David Rosenberg's work is making a buzz. I referenced his work on June 16 in an article titled Don't Expect a Consumer Led Recovery. I've know of Rosenberg's work for some time. I'm not sure whether he or Mish came up with the phrase "The Age of Frugality" to describe the probable consumer behavior in the next expansion (or whether it was someone else), but the phrase seems to be associated with his work.
However, the work which is now being touted as evidence that the sky is falling, dogs and cats will soon live together and we'll be forced to listen to Barry Manilow misses a few points. Let's take them one by one.
The Consumer
Rosenberg makes two key points in his work. 1.) The consumer is de-leveraging and, 2.) that is leading to a decrease in sales. First, I have no debate about the contraction in consumer credit because he's correct. However, he uses a graph of retail sales less autos, gas and building materials as evidence that retail sales are contracting. He also uses a four month percent change at an annual rate. What he might as well have said was "let's strip out any part of retail sales that has increased over the last few month." Here is the chart of of retail sales with all those data points put back in.
Simply put with those numbers put back into the equation things look much better. In other words, when you look at the whole picture things are bottoming.
We also see this bottoming process with a look at total real PCE -- personal consumption expenditures
Housing
Rosenberg argues that housing will be a problem area for some time largely because of (massive) excess supply and a contraction in demand. I have no argument with that basic statement. However, missing from Rosenberg's analysis is a chart of both new and existing home sales -- perhaps the most important statistic when looking at consumer demand.
It looks like new homes sales have bottomed as have
And existing homes sales have as well.
Calculated Risk has argued we'll see a two part bottom in the housing market. The first will be in sales and the second will be in prices. Considering that housing is now very affordable along with the massive first time buyer tax credit and cheap mortgage rates a sales bottom is likely here (confirmed by the above charts). However, considering the massive spike we've seen in housing prices over the last 5-10 years, a continued drop in housing prices is likely.
Employment
Rosenberg argues that because of the increase in continuing unemployment claims along with the increase in the number of people who are losing unemployment benefits the idea of an end to the recession is overblown. However, Rosenberg does not mention initial unemployment claims. Before firms start hiring people they have to stop laying them off. That's the general business cycle. So until we see a continued drop in initial unemployment claims we're not going to see an increase in employment. But the continual decline in the four-week moving average of initial unemployment claims indicates we're moving in the right direction.
Now -- do not read this as saying I think all people who are unemployed should not receive money/aid/help or that I am in any way arguing they are less than human and should not be treated as humanely as possible.
Industry
Rosenberg correctly notes that industrial production has been dropping year over year and that capacity utilization is at a 40+ year low. However, what he fails to note is the rate of decline has been slowing. He also notes that while the ISM number has been rising (which I have noted for some time) it is a useless metric because industrial production has been dropping while the ISM has been rising. What Rosenberg fails to note is the ISM (along with the Empire State Index and the Philly Fed Index) are all approaching expansion levels. Here are the relevant graphs:
The Empire and Philly Index are approaching expansion readings as is:
The ISM index.
The continuing rise in all three of these indexes coordinates with the slowing drop in industrial production over the last 6 months. All of these development indicates we're nearing the end of a recession.
Finally, Rosenberg uses year over year numbers for his rail traffic numbers which show a decline. However, a month to month reading shows (you guessed it) a bottom.
I don't have an issue with Rosenberg's general thesis -- that we're in for a period of slow growth and high(er) general unemployment. On May 8, I wrote an article titled Has the Employment Situation Bottomed? This was the first article where I contemplated the end of the recession. Here is the conclusion I drew:
So -- the rate of job destruction appears to be topping. HOWEVER, we're not out of the woods yet as the rate of job creation has yet to pick up.
I do disagree with his general conclusions because I think he is
1.) Relying too heavily on year over year statistics which miss turnarounds in the economy
2.) Not using statistics like total retail sales, total new home sales and total existing home sales (on a month to month basis) to see the bottoming trend, and
3.) Not noticing that the industrial production numbers are approaching expansion again.
