance can sometimes be bliss.

-- Jack Krupansky

Fannie Mae Statement on Conforming Loan Limit Increase

Now that President Bush has signed the fiscal stimulus legislation into law, one of the more immediate impacts will be renewed availability of low-cost jumbo home mortgages.

Here is Fannie Mae's initial statement on the higher mortgage limit from yesterday:

The temporary increase in the GSE loan limit that President Bush signed into law today will help bring stability, liquidity and affordability to an important part of the housing finance system. Fannie Mae welcomes this opportunity to help support the housing market in high-cost areas, and we are working with our regulators and our lender partners to implement the change as quickly as possible.

No specific target date for availability, but since there is a lot of profit opportunity you know that all the players want to get the money machine cranking again. This legislation was essentially a license for the home mortgage GSEs to print money. Whether we see something happen with 30 days is debatable, but I would expect that within two months Fannie Mae and Freddie Mac will have absorbed an interesting amount of jumbo mortgages. The initial impact will be for banks to sell mortgages that have been sitting on their balance sheet to the GSEs, thus freeing up capital for other uses. This will significantly enhance bank liquidity.

To be clear, this change was an extremely important piece of legislation.

Even more, it is a real kick in the teeth to Wall Street, having the government in the form of the GSEs bail out the big banks when just a few years ago Wall Street was hollering that the GSEs "posed a systemic threat to the financial system." I knew back then that it was all a lie and that Wall Street just wanted "a piece of the action." The GSEs were never a systemic threat. It was and always will be Wall Street greed that is the only true systemic threat.

-- Jack Krupansky

Euro remains adrift in a narrow trading range

The euro continues to drift in a narrow trading range, and may be on the verge of making the U.S. dollar look "strong" again. March euro futures closed on Friday at $1.4492, down 1.65 cents from $1.4657 two weeks ago.

Far from being bullish on the euro, futures all the way out at June 2009 are priced only at $1.4308, which indicates the dollar gaining strength.

In fact, at least one Wall Street firm is now calling for the U.S. dollar to strengthen, at least as a medium-term trading play.

Although foreign exchange "strategists" do a lot of talking about "fundamentals" and how weak the dollar is, the truth is that it is all a giant shell game with speculation and short-term trading as its aim and nothing to do with long-term fundamentals.

Despite the "weakness" of the dollar, the euro, pound, and Canadian dollar have not made any headway against the dollar for over three months now.

-- Jack Krupansky

Intrade market indicates a 66.5% chance of recession in 2008

Trading on the Intrade Prediction Market indicates a 66.5% chance (down from 68.9% last week) of a U.S. recession in 2008. This is in the face of two diametrically opposed events this week: the ISM Services report indicated a contraction of the service economy, but Congress struck a deal on the fiscal stimulus plan that will be signed by President Bush on Monday, ahead of schedule.

People are not only quite worried that a recession is possible, but they consider it to solidly be the likely scenario. Nonetheless, conviction is still only "medium."

As a result of the very poor ISM Services report, my personal assessment is that there is a 55% chance of a recession for the U.S. economy in 2008. My gut feel remains that a recession is unlikely, but the data is what the data is.

The so-called weakness in the economy is simply not profound enough to strongly suggest an outright recession. For example, the weekly initial unemployment claims number has remained well below 400,000 even recently, while traditionally that number tends to spike well above that 400,000 in recessionary times.

Nonetheless, the Intrade indication is probably a good proxy for overall market sentiment.

-- Jack Krupansky

Jumbos are coming back for the home mortgage market!

After a long hiatus, jumbo mortgages will be coming back very shortly. President Bush is expected to sign the Economic Stimulus Act of 2008 on Monday. This legislation temporarily raises the limit on "conforming" mortgages that Fannie Mae and Freddie Mac can securitize and that the FHA can issue by about 25%.

The exact new limit will vary by area, but will be roughly 25% higher than the median price for houses in that area, but not more than 75% higher than the current $417,000 limit ($729,750.) For example, if the median price in an area is currently $600,000, then new limit would be $729,750 ($600,000 plus 25%, but capped at 175% of $417,000.) If the median price in an area is currently $500,000, the conforming limit rises from $417,000 to $625,000 ($500,000 plus 25%.) Yes, this does not cover all jumbo mortgages, but should cover the lion's share and help to sell a lot of houses in the $425,000 to $725,000 range.

Although this new limit is nominally only temporary, for mortages issued up until the end of 2008, the good news is that this change is retroactive to mortgages issued all the way back to July 1, 2007. This means that banks and other financial institutions that had issued jumbo mortgages over the past seven months and are still holding them (bcause the securization market had dried up) can now sell them to Fannie Mae and Freddie Mac for securitization which frees up that capital for new loans and mortgages and other purposes.

Although a lot of cynics grumble that it will take a couple of months to see the stimulus rebate checks, jumbos should have an impact within a very short period of time.

I fully expect that the limit change will become permanent. The only way that would not happen is if the Wall Street jumbo securitization market recovers strongly over the remainder of the year. Even then, there will be pressure on politicians to keep the new limits in place.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises sharply but still suggests high risk of recession

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+1.84% vs. -3.38% last week) but the six-month smoothed growth rate fell moderately sharply (to -7.9 vs. -7.1 last week), well below the flat line, suggesting that the economy will be struggling in the months ahead.

The bottom line is that the ECRI WLI is "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator.

I will keep my personal assessment of the chance of recession at 55% (where I put it after the weak ISM Non-Manufacturing report this week). The ECRI data is mixed this week. If the WLI falls next week I will likely raise my assessment to a 60% chance of recession. The economy still has a good chance of avoiding a recession, but only if we can repeat some of the better news that the WLI saw this week.

To be clear, there is no certainty as to whether we are currently in a recession. It will take another four months to confirm, if we are in fact in a recession. The current, weekly, high-frequency economic data strongly suggests that we are in fact not in a recession.

Although the fiscal stimulus ("Economic Stimulus Act of 2008", passed by both houses of Congress and to be signed into law by President Bush on Monday) rebate checks may take awhile, the good news is that the the congressional legislation raised the limit for "conforming" mortages that Fannie Mae and Freddie Mac and can securitize, and that FHA can issue, so jumbo mortages will become available once again very shortly.

Give the economy another month or so to see if the the weakness starts to "snowball." Without "snowballing" we will simply have a slowdown and not a true recession.

-- Jack Krupansky

No sign of recession on the unemployment insurance claims front

The latest weekly unemployment insurance claims report continues to indicate that the economy is sluggish but not outright recessionary. Initial claims are at 356,000 (a decline from last week), well below the 400,000 rule of thumb threshold for recession, and only moderately above the year-ago level of 314,000. The four-week moving average of initial claims did tick up again, but is still only moderately above the level of a year ago.

Continuing claims ticked up, but at 2.1% are not dramatically higher than the year-ago level of 1.9%.

The bottom line is that if you are trying to prove that we are in a recession or "clearly" headed for one, you will will have to look somewhere else than the weekly unemployment insurance claims report.

This report would argue that we are going through more of a moderate "adjustment" in the economy and not headed into a deep and prolonged recession as some are strongly suggesting.

-- Jack Krupansky

Intrade market indicates chance of recession in 2008 declined to 65%

Trading on the Intrade Prediction Market indicates a 65.0% chance of a U.S. recession in 2008. That is down modestly (from 70.5%) since the negative ISM Non-Manufacturing report, suggesting that negative sentiment may have peaked in the face of a big Fed rate cut and progress on the fiscal stimulus plan.

I continue to be surprised that punters haven't bid a recession up above 90%, which is what they would do if they were guided by all of the negative media reports, but maybe that suggests that people are being a bit more rational and skeptical of the media than I would have otherwise expected.

We will have to ponder why 35% of punters are so confident that a recession will not occur. I know the reasons for my own rationale, but I am curious what the non-recession punters think.

-- Jack Krupansky

Intrade market indicates a 70.5% chance of recession in 2008

Trading on the Intrade Prediction Market indicates a 70.5% chance of a U.S. recession in 2008. That is not a significant change from before the negative ISM Non-Manufacturing report, suggesting that negative sentiment may have peaked in the face of a big Fed rate cut and progress on the fiscal stimulus plan.

Actually, I am a bit surprised that punters haven't bid a recession up above 90%, if they were guided by all of the negative media reports, but maybe that suggests that people are being a bit more rational and skeptical of the media than I would have otherwise expected.

We will have to ponder why almost 30% of punters are so confident that a recession will not occur. I know the reasons for my own rationale, but I am curious what the non-recession punters think.

-- Jack Krupansky

On the edge of recession

Now we have two very interesting and very conflicting signals: the ISM Manufacturing report on Friday flipped back to indicating a very modest expansion of the manufacturing sector in January, while the ISM Non-Manufacturing report out today indicate a substantial contraction of the larger services sector in January. Nominally this weakness in services is a clear signal that we may be at the edge of a recession, but the renewed strength in manufacturing urges caution in drawing too-strong conclusions and suggests that the economy is suffering more from a degree of volatility than a clear decline.

For now, in light of the ISM Non-Manufacturing report, I will raise my chance of recession to 55%, very modestly greater than 50/50. If the ISM Manufacturing report had been weaker I would have gone to 60%. If the data is as weak next month, then I will go up to 60%. If both reports weaken further, then I will go to 65%. A third month and I will go to 70%. Five months of decline in both reports would push me to 100%. But, all of this is begging the question of uncertain future data. For now, with the current data and with the knowledge of all of the stimulus in the pipeline, I feel comfortable saying that there is only slightly greater than 50% chance of recession in 2008.

The key thing to remember is that this is only one month of data.

The renewed strength in manufacturing was primarily a rise in production as well as a surge in exports, which could save monthly GDP for January. Unfortunately, new orders contracted, so there is no sense of sustainability of this one-month improvement.

Just to be clear, the negative data for the ISM Non-Manufacturing report indicates that we could be at the edge of a recession, not that we are in a recession. Only the elapse of another four months will tell us definitively that a recession is upon us.

The real bottom line is that the Federal Reserve did the right thing with their target rate cuts over the past few weeks. Some will persist in arguing that the Fed is "behind the curve", but they are in fact right where they need to be for the job they they do, as opposed to what Wall Street might want to help line their pockets with our money.

-- Jack Krupansky

Intrade market indicates a 68.9% chance of recession in 2008

Trading on the Intrade Prediction Market indicates a 68.9% chance (up from 67.0% last week) of a U.S. recession in 2008.

People are not only quite worried that a recession is possible, but they consider it to solidly be the likely scenario. Nonetheless, conviction is still only "medium."

As a result of the deterioration of the ECRL Weekly Leading Index, I am upping my personal chance of a recession from 25% to 35%.

The so-called weakness in the economy is simply not profound enough to suggest an outright recession. For example, the weekly initial unemployment claims number has remained well below 400,000 even recently, while traditionally that number tends to spike well above that 400,000 in recessionary times.

Nonetheless, the Intrade indication is probably a good proxy for overall market sentiment.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls sharply and suggests high risk of recession

[Note: I did not receive the ECRI report this week, so this post is based on the Reuters report.]

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply and the six-month smoothed growth rate fell moderately, remainng moderately below the flat line, suggesting that the economy will be somewhat sluggish in the months ahead.

According to the Reuters story, the WLI fell due to higher jobless claims, weaker housing activity, and lower stock prices.

According to ECRI, "WLI growth has dropped back to the six-year low seen in early January. While the economy and employment did continue to grow through the end of 2007, the window of opportunity to avert a U.S. recession is about to slam shut."

Maybe close, but still not quite there.

Please note that overall mortgage application activity was up strongly this week, with refinancings strongly outweighing the decline in applications for purchase, and that the four-week moving average for purchase applications did tick higher as well. Also note that the weekly data is very volatile.

The bottom line is that the ECRI WLI is "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator.

Nonetheless, as a result of this data, I will raise my own assessment of the chance of recession from 1 in 4 to 35%.

I would need to see a real "stumble" in the data to go up to even a 50% chance. Give the economy another month or so to see if the the weakness actually does start to "snowball." Without the "snowballing" we will simply have a slowdown and not a true recession.

-- Jack Krupansky

Unclear gloom on the emplyment front

The headlines sounded gloomy ("Payrolls Drop for First Time Since 2003", "U.S. Economy Unexpectedly Sheds 17,000 Jobs", "U.S. employers slashed payrolls in January", and "Employment Drops in a Pink Slip Blizzard"), and the headline payroll number was in fact negative (-17,000), but beyond that the gloom on the employment front is anything but clear. Here is the silver lining of the supposedly dark cloud:

1. The -17,000 decline is after the November payroll number was revised up from a mere 18,000 rise to a more substantial 82,000 rise. In other words, rather than a net decline in December, we are looking at a net rise from where he thought we were in November.
2. The "decline" was really limited to construction and manufacturing while the service economy continues to add jobs.
3. As the Bureau of Labor Statistics puts it, the headline payroll and unemployment numbers were "essentially unchanged in January." In other words, the "decline" was not statistically significant.
4. Unemployment actually ticked down, although that may have been more a function of people deciding to stop looking for work.
5. The January numbers will inevitably be revised in a month, and revisions tend to be upwards.
6. Finally, the decline was simply too modest to constitute the kind of "significant" decline needed to mark a true recession.

The bottom line is the "essentially unchanged" character of the numbers. The net of that is that even with a gloomy characterization, the decline is not "significant" enough to mark the onset of a true recession. Yes, we are seeing a slowdown and sluggish growth, but we are not yet seeing a full-bore recession.

Once again we are faced with a "mixed bag" of economic data.

BTW, I do take strong exception to the MSNBC headline of "U.S. employers slashed payrolls in January" since a small decline hardly merits the characterization of "slashed." I also take strong exception to the Associated Press headline of "Employment Drops in a Pink Slip Blizzard" since "a few flakes" hardly constitute a blizzard.

I also have to take strong exception to the MarketWatch headline of "Last pillar of denial is gone" which goes more than a bit overboard and certainly mischaracterizes both the data and the efforts of people seeking the truth about what is really going on.

FWIW, here is the opening paragraph from the Bureau of Labor Statistics:

Both nonfarm payroll employment, at 138.1 million, and the unemployment rate, at 4.9 percent, were essentially unchanged in January, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The small January movement in nonfarm payroll employment (-17,000) reflected declines in construction and manufacturing and job growth in health care. Average hourly earnings rose by 4 cents, or 0.2 percent, over the month.

The important data to watch now are the weekly unemployment insurance reports which would certainly signal any dramatic cutting of jobs. They haven't been for the past month.

-- Jack Krupansky