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Will Credit Markets Kill Fledgling US Recovery?

  • Written by Syndicated Publisher 42 Comments42 Comments Comments
    November 20, 2011

    The American economy is set to recover, if only that huge 800-lb European gorilla won’t squash everything.

    european gorilla

    With interest rates at record lows and set to stay that way for at least another year, the Federal Funds Target Rate is no longer a significant instrument in the Fed’s tool shed to move the economy. Francois Trahan, Head of Portfolio Strategy & Quantitative Research at Wolfe Trahan, has noted that the inflation cycle is the new Federal Funds Rate. When inflation is elevated it cuts into consumer wallets and corporate profits, and when the inflationrate falls the converse is true. Thus, the plunge in commodity prices since April-May is providing a disinflationary stimulus that is currently leading to an economic rebound. Given inflation trends have a lagging impact on the economy by roughly six months and commodities recently bottomed in October of this year, we could expect a manufacturing rebound to continue into Q1 to Q2 of 2012. However, that may all be thrown out the window if the 800 lb gorilla, which is the European credit crisis, is not resolved in short order as fear will likely permeate into consumer and business sentiment, leading both to tighten their purse strings and dash any hope of an American recovery.

    Leading Indicators Pointing to Manufacturing Recovery

    As mentioned in the opening paragraph, inflation trends have proven to be a great tool at predicting economic turning points as their peaks and troughs are associated with peaks and troughs in manufacturing roughly six months down the line. With commodities peaking in the spring, one could predict an economic turnaround late in the fall which appears to be happening as the ISM Manufacturing PMI has stopped falling. Shown below are the trends in commodities relative to the ISM Manufacturing PMI, with the commodities shown inverted for directional similarity and advanced. As seen below, the declining commodity inflation pressures over the prior six months forecast the ISM to rebound heading into early 2012.

    falling commodities
    Click here to enlarge

    Source: Bloomberg

    Other indicators such as money velocity are also predicting a pickup in the manufacturing sector heading into 2012 as previously created money trickles into the economy.

    ism money velocity
    Click here to enlarge

    Source: Bloomberg

    Even the interplay between sectors in the stock market is suggesting a pickup in manufacturing activity. The leading tendencies between the sectors that are hurt by inflation (consumer discretionary stocks) and those that benefit from inflation (energy stocks) are suggesting a rebound in manufacturing. The relative performance of the consumer discretionary sector to the energy sector suggests the ISM should improve over the next few months.

    ism cycles
    Click here to enlarge

    Source: Bloomberg

    In addition to an improved manufacturing outlook, we may also see improvement in the labor market. US job openings tend to lead overall employment levels by several months and the fact that job openings just hit a cycle high suggests payrolls may continue to expand for the next several months, a welcome news for everyone. We have yet to see the drop off in job openings as we did during the 2001 and 2007 recessions and as long as job openings continue to rise so too should overall employment levels.

    jobs
    Click here to enlarge

    Source: Bloomberg

    With the negative economic momentum seeming to end over the last two months, it was encouraging to see our recession probability model fail to exceed the 20% threshold level typically associated with recessions, with the 1987 breach the only exception.

    recession model
    Click here to enlarge

    Source: Bloomberg

    The 800 Pound Gorilla

    While the outlook is markedly improved from a few months ago and despite the message of leading indicators suggesting further improvement ahead, today’s investing climate could see winds change at a moment’s notice.

    Read the Rest Of This Great Article By Chris Puplava Here:

    Could Credit Markets Kill a Fledgling US Economic Recovery? | Chris Puplava | FINANCIAL SENSE.

    Image:; Flickr (licence attibution)

    About The Author

    Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He manages PFS Group’s Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff. Chris enjoys the outdoors.
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