Thursday, September 15, 2011

Teetering

That’s my word of the day on Twitter.

You’ve heard me use it before, as in, “the U.S. is teetering on the brink of another recession”.

Three more indicators today that show that is where we are.

Number one: today’s job report. Have a look at what Ed Morrissey at HotAir has to say about it.

Initial jobless claims jumped last week to 428,000, one of the highest levels since the beginning of the third quarter.  The Department of Labor also revised last week’s figure upward to 417,000 as the four-week average jumped 4,000 to almost 420K[.]

[…]

Last week’s initial figure was 414K, up two thousand from the previous week’s 412K, which was initially 409K before it got upwardly revised as well.  Are you seeing a pattern?  Six weeks ago, the level was at 400K even, and a week prior to that it had been below 400K.

The first part of Q3 had looked like the economy might have stabilized a little bit, and Q3 was looking like it might be a bit better than Q2.  We were seeing less inventory and slightly better jobs numbers. Whatever momentum there was appears to have disappeared, however. Based on the latest reports, Q3 is looking very much like a mirror image of Q2. No better. Maybe a bit worse, depending on how the next few reports look.

And now let’s talk about number two.

Jim Pethokoukis tweeted today that the IMF said that the EU financial crisis would knock at least another 0.7% off of U.S. GDP. I can’t find that in anything on their site, but that’s no doubt due to my search capability. I trust JP to get it right.

So, where does that put us? Well, if you recall, the latest estimate from the BLS on Q2 GDP was 1.0. If we take that number for Q3/Q4 as a starting point and subtract 0.7, we’re left with 0.3.

In other words, teetering.

And I still think that Q2 is going to be revised downwards yet again. So, even if the EU salvages this situation somehow, the U.S. will still be…yes…teetering on the brink of a recession.

But I’m not finished yet.

Today we also learned that Goldman Sachs has changed their forecast for crude oil. They now predict $130 a barrel within a year.

Crude oil is currently around $90 a barrel. In September, 2010, it was about $75 a barrel.

If it hits $130 by this time next year, that will be an increase of roughly 70% over 24 months. We discovered before that there’s a weak correlation between energy prices and recessions. Energy prices (of which crude oil is only one factor) tend to rise by between 60-100% sometime before the recession starts, and then start to fall off. This tends to be an indicator about half the time.

Now, I admit that the correlation here is not as strong as a numbers junkie like me would like. If it was the only indicator, I might point it out to you and say that it bears watching, but don’t be nervous…yet. However, it’s not the only indicator, and as such bears mentioning, with the appropriate caveat.

Anyway, 70% would be squarely in the 60-100% range. But we’re not there yet. We just appear to be headed there.

In other words: teetering.

Make me give a number, and I say ~60% chance we’re in a recession by next November. Maybe slightly higher, but let’s see this month’s revision to Q2 GDP before we start getting worried.

But that’s if nothing significant and bad happens. We’re so close to the edge, that really, anything at this point would push us over, such as an implosion in Europe, oil disruptions in the Middle East, another big hurricane, maybe even a sufficiently large political scandal. It’s not going to take much to get consumers to put their wallets away, and for investors to lock up their safes. When that happens, things will go from moderately bad to downright awful, and fast.

Teetering.

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