Unemployment insurance initial claims at recessionary level for a fourth consecutive week

The weekly unemployment insurance initial claims number is above the 400,000 rule-of-thumb threshold that traditionally indication that the economy is recessionary. Initial claims have been above that 400,000 threshold for four consecutive weeks, plus a week at the end of June. Being only a rule-of-thumb this is not a slam-dunk indicator of a recession, but if we do not see some significant improvement over the next month, it will be difficult to deny that this data series is pointing in the direction of a recession.

To me, it still only feels as if we are only at the "edge" of a recession, and not fully off the cliff.

Nonetheless, employers are acting as if they are experiencing a recession.

The bottom line is that total net job losses are still relatively mild for a traditional recession.

-- Jack Krupansky

Gasoline finally back down to $3.70

The latest AAA Daily Fuel Guage Report shows the average retail price for a gallon of regular unleaded gasoline is down to $3.702. Gasoline has fallen for 35 consecutive days, but only today did the cumulative decline add up to a full 10%. Still, that is a major and very welcome milestone. And, more declines are in the pipeline, as signaled by the commodities futures market.

The wholesale price (September 2008 Gasoline RBOB futures contract) today is sitting at $2.9815 per gallon. Add 60 to 65 cents to the wholesale price to get a rough target retail price, which would be $3.58 to $3.63. That means we could see declines of up to 7 to 12 cents over the next week or two.

-- Jack Krupansky

Monthly GDP for June rose by 0.7% (9.3% annualized), Q3 tracking for a 1.8% annualized gain

Monthly real GDP, one of the five primary economic indicators that the NBER Business Cycle Dating Committee (NBER BCDC) uses to judge recession start and end dates, rose sharply in June (+0.7% or +9.3% annualized) , according to Macroeconomic Advisers (MA). The government does not publish GDP data at a monthly level, but the NBER Business Cycle Dating Cycle says that they refer to sources such as Macroeconomic Advisers (MA) and their MGDP data series. As as Macroeconomic Advisers put the report for June:

Monthly GDP rose 0.7% in June following a 0.8% increase in May.  The robust growth of monthly GDP over May and June was largely accounted for by sharp gains in net exports.  Inventory investment also provided a significant boost to growth in June.  Domestic final sales, on net, subtracted from growth over May and June.  The level of monthly GDP in June was 3.1% above the second-quarter average at an annual rate.  Our latest tracking forecast of 1.8% growth of GDP in the third quarter assumes average monthly declines of 0.2% per month over July, August, and September.

Real GDP is once again at an all-time high, for the second month in a row. It had peaked in January and then fell sharply in February and slightly in April, but rose strongly in March, May, and June.

If you are looking for evidence of a recession, it is not there in the GDP data. Although I do agree with "Dr. Phil" Gramm that we are in a "mental recession."

It is curious that MA is forecasting that monthly GDP will decline for three consecutive months, a full quarter, but still result in the quarter being higher than the previous quarter. This is simply because the quarterly number is the average for the quarter rather than the ending month of the quarter. The June peak was undoubtably also spiked with the tax rebate checks. It is actually heartening that Q3 will be as strong as MA forecasts, even without the direct influence of those rebate checks.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls moderately and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately (-0.43% vs.-1.08% last week) and the six-month smoothed growth rate fell sharply (to -8.9 from -7.6), which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With the WLI falling to a fresh five-year low, a business cycle upturn looks increasingly distant."

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 and there is a lot of stimulus as well as potential problems in the pipeline.

Given that the WLI has continued to deteriorate in the past two weeks, I will increase my own forecast for the probability of recession, again...

I am revising my personal assessment upwards to a high level confidence that there is no more than a 80% chance of recession (up from 75%) and a moderate level of confidence that there is no more than a 45% chance of recession (up from 40%) based on the fact that we are seeing some hints of moderation as well as hints of some worsening mixed in with all of the gloomy news.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signaling to me, as well as ECRI's assessment and recession "call."

The bottom line is that the economy remains at "the edge" of a recession, but persists in refusing to overtly "fall" into recession.

-- Jack Krupansky

$3.80 gasoline coming soon to a station near you -- update

Wow... it is amazing how much the markets can move when they put their minds to it. Earlier today I wrote:

The wholesale price (September 2008 Gasoline RBOB futures contract) today is sitting at $3.0689 per gallon. Add 60 to 65 cents to the wholesale price to get to target retail price, which would be $3.66 to $3.71. That means we could see declines of up to 17 to 22 cents over the next week or two. That would certainly be a welcome relief to consumers.

Now, I have to update that to:

The wholesale price (September 2008 Gasoline RBOB futures contract) today is sitting at $2.9924 per gallon. Add 60 to 65 cents to the wholesale price to get the target retail price, which would be $3.59 to $3.64. That means we could see declines of up to 24 to 29 cents over the next week or two. That would certainly be a welcome relief to consumers.

What happened? Traders decided that Tropical Storm Edouard was not as big a risk as initially thought. Barack unveiled his "stick it to the big energy companies" energy plan. The September futures contract became "front month" today and there is always a lot of volatility in the days immediately before and after the traansition to a new front month. I am sure there were other factors. My suspicion is that somebody is spreading rumors that gas and oil are not going to stop falling until we break below $100 oil again and that their intention is simply to con people into going way too short and then instigating a dramatic short-squeeze rally. We'll see how this plays out.

In any case, the Fed can breathe a sigh of relief that the prime driver for recent inflation is backing off.

-- Jack Krupansky

Real personal income is... well, it depends

I am sure that consumers have really appreciated their stimulus checks, but from the perspective of those of us trying to figure out what is really going on in the economy, they really suck. The latest Personal Income and Outlays report, for June, from the Bureau of Economic Analysis (BEA) shows that personal income was up +0.1% in June over May, but disposable personal income was down -2.6% for the month in inflation-adjusted terms. Personal spending was up 0.6% but down -0.2% after adjusting for inflation. Sure, that decline of -2.6% looks depressing, but that was after a +5.2% gain in May, due to the uneven nature of the distribution of the stimulus checks. The bottom line is that we need to wait another two or three months to see where the economy is after that stimulus money has been digested and cycled around the economy.

One useful measure is to look at per-capita real disposable income, which filters out population changes and inflation. It did show a -2.71% decline from May to June, but that was after a +5.11% gain in May. June was still +2.29% higher than March and +2.47% above a year ago.

You can think of the stimulus checks as a lifeline or life support, but the fact remains that the money is now out there influencing the economy.

It is also worth noting that population growth is in fact helping to keep the economy "afloat", even though this will not make the people in the "lifeboats" feel any happier.

Yes, all of this muddies the "calculation" of whether the U.S. economy is in a recession, but "it is what it is."

-- Jack Krupansky

$3.80 gasoline coming soon to a station near you

The AAA Daily Fuel Guage Report continues to register steep declines in the retail price of gasoline. The national average retail price for a gallon of regular unleaded gasoline hit a peak of $4.114 on July 17, 2008, but has now fallen to $3.881, a decline of 23.3 cents, more than a 5% decline, and more declines are on the way. The media continues to rant and whine about $4 gasoline, but $3.80 will be here soon.

The wholesale price (September 2008 Gasoline RBOB futures contract) today is sitting at $3.0689 per gallon. Add 60 to 65 cents to the wholesale price to get to target retail price, which would be $3.66 to $3.71. That means we could see declines of up to 17 to 22 cents over the next week or two. That would certainly be a welcome relief to consumers.

We may only be halfway through the Summer driving season, but traders will increasingly be looking ahead to the Fall when retail demand for gasoline tapers off.

OTOH, the sharp declines in crude oil and gasoline and other commodities could simply be part of a short-term trading move by speculators which could reverse at any moment and reclaim all of the recent declines and then some in a matter of weeks if not days. Hard to say for sure.

The three big wildcards are that we do not know: 1) what the hedge funds are thinking in terms of their asset allocation plans for commodities over the short and medium term, 2) what the invesment banks are recommending to their institutional clients as far as asset allocations for commodities, and 3) what the in-house proprietary trading desks at financial firms are planning as far as their asset allocations. These are the three key variables which will drive commodities price swings until we get to a stage where all three groups finally lose interest in commodities and drive their commodities allocations to zero and we return to a normal commodities market with garden-variety "mom and pop" traders and speculators rather than an environment in which commodities are (misguidely) treated as an "investment class."

-- Jack Krupansky