The Long March

The Long MarchThe funny thing about time is that it tends to move forward. With March 2012 finally behind us, a marked pause has emerged in global economic indicators. Perhaps this should be of no surprise. After $7,000,000,000,000 ($7 trillion, for those finding difficulty in counting the zeros) in central bank easing of various forms it may be ‘just about time’ for a respite. Recessions generally emerge about every three to four years – it has been three years since drastic actions were enacted to avert the normal course of economic cycles and arrest a deep economic contraction. So even with the incredible amount of easing, not to mention renewed efforts by 16 of the world’s 33 major central banks over the past four months, this artificially stimulated economic advance appears very tired.

During March, the USA saw 19 of 30 major economic (63%) reports fail to meet expectations. While we traditionally do not pay significant attention to individual monthly moves versus expectations we believe that others may view this as a negative development. Others did react negatively when similar data emerged during late spring and summer in each 2010 and 2011. It appears that a large part of the recent equity rally that began in November has been built on the presumption that global economic prospects were brightening. Unfortunately, in the USA housing and median wages continue to flounder. Considering the following two charts (data generously provided by American Business Analytics & Research LLC) it is surprising that there are still many pundits proclaiming that the USA is in a solid recovery. Please recall that housing and median wages are closely followed because they have historically been good barometers for wealth creation as well as credible indicators for consumption related to filling homes with copious amounts of stuff.

New Home Sales

Real Median Household Income

Moving to a broader and more global view we next turn to another of our favorite measurements. The ‘Markit Monthly Purchasing Manager Index’ details month over month expansion or contraction in manufacturing. A reading of more than 50 implies expansion, while a reading of less than 50 implies contraction. The following chart* details the ascent from the early 2009 deep contraction to general expansion from September 2009 through April of 2011. More recently it shows deterioration in expansion from April 2011 through February 2012. Some of the referenced economies are actually registering contraction. India and Russia appear to be the current bright spots while the USA decelerates and flirts with declining below 50. In any event, the global trend for nearly a year has been defined by slowing growth, and in some instances outright declines in growth. As we mentioned at the outset of this article, no wonder 16 of 33 major central banks reengaged easing over the past four months.

Monthly Purchasing Manager Index

Finally, our tour of data leads us to contemplate the USA Index of Industrial Production. As you will find on the chart below (again, data generously provided by American Business Analytics & Research LLC), USA industrial production has recovered to levels last seen in 2006. Europe is in a similar situation.

Index of Industrial Production

While directionally encouraging, it is not the trajectory needed to absorb the next inevitable recession. Fortunately, other regions of the planet have been able to significantly grow their industrial production cushion since 2006. South America has registered about 16% growth and Asia has seen growth of about 32%. These regions and subsets of other regions, such as the oil and gas producing portions of the Middle East and North Africa, not only possess an industrial production cushion but also have room for traditional fiscal and monetary efforts to soften recessions. Sadly, after five years much of the west has failed to build up a sufficient economic buffer (unemployment is already high, debt continues to increase, etc. . . .) and has nearly exhausted their ability to productively ease further. Unless, of course, printing more money and thereby diluting the value of their home currencies is considered a productive option.

With massive artificial stimulus seemingly fading in its effect, this is alarming indeed. So while time will definitely continue to march forward we continue to worry that equity indices may be indicating something very different than what pundits have proclaimed to be brightening economic prospects. Perhaps, as suggested above, the equity indices are likely discounting the probability of currency dilution due to further easing or outright money printing. Accordingly, we suggest that folks remain positioned for economic related caution as well as inflation from further easing efforts across the globe.

* Special thanks to our intern Kendrick Titus for compiling and analyzing data used in this chart.