Return to business

It's been nearly two weeks since my last post. Things just got kind of crazy. I'm back now, so lets look at the things that happened while I was away.

First the good news, Retail Sales came in very strong. I wish I had a graph to show how retail sales behaves during recessions, but unfortunately I don't. They change the way they measure retail sales so often that it's nearly impossible to put together that kind of a graph. Using the current system of measurement, this is what Retail sales looks like:

With this release, we have enough data to call this a trend. Businesses should be using these numbers to make hiring/firing decisions this spring.

The other good news came out this morning. Industrial Production (a.k.a. manufacturing) is up again. While this signals good news for manufacturers (and their workers), it also reinforces one of the strongest indicators that we wont fall back into a recession. The Capacity Utilization report is part of the Industrial Production release. It came in positive, and take a look at the graph (especially in relation to other recessions, indicated by the grayed areas):

Only once did capacity utilization increase and then fall again during a recession, 1982-83. We have seen a much more significant rise than the 82-83 false signal. What this report shows is two-fold: we are likely getting better, but things are worse than they've been since this report has was started in the early 70s.

Now for the bad news, and I'm afraid it's really bad. Inflation reports for producers came in today significant above what they should be. To give you some scale, if you annualized the raw data producers would see a 21.6% yearly inflation rate (it came in at a 1.8% monthly rate). The core (excluding food and energy) came in at a much more manageable, but still elevated .5% monthly rate (annually 6%).

The produce inflation rate is subject to wild fluctuations, and one data point does not make a trend. Take a deep breath because this could just be a number of coincidences that go away next month, but seeing an elevated consumer inflation rate tomorrow is about the worst thing that could happen right now.

Let me paint a picture for you to explain what will likely happen with an elevated consumer inflation report tomorrow. The Federal Reserve transitions from "Want money? Take it interest free!" to "Price Stability is our chief concern." Markets will crash. The Federal Government attempts to pick up the slack, but its spending not only creates deficit problems (further lowering the value of the dollar) and borrowing problems (lenders begin to question whether the Government will honor its debts) but its spending causes crowding out of private investment (their spending increases demand, which in turn increases price, lowering private spending). The Fed and the Government do policy battle.

You see, according to the Fed we are no longer in a recession. They are happy to help out the recovery, so long as it doesn't impact the only number they truly care about, "Price Level." Now that that number is threatened, don't count on unconditional Fed support.

If you think that I'm exaggerating, take a look at 1932-1938. The exact same thing happened. They were actually in recovery, the Fed returned to its pre-recession stances, and, voila, another recession. Definitely expect a post tomorrow.

I won't really talk about jobs until Thursday, but I wanted to post something. I typically despise Krugman. I could rant for quite a while about all the problems, but suffice it to say, he and I don't typically see eye-to-eye. That being said, he put out a great summary of the employment situation going forward. (To see the post on his site, go here)

"It was truly amazing the way last week’s employment report was hailed by many people as a sign that our troubles are over. Here we are, having suffered huge job losses, and needing to make up the lost ground — and a report showing that we’re still losing jobs, but not as fast, is grounds for celebration?

Anyway, I thought it might be useful to create a sort of benchmark for the level of job growth that would really count as good news. I start from the fact that we’ve lost about 8 million jobs since the recession began — that’s the official number plus the preliminary estimate of the coming benchmark revision. I then take EPI’s estimate that we need to add 127,000 jobs a month. EPI points out that when you put these numbers together, they say that to return to pre-crisis unemployment within two years we’d have to add 580,000 jobs a month. That’s not going to happen.

But let’s set a more modest goal: return to more or less full employment in 5 years –which means seven lean years of depressed employment. To keep up with population growth over those 7 years, the United States would have had to add 84 times 127,000 or 10.668 million jobs. (If that sounds high, bear in mind that we added more than 20 million jobs over the 8 Clinton years). Add in the need to make up lost ground, and we’re at around 18 million jobs over the next five years — or 300,000 a month.

So that’s a useful benchmark. Even if we add 300,000 jobs a month, we’re looking at a prolonged period of suffering — a huge cost from the Great Recession. So that’s kind of a minimal definition of success. Anything less than that, and it’s bad news. It sort of puts that wonderful report that we only lost 11,000 jobs in perspective, doesn’t it?"