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The Two Scariest Economic Reports Of The Week

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    June 28, 2013

    The reality of U.S. economic conditions were revealed by two reports this week that measure what the economy is actually doing, rather than what analysts believe it should be doing based on analyzing and interpreting individual reports like employment numbers, rising home prices, consumer confidence, etc.

    The first report, released on Monday, was the Chicago Fed’s National Business Activity Index (CFNAI). It’s an index of 85 economic indicators designed by the Fed to combine the volatile individual economic data and reports into a consensus economic indicator.

    The Fed explains that, “When the 3-week moving of the index (CFNAI-MA3) moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when CFNAI-MA3 value moves above -0.70 following a recession, there is an increasing likelihood that a recession has ended.”

    The indicator has a quite impressive record.

    This week’s report showed that the monthly CFNAI was a negative -0.31 in May, and the more important 3-month m.a. fell to -0.42.

    The following chart, courtesy of Doug Short, shows the recessions since 1965 (the vertical gray areas), and the -0.70 line (the dotted red line). Not only is the index getting close to the recessionary -0.70 line, but it’s pattern of lower highs and lower lows since 2010 is not encouraging.

    Click to View

    Not that it is indicating a recession is underway, but it is indicating the seriousness of the stumbling economic recovery. 

    And then there was yesterday’s final revision of first quarter economic growth (GDP).

    As more data has become available, the revision was sharply downward from the already dismal 2.4% of the previous report, to just 1.8%.

    That was considerably worse than the consensus forecast that the final revision would be unchanged at 2.4%.

    The economic weakness was pretty much across the board, including consumer spending, business investment, and exports, in fact in all growth categories with the exception of home construction.

    It is also notable that a significant portion of what strength there was came from the growth of business inventories, goods that were produced but not sold. Excluding the inventory build-up, GDP grew at only a 1.2% rate.

    It seems obvious that the austerity measures (aimed at tackling the record budget deficits and record government debt) begun in January, already had a significant effect on the economy in the first quarter.

    Gold Is Still Looking Ugly.

    Gold’s further plunge of $63 an ounce so far this week ended the potential that it was building a base around $1,375.

    But it has it short-term oversold again.


    The big banks continue their game of lowering their forecasts with each plunge, so when the bottom is finally in it will look like they predicted it.

    Societe Generale has now downgraded its forecast for 2013 to $1,200 from its last downward revision of $1,375.

    Swiss bank UBS has gone further though, playing catch-up, or is it catch-down, by slashing its 12-month forecast to $1,050 from the previous $1,750.

    We will just continue to follow our indicators.


    To read my weekend newspaper column click hereMore Similarities To The Market Peak In 1973


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    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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