ON THE HIGH PROBABILITY OF MORE ECONOMIC SLUGGISHNESS
Courtesy of The Pragmatic Capitalist
From a macro perspective there are still a few major trends dominating future
(Figure 1)
While most economists and investors have now ruled out a double dip (mainly because of recent ISM reports) the inventory effect (or lack thereof) and the waning stimulus effect are likely to reveal a private sector that is once again very weak. This negative trend is really only just picking up momentum and is going to persist through 2011. I think we are beginning to see signs of this in the ISM New Orders and Inventories data already. The New Orders to Inventories ratio rarely turns negative (as it did last month) and when it does it generally precedes economic sluggishness:
(Figure 2)
The two macro trends above are also perfectly correlated with the strength in the ADS over the last 18 months. The ADS has only just recently turned negative and is forecasting a protracted decline. If the inventory and stimulus effect (see figure 1) are consistent with this data it is likely that the economy will remain sluggish for quite some time.
(Figure 3)
While we’re certainly nowhere near March 2009 levels in terms of household weakness it is still clear that the private sector is not ready to run with the baton. But the environment is vastly improved from the lows and there are signs that the private sector is at least accommodating weak economic