8/6/21: U.S. Investor Confidence under Biden

 My recent comment on the Biden Administration early successes for the Euromoney: https://www.euromoneycountryrisk.com/article/b1rqlvl15wr2mw/special-country-risk-survey-us-investor-confidence-is-returning-under-biden?LS=Adestra2055255%E2%80%A6 

8/6/21: This Recession Is Different: Corporate Profits Boom

 

Corporate profits guidance is booming. Which, one might think, is a good signal of recovery. But the recession that passed (or still passing, officially) has been abnormal by historical standards, shifting expectations for the recovery to a different level of 'bizarre'.

Consider non-financial corporate profits through prior cycles: 

Chart 1 above shows non-financial corporate profits per 1 USD of official gross value added in the economy. In all past recessions, save for three, going into recession, corporate profit margins fell below pre-recession average. Three exceptions to the rule are: 1949 recession, 1981 recession and, you guessed it, the Covid19 recession. In other words, all three abnormal recessions were associated with significant rises in market power of producers over consumers. And prior abnormal recessions led to subsequent need for monetary tightening to stem inflationary pressures. Not yet the case in the most recent one.

The second chart plots increases in corporate profit margins in the recoveries relative to prior recessions. Data is through 1Q 2021, so we do not yet have an official 'recovery' quarter to plot. If we are to treat 1Q 2021 as 'recovery' first quarter, profits in this recovery are below pre-recovery recession period average by 2 percentage points. Again, the case of two other recessions compares: the post-1949 recession recovery and post-1980s recovery are both associated with negative reaction of profits to economic cycle shift from recession to recovery.

Which means two things:

1. Market power of producers is rising from the end of 2019 through today, if we assume that 1Q 2021 was not, yet, a recovery quarter (officially, this is the case, as NBER still times 1Q 2021 as part of the recession); and
2. Non-financial corporate profits boom we are seeing reported to-date for 2Q 2021 is a sign not of a healthier economy, but of the first point made above.

In effect, some evidence that Covid19 pandemic was a transfer of wealth from people to companies that managed to trade through the crisis. 

26/9/20: America's Scariest Charts: Continued Unemployment Claims

 

Updating my charts for the continued unemployment claims:

The latest data is covering the period through September 12, 2020.

• On a non-seasonally-adjusted basis, there were 13,355,586 Americans with continued unemployment claims in the week of September 12, 2020, an increase of 212,869 on the week prior, but 9,438,559 down on the COVID19 peak reached in the week of May 9, 2020. At the lowest point in pre-COVID expansion period, weekly continued claims stood at 1,350,834. 
• In the last 4 weeks through September 12, 2020, average decline in continued unemployment claims was 461,476. At this rate of decline, it will take the U.S. economy 26-27 weeks to recover its pre-COVID19 lows in terms of continued unemployment.
• Current level of continued unemployment claims implies 9.14% unemployment rate.

Per charts above - covering seasonally-adjusted data that has been subject significant methodological revisions starting with September 2020:

• It would take thee U.S. economy 33 weeks from September 12, 2020 to complete full recovery to pre-COVID19 levels of continued unemployment claims
• In seasonally-adjusted terms, unlike in terms of raw data discussed above, September 12, 2020 continued unemployment claims stood at 12,580,000 down 167,000 on week prior. 

I will be covering new or initial unemployment claims in the net post, so stay tuned. 

23/8/20: America's Scariest Charts: Continued Unemployment Claims

 

Having updated non-farm employment data (https://trueeconomics.blogspot.com/2020/08/23820-americas-scariest-charts.html), let's take a look at continued unemployment claims, as reported through the first week of August.

A chart to start with:

Continued unemployment claims are still falling.

• The weekly rate of declines is improving. Most current week on week decline is 636,000, an improvement on prior week/week decline of 610,000. $ weeks average weekly rate of decline is 326,750. 
• Latest continued unemployment claims are at 14,844,000 which is down from the COVID19 peak of 24,912,000 set in the week of May 9, 2020. 
• We have registered reductions in continued claims in 11 out of the 13 weeks since the peak claims.

Here is the chart comparing historical records of recovery in continued claims to the current crisis perid:

And the same on the log scale

Comparing current continued claims to pre-recession period claims:

• Current levels of claims are 8,687,000 higher than pre-recession period high, 13,195,000 above the pre-recession trough and 13,142,000 above the claims registered in the last  month before the onset of the recession.

The key takeaways from this are: 

1. What matters from now on is not so much the level of the recession peak, but the rate or the speed of the recovery toward pre-recession 'normal'. So far, the rate of recovery has been fast. If sustained, we might be able to avoid much of the damage that arises from long-term unemployment duration. 
2. The rate of benefits expirations will also matter a lot. We are looking at eligibility for unemployment dropping with weeks ahead, and the supplemental payment to unemployment insurance also falling off. As the two effect bite, the impact on the overall economy from reduced unemployment support schemes can be pronounced, triggering renewed recessionary risk. 

Stay tuned for the analysis of the first time unemployment claims figures next.

23/8/20: America's Scariest Charts: Employment

 

Good news, folks, just in time for the Republican National Convention. The latest data, through July 2020, shows some recovery in non-farm payrolls numbers that is bound to make a feature in political chest-beating coming up next week.

Behold the chart:

In basic terms:

• July non-farm payrolls stood at 139,582,000, up 1.291% on June, and up 9,279,000 on the COVID19 pandemic trough (April 2020). 
• Average monthly rate of jobs recovery has been so far 3,093,000 through July. Which is worse than 3,749,500 average rate of recovery recorded through June. In other words, we are potentially seeing a slowdown in jobs recoveries.
• At current average monthly rate of recovery, it will take us just over 4 months to regain jobs lost to COVID19 pandemic, assuming no further slowdown in the rate of recovery (a strong assumption).
• Currently, non-farm payrolls sit 12,881,000 below their pre-COVID19 peak employment levels, attained in February 2020.

Some of these are good news. Assuming the recovery dynamics remain unchallenged by:

1. Natural rate of moderation in jobs recoveries
2. Renewed pressures of COVID19 (see the latest on this here:https://trueeconomics.blogspot.com/2020/08/23820-covid19-update-us-vs-eu27.html), or a second wave of the pandemic
3. The ravages of political uncertainty surrounding November 3 elections (not only Presidential).

One side note: the above comparatives are current-to-past. These, of course, do not take into the account where the U.S. employment figures would have been, absent COVID19 pandemic crisis. Whilst estimating potential employment levels is a hazardous exercise, taking a simple exponential trend (decaying over time) from August 2018 through the latest reported period implies potential July employment level ex-COVID19 of 153,267,800. Which is not that much of a gap to the pre-crisis peak. 

Another side note: if we assume that the rate of decay in jobs additions that prevailed between June and July 2020 (-17% decay) continues into the future (also a strong assumption), jobs recovery to the pre-crisis peak will take us through May 2021. For the pre-pandemic trend case, the recovery will take us into March 2022.

More data analysis of the U.S. labor markets is coming up in subsequent posts, stat tuned. 

25/720: Updated: America's Scariest Charts: Unemployment Claims

Updating my Scariest Charts for the latest data, through thee week of July 18, 2020:

First, a summary table and chart for changes in the Initial Unemployment Claims:

Next: Continued Unemployment Claims through the week of July 11, 2020:

Key takeaways this week:

Continued unemployment claims changes:

• Latest count at 16,197,000, down from 17,304,000 a week ago - a decline driven by both, re-gained jobs and exits from unemployment benefits;
• Latest week w/w decline is faster than in any of the prior weeks of the current recession;
• Latest counts are 14,495,000 above the levels recorded in the first week of the current recession and are 14,548,000 above pre-recession trough;
• At last week's rate of decline, we have 13 weeks of unemployment claims to work through before recovering to pre-recession levels; based on the last 4 weeks average - 19 weeks.

New unemployment claims changes:

• Latest new unemployment claims filed figures are the lowest in the current recession cycle, but materially close to those recorded in the week of July 4, 2020;
• Nonetheless, we are now in 18 weeks of continued new unemployment claims filings in excess of 1 million per week.

Longer term view:

• Discontinuation of emergency $600/week unemployment support payment or curtailing of the benefit is likely to push both of the above series down in the short run in mid- to late-August, with a knock-on longer term effect of increasing longer term unemployment claims in September and onward. 

16/720: Updated: America's Scariest Charts: Unemployment Claims

New data for the week prior on continued and new unemployment claims continues to support a view of a relatively slow and slowing-down recovery in the U.S. labour markets.

Continued unemployment claims:

Continued unemployment claims in the week of July 4 amounted to 17,338,000 down 422,000 on prior week. A week before, the rate of decline was 1,000,000, and in 4 weeks prior to the the week of July 4, 2020, average weekly rate of decline was 711,500. Current 4 weeks average rate of decline is 737,750 driven by two weeks of > 1 million declines. The good news is that we now have 8 consecutive weeks of drops in continued unemployment claims. The bad news is that we do not know how much of the decline from the COVID19 pandemic peak is down to benefits expirations, or due to benefits cancelations due to some income being earned, with restored income being below pre-COVID19 levels. In other words, we have no clue as to whether jobs being restored are of comparable quality to jobs lost.

Next, Initial Unemployment Claims: these remain troubling too. In the week of July 11, 2020, there were 1,503,892 new initial unemployment claims filed, the highest number in 5 weeks.

As the table above highlights, we now have more than 17 weeks of new unemployment claims filings in excess of 1 million. Note: new unemployment claims filings can reflect many factors, including:

1. A person becoming newly unemployed;
2. A person who was unemployed and temporarily left unemployment insurance coverage due to receipt of irregular earnings;
3. A person who was unemployed, and run out of benefits coverage, taking a temporary job, but re-listing as an unemployed at that job expiration; 
4. A person who was unemployed before but did not secure past unemployment benefits; and
5. A person who was unemployed but was denied prior benefits due to various reasons.

Here is the history of the Initial Unemployment Claims, smoothed out to a 3mo moving sum:

An updated employment outlook for July 2020:

10/7/20: America's Scariest Charts Updated

Updating my series of 'America's Scariest Charts' for the latest data releases this week.

First: continued unemployment claims for data through the week of June 27th.

Continued unemployment claims fell from 18,760,000 in the week of June 20 to 18,062,000 in the week of June 27. Continued claims are now down 6,850,000 from their pandemic-period peak, which implies a decline of 978,571 per week since the peak. Based on the last two weeks' average weekly decline, it will take around 28 weeks to return continued unemployment claims to the pre-COVID19 levels.

Now, putting current crisis into historical perspective, the following chart uses log scale to show COVID19 recession experience in relation to all past recessions:

Next, new unemployment claims for the week of July 4, 2020. New claims in that week stood at 1,399,699, down slightly on the new claims in the eek prior at 1,431,343. Table below provides a summary:

Updated non-farm payrolls forecast for July 2020, based on June data for payrolls and the first data for July on changes in unemployment claims:

Average duration of unemployment is still completely swamped by the force and speed of the COVID19 onset, but is rising toward recession-consistent above-average territory:

3/7/20: Labor Market COVID19ed

I have been running a regular update on my 'America's Scariest Charts' covering labor markets developments (see most recent one here: https://trueeconomics.blogspot.com/2020/07/2720-americas-scariest-charts-updated.html). These charts rely heavily on two data sets: Non-Farm Payrolls data (monthly frequency), and initial unemployment claims (weekly frequency). I ignored for now two other data series:

1. Average duration of unemployment: this is, of course, rising, but from low levels, as the COVID19 crisis is still relatively young; and
2. Continued unemployment insurance claims: these data have been also proximate to the initial unemployment claims through the period of February-May.

Now, with two months of some jobs recovery, it is worth looking at (2) above. So here they are: continued unemployment claims charts:

Let us start with history:

There is no scaling in the above chart, just the numbers of people claiming unemployment insurance on continued basis. Which is telling: in recessions, these rise; in recoveries they fall. You can see that the lowest unemployment claims tend to happen some months before the onset of the subsequent recession. And recoveries take long. Of course, in the 1970s, there were fewer people in the labour force and, therefore, the absolute numbers of the unemployed were also lower.

Which means, it is worth rescaling each episode of rising and falling unemployment claims to the pre-recession levels ('norm') and to the recession peaks, taking into the account how long does it take unemployment claims accumulated during the recession to drop back to the levels of pre-recession claims.

So, methodology. I define 'normal' unemployment claims level as being the lowest level attained in the 12 weeks preceding each recession. This is set as an index of 100 for every recession. We look at the period of 6 weeks prior to the onset of the recession to identify the starting level of recession in terms of unemployment levels (these are weeks -6 through 1 on the X-axis). We then look at subsequent weeks (non-negative values on the X-axis) and plot index of unemployment claims (current unemployment claims normalized to the 'normal' level) through the recession and into the recovery, mapping these until one of the two events occurs:

1. Either the index returns back to 100 - meaning unemployment claims finally are restored to the level of the pre-recession levels or the 'normal'; or
2. In cases where this does not happen, until the onset of the next recession.

First, let us do this for all recessions since 1967 (when the data starts) through the end of 2019 - ignoring for now the COVID19 period.

Lots of interesting stuff in the above.

• 2008-2009 Great Recession was long - longer than any other recession - in terms of labor markets recovery to 'normal' levels of unemployment claims. It was also sharp - second sharpest on record - in terms of the mass of unemployment claims at the peak of the recession. 
• Legacy of the 1990-1991 recession was also painfully long, but shallower on the impact side (peak levels of unemployment claims). 
• Epic 1973-1975 recession was horrific: it had a long lasting impact on unemployment claims and, in fact, it never got the point of returning unemployment claims levels back to the pre-recession 'normal'. 
• We normally think of the 2001 recession as being 'technical' - caused just by the gyrations in the stock markets, aka the dot.com bubble burst. But in reality it too was pretty long in terms of its impact on the unemployed and it was pretty sharp as well.

And so on... but now, time to bring in the COVID19 pandemic. Let us start by just plotting it with the rest of the data. Boom!

The COVID19 pandemic made so many people claim unemployment insurance - on continued basis, not just one-off first time claims that anyone can file - that you can no longer meaningfully consider the rest of the recessions in comparison. In data analysis, we say that COVID19 pandemic is an influential outlier - it distorts our analysis of all other recessions. In this case, it is useful to use logarithmic scale to visualize the data. So here it is:

 

Even with log-transform, as above, the COVID19 crisis is off-the charts! No one has ever seen anything like this. Which we know.

The recovery from the pandemic has been sharp as well (steeper slope than in other recessions), but both charts above highlight the fact that whilst the U.S. economy is restoring some jobs during May-June re-opening period, the process of restoring these jobs is slow. Unlike what you hear from the White House and the Republican Party and its media, we are not in a 'tremendous recovery' and there is no 'roaring growth'. There is a mountain of pain that is being chipped away. At a current rate of 'chipping away', it can take the jobs markets some 10 months to come back to the pre-COVID19 'normal'. But that assumes that there will be no permanent or long-term jobs losses from the pandemic and the aftermath of the pandemic. It also assumes that the second wave of COVID19 infections that the U.S. is currently experiencing is not going to lead to such losses of jobs, and will not result in return to April-May levels of restrictions, and will not trigger a third wave of pandemic in Autumn. All three 'ands' must hold to get to that 10 months recovery. 

Stay tuned, I will be updating this chart as we go.

2/7/20: America's Scariest Charts Updated

Some updates from the US Labour Markets to our America's Scariest Charts series today.

First, headline official Non-Farm Payrolls data for the month of June 2020 is out today. Here is the visual:

Total Non-Farm Payrolls dropped during the COVID19 pandemic to the crisis-period low of 130,303,000 in April 2020. This marks a drop of 22,160,000 on pre-crisis high - a decline of 14.53%, the sharpest drop on record for any recession. Since then, the payrolls improved in May and again in June. Payrolls rose 2,699,000 in May and by 4,800,000 in June, prompting the White House (and the army of its trolls) to herald an 'unprecedented' 'tremendous' recovery. However:

• Despite these gains, current employment levels remain 14,661,000 below pre-COVID19 highs.  
• Relative to the pre-COVID19 trend, current payrolls are 15,398,000 below where they would have been were the pre-crisis trends to remain place. 

Hardly 'tremendous' success so far.

Summary of comparatives of the current recession to prior recessions:

Now, next in the set of our America's Scariest Charts: initial unemployment claims 9also released today). The table above already shows the latest print for these series - for the week ending June 27, 2020, at 1,445,481 new claims filed. This was virtually unchanged on the revised final estimate for the week ending June 20, 2020 that came in at 1,460,056. New claims have basically stabilized from the week of May 30th through latest. 

The six-months moving sum of all initial unemployment claims filings is now at a massive 47.477,907. This number, of course, are reflective of claims filed. And it does not reflect expired claims or people moving from unemployment to employment. Hence, it is useful in only highlighting the relative magnitude of the current jobs crisis controlling for duration.

Prior to the COVID19 pandemic, there has been only one instance of initial unemployment claims exceeding 1 million count in any given week - during the week of January 9, 1982, when there were 1,073,500 new claims filed. Which means that last week's print - although well below peak COVID19 filings - still stands almost 35% above the worst weekly unemployment claims filing in pre-COVID19 history. 

So here is the overall 'recovery' to-date:

You can call it 'magnificent' or 'tremendous' or you can call it 'ugly'. I guess your perspective will depend on your party affiliations and the membership in the 1% vs 99% clubs.

1/7/20: Manufacturing PMIs Q2 2020: BRIC

BRIC economies reported their June manufacturing PMIs, so we can update Q2 2020 data. Here is the chart:

Despite improving PMIs in all BRIC economies through June 2020, quarterly readings remains deeply recessionary in all BRICs except for China.

• Brazil Manufacturing PMI averaged 40.6 in 2Q 2020 down from 1Q reading of 50.6. Brazil Manufacturing sector growth was slowing down from the start of 4Q 2019 and was showing anaemic growth (statistically, zero growth) in 1Q 2020 before COVID19 restrictions kicked in. June 2020 monthly reading rose, however, to 51.6 - signalling pretty robust growth on a monthly basis for the first time since the end of February. Some good news, but not enough to lift 2Q 2020 average above 50.0 mark.
• Russia Manufacturing PMI remains below 50.0 in June, as it did consecutively since the end of April 2019. This marks 14 months of continued contraction, only accelerated by COVID19. Quarterly PMI for 2Q 2020 is deep under water at 39.0 - the worst reading in history, matching that of the lows of the 2009 recession in 1Q 2009. June monthly uptick to 49.4 is still leaving Russian Manufacturing index below zero growth mark of 50.0. 
• India Manufacturing PMI rose from 30.8 in May to 47.2 in June 2020, but remains well below zero growth line. Quarterly index is now at 35.1 for 2Q 2020, which is an all-time low. 
• China Manufacturing PMI was the only BRIC index to reach into positive growth territory in 2Q 2020, at 50.4. Statistically, this reading is indifferent from zero growth conditions in the sector, however. 

Overall, GDP-shares weighted BRIC Manufacturing index is at 45.0 in 2Q 2020, down from 49.1 in 1Q 2020. Not as bad as 4Q 2008 - 1Q 2009 readings of 43.1 and 43.7, respectively, but bad. Still, BRICs as a group managed to sustain less manufacturing decline than the Global Manufacturing index which collapsed to 43.6 in 2Q 2020 from 48.4 in 1Q 2020.

29/6/20: Eurocoin Growth Indicator June 2020

Using the latest Eurocoin leading growth indicator for the Euro area, we can position the current COVID19 pandemic-related recession in historical context.

Currently, we have two data points to deal with:

1. Q1 2020 GDP change reported by Eurostat (first estimate) came in at -3.6 percent with HICP (12-mo average) declining from 1.2 percent in January-February to 1.1 percent in March.
2. Q2 2020 Eurocoin has fallen from 0.13 in March 2020 to -0.37 in June 2020 and June reading is worse than -0.32 recorded in May. This suggests continued deterioration in GDP growth conditions, with an estimate of -2.1 percent decline in GDP over 2Q 2020. HICP confirms these: HiCP dropped from 1.1 percent in March 2020 to 0.9 percent in May. 

Here are the charts:

We are far, far away from the growth-inflation 'sweet spot':

5/5/20: A V-Shaped Recovery? Ireland post-Covid

My article for The Currency on the post-Covid19 recovery and labour markets lessons from the pst recessions: https://www.thecurrency.news/articles/16215/the-fiction-of-a-v-shaped-recovery-hides-the-weaknesses-in-irelands-labour-market.

Key takeaways:
"Trends in employment recovery post-major recessions are worrying and point to long-term damage to the life-cycle income of those currently entering the workforce, those experiencing cyclical (as opposed to pandemic-related) unemployment risks, as well as those who are entering the peak of their earnings growth. This means a range of three generations of younger workers are being adversely and permanently impacted.

"All of the millennials, the older sub-cohorts of the GenZ, and the lower-to-middle classes of the GenX are all in trouble. Older millennials and the entire GenX are also likely to face permanently lower pensions savings, especially since both cohorts have now been hit with two systemic crises, the 2008-2014 Great Recession and the 2020 Covid-19 pandemic.

"These generations are the core of modern Ireland’s population pyramid, and their fates represent the likely direction of our society’s and economy’s evolution in decades to come."

23/3/20: Private Consumption Gets the Virus. Heads to an ICU...

Via @bkollmeyer, Deutsche Bank's Research chart on discretionary spending across the global economy:

I have no access to the primary data on this, but if the chart is true, the global economy is 'borked'. 

One notable line here is for Ireland. Ireland's economy is heavily dependent on personal consumption expenditure. Here are the latest data:

	PC as % of     modified     total    demand	PC as %          of GNI*
1995-1999	58.8	57.6
2000-2007	54.7	55.2
2007	54.1	56.7
2008-2014	62.8	63.8
2015-2018	59.4	55.4
2019	58.7	NA

My estimate is that 2019 Personal Consumption to GNI* ratio was around 55.2%. If true, coupled with the above-cited DB research, Irish economy has taken a nosedive of around 4 percentage points for FY 2020 just on personal consumption side of economic activity. Investment and private sector production will be the other contributors to that decline.

18/3/20: Yield Curve and Recessions

Some things work even in pandemics:

18/3/20: Past Recessions and COVID19 Crisis

As governments around the world are revising the expected duration of the extraordinary restrictive measures aimed at containing COVID19 pandemic, it is worth looking back at the history of past recessions by duration:

The chart above clearly shows that U.S. recessions (generally historically shallower and less prolonged than those in Europe) have been lengthy in duration, with only two recessions lasting < 8 months and only six lasting less than 10 months. The 1918-1919 recession was preceded by the Spanish Flu epidemic, but the recovery from the recession was also supported by the end of the WW1. Some more on the Spanish Flu pandemic effects on the economy can be found here: https://www.stlouisfed.org/~/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf.

The 1918-1919 recession was not an isolated incident, as it was followed closely by the twin recession of 1920-1921. The joint episodes lasted 25 months. Similarly, the 1980 and 1981 twin recessions should also be treated as a joint episode of 22 months duration. Adjusting for these, average recession has been lasting 15 months, not 13 months, with only four recession of duration < 10 months.

Should, as now expected, the Covid2019 pandemic cause a global recession, it is unlikely to be short-lived, implying that any fiscal and monetary supports required to ameliorate the crisis core effects will have to be in place for much longer than the 2-3 months currently implied by the crisis contagion and social distancing restriction.

2/7/19: Inverted Yield Curve

Inverting U.S. yield curve is one of the best early indicators of recessions. Or at least it used to be... before all the monetary policy shenanigans of the last 11 years. Regardless, the latest U.S. Treasury yields dynamics are quite disquieting:

18/6/19: In May, 12 month forward probability of a U.S. recession has jumped up

The NY Fed estimated risk of recession (12 months forward) has hit another business cycle high of 29.62% for May 2020, up from 27.49% for April 2020, marking seventh consecutive monthly increase.

Historically, probability of a recession 9-15mo ahead of the actual recession realisation has been at 18.45%, which is significantly below the current running 3 months average of 28.06%.

To put these levels into perspective, here is the chart of the time series:

The current levels of the index are clearly in line with the historical trends for the 9-12 months recession expectations. More so, they are actually in line with 3-6 months recession expectations. In fact, we have to go back to 1967-1968 to find the only episode in the entire history of the data series where current levels of the index were not coincident with an actual recession or with 3-6 months-lagged realisation of a recession.

May 2020 reading is the ninth highest probability estimate for the probability of a recession in history for any period outside and actual recession + 6 months prior and 3 months after.

17/6/16: Credit markets on the ropes?

In their research note, titled aptly “Credit Metrics Bode 1ll”, Moody’s Analytics produced a rather strong warning to the corporate credit markets, a warning that investors should not ignore.

Per Moody’s: “The current business cycle upturn is in its latter stage, aggregate measures of corporate credit quality suggest. The outlook for the credit cycle is likely to deteriorate, barring improved showings by cash flows and profits, where enhanced prospects for the latter two metrics depend largely on a sufficient rejuvenation of business sales.”

In other words, unless corporate performance trends break to the upside, credit markets will push into a recessionary territory.

“Recessions materialized within 12 months of the year-long ratio of internal funds to corporate debt descending to 19.1% i n Ql -2008, Ql-2000, and Q4-1989. As derived from the Federal Reserve's Financial Accounts of the United States, or the Flow of Funds, the moving year long ratio of internal funds to corporate debt for US non-financial corporations has eased from Q2-2011's current cycle high of 25.4% to the 19.1% of Ql-2016.”

Moody’s illustrate:

Now, observe the ratio over the current cycle: the peak around the end of 2011-start of 2012 has now been fully and firmly exhausted. Current ratios sit dangerously at 4Q 2007 and close to 1-3 quarters distance from each previous recession troughs.

The safety cushion available to the U.S. corporates when it comes to avoiding a profit recession is thin. Per Moody’s: “The prospective slide by the ratio of internal funds to corporate debt underscores how very critical rejuvenations of profits and cash flows are to the outlooks for business activity and credit quality. Getting profits up to a speed that will keep the US safely distanced from a recession has been rendered more difficult by the current pace of employment costs."

Here’s the problem. Employment costs can be cut back to improve profitability in a normal cycle. The bigger the cut back, the more cushion it provides. But in the current cycle, employment costs are subdued (do notice that this environment - of slower wages and costs inflation - is the same as in 2004-2007 period). Which means two things:

1. U.S. corporates have little room to cut employment costs except by a massive wave of layoffs (which can trigger a recession on its own); and
2. U.S. corporates have already front-loaded most of the risk onto employment costs during the Great Recession. Which means any new adjustment is going to be even more painful as it will come against already severe cuts inherited from the Great Recession and only partially corrected for during the relatively weak costs recovery period since then. 

Moody’s are pretty somber on the prospect: "As inferred from the historical record, restoring profits through reduced labor costs is all but impossible without the pain of a recessionary surge in layoffs. Thus, barring a recession, employment costs should continue to expand by at least 5% annually."

That’s the proverbial the rock and the hard place, between which the credit markets are wedged, as evidenced by the recent dynamics for both Corporate Gross Value Added (the GDP contribution from the corporate sector) and the nominal GDP:

Again, the two lines show steady downward trend in corporate performance (Corporate GVA) and slight downward trend in nominal GDP. In terms of previous recessions, sharp acceleration in both trends since the end of 4Q 2014 is now long enough and strong enough to put the U.S. onto recessionary alert.

Per Moody’s: "As of early June, the Blue Chip consensus projected a 3.2% annual rise by 2016's nominal GDP that, …signals a less than 3% increase by corporate gross value added. [This]... implies a drop by 2016's profits from current production that is considerably deeper than the - 2.5% dip predicted by early June's consensus. Moreover, as inferred from the consensus forecast of a 4.4% increase by 2017's nominal GDP, net revenue growth may not be rapid enough to stabilize profits until the second-half of 2017, which may prove to be too late for the purpose of avoid ing a cyclical downturn."

In other words, there is a storm brewing in the U.S. economy and the credit markets are exhibiting stress consistent with normal pre-recessionary risks. Which is, of course, somewhat ironic, given that debt issuance is still booming, both in the USD and Euro (a new market of choice for a number of U.S. companies issuance in response to the ECB corporate debt purchasing programme):

Just as the corporate credit quality is deteriorating rapidly:

You really can’t make this up: the debt cornucopia is rolling on just as the debt market is flashing red.

4/7/2014: Q1 2014: Domestic Demand dynamics

In the previous posts I covered the revisions to our GDP and GNP introduced by the CSO, top-level GDP and GNP growth dynamics, and sectoral decomposition of GDP.  These provided:

1. Some caveats to reading into the new data 
2. That the GDP has been trending flat between Q2-Q3 2008 and Q1 2014, while the uplift from the recession period trough in Q4 2009 being much more anaemic than in any period between 1997 and 2007. The good news: in Q1 2014, rates of growth in both GDP and GNP were above their respective averages for post-Q3 2010 period. Bad news: these are still below the Q1 2001-Q4 2007 averages.
3. Evidence that in Q1 2014, four out of five sectors of the economy posted increases in activity y/y. 

Now, let's consider Domestic Demand data. In the past I have argued (including based on econometric evidence) that Domestic Demand dynamics are most closely (of all aggregates) track our economy's actual dynamics, as these control for activities of the MNCs that are not domestically-anchored (in other words, they include effects of MNCs activities on Exchequer and households, but exclude their activities relating to sales abroad and expatriation of profits and tax optimisation).

Of the components of Domestic Demand:

• Personal Consumption Expenditure on Goods and Services stood at EUR19.915 billion in Q1 2014, which is up EUR42 million (yes, you do need a microscope to spot this - it is a rise of just 0.21% y/y. Good news is that this is the first quarter of increases in Consumption Expenditure after four consecutive quarters of decreases. Previously we had a EUR125 million drop in Personal Consumption Expenditure in Q4 2013 compared to Q4 2012.
• Net Current Government Expenditure stood at EUR6.614 billion in Q1 2014 which is EUR167 billion up on Q1 2013 (+2.59% y/y) and marks third consecutive y/y increase in the series.  Over the last 6 months, Personal Consumption fell by a cumulative EUR83 million and Government Net Current Expenditure rose EUR617 million. Austerity seems to be hitting households more than public sector?..
• Gross Domestic Fixed Capital Formation (basically an imperfect proxy for investment) registered at EUR6.864 billion in Q1 2014, up EUR191 million y/y. Which sounds pretty good (a 2.86% rise y/y in Q1 2014) unless one recalls that in Q4 2013 this dropped 11.35% y/y. Over the last 6 months Fixed Capital Formation is down EUR798 million y/y in a sign that hardly confirms the heroic claims of scores of foreign and irish investors flocking to buy assets here.
• Exports of Goods and Services, per QNA data, stood at EUR47.164 billion in Q1 1014, up strongly +7.41% y/y, the fastest rate of y/y growth since Q1 2011 and marking fourth consecutive quarter of growth. I will cover exports data in a separate post, as there is some strange problem with QNA data appearing here.
• Imports of Goods and Services were up too, rising to EUR37.635 billion a y/y increase of EUR2.086 billion.  
• Over the last 6 months, cumulatively, y/y Exports rose EUR4.970 billion and Imports rose EUR3.741 billion.
• Total domestic demand (sum of Personal Expenditure, Government Current Expenditure, Gross Fixed Capital Formation and Value of Physical Changes in Stocks in the economy) stood at EUR33.828 billion. This represents a y/y increase of just EUR335 million or 1.0%. This is the first quarter we recorded an increase since Q4 2013 saw a y/y drop in Total Domestic Demand of 3.83%. Over the last 6 months, cumulatively, Irish domestic economy was down EUR1.087 billion compared to the same 6 months period a year before.

The above are illustrated in the two charts below:

Lastly, let's take a look at nominal data, representing what we actually have in our pockets without adjusting for inflation. Over Q1 2014, nominal total demand rose by EUR499 million y/y, while over the last 6 months it is down EUR570 million y/y. So in effect all the growth in Q1 2014 did not cover even half the decline recorded in Q4 2013. One step forward after two steps back?..

Chart below summarises nominal changes over the last 6 months and 12 months.