Ten Reasons Why This Has Been A Weak Recovery

June 17, 2010

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Ten Reasons Why This Has Been A Weak Recovery

9 Y/O BOY SICK IN BED WITH ICE PACK AND THERMOMETER

Courtesy of Edward Harrison at Credit Writedowns

Comstock Partners latest weekly note called "Why it’s Still A Secular Bear Market" is in line with my view of the economy and market. They see the core issue as a longer-term deleveraging that cannot be solved by fiscal and monetary stimulus. I have said that this likely means lower inflation-adjusted stock prices when the stimulus-induced recovery fades. This is a view they also hold.

However, they also provide ten specific reasons why we should see the recovery as already under attack.

While May retail sales were up 8% from the early 2009 low they are still 4.4% below the peak reached 2 1/2 years ago in November 2007. By way of comparison, over the last 43 years retail sales have seldom declined at all, even in recessions.
May industrial production (IP) was 8.1%% over its June 2009 trough, but still 7.9% below the late 2007 peak. At its current level, IP is still where it was over 10 years ago in early 2000.. Never since the 1930’s depression has IP failed to exceed a level attained 10 years earlier.
New orders for durable goods in April were up 21% from the low of March 2009, but still 22% below the top in December 2007. In fact new orders are at the same level as in late 1999, over ten years ago.
Initial weekly unemployment claims steadily declined from 651,000 in March 2009 to 477,000 by Mid-November, but have been range-bound with no improvement in the last 6 ½ months. Furthermore the current number of claims is still in recession territory.
April new home sales were up 14.8% from a month earlier and are up a seemingly robust 48% since the low. However, the current number is still a whopping 64% below the 2005 monthly peak. Prior to the current recession the last time new home sales were this low was in February 1991.
Existing home sales in April were up 27% from the low in late 2008, but still 20% below the peak in late 2005. We also note that both new and existing home sales were boosted by the homebuyers tax credit that has already expired, and that the housing market has weakened considerably since that time.
May vehicle sales of 11.6 million annualized were up 14% over the prior month and 26% from the trough. However, this remains far below the annual average of about 16 million vehicles in the decade starting 1997.
Personal income for April was up 3.2% from the May 2008 trough with major help from government transfer payments, but is still 0.8% below the peak about two years earlier. We note that prior to the current cycle, personal income was never down year-over-year in any month going back to 1960, and the current figure of plus 2.5% is still at recessionary levels. .
Payroll employment in May increased 431,000, but the vast majority of these were government census jobs. Private employment was up only 41,000, leaving the total number of employed still 7.4 million jobs below the pre-recessionary peak. In fact, on a point-to-point basis no new jobs have been added since January 2000.
March consumer credit outstanding was 3.4% below a year earlier, the 13^thconsecutive monthly decline. Prior to the current recession, consumer credit had never been down from a year earlier in any month since the waning days of World War II.

Looks like a pretty good list to me. Going forward I would look most toward job and income growth because consumption growth has outstripped income growth during this nascent recovery. This divergence is unsustainable unless we see greater job and income gains in the second half of the year due to increased hiring. My hope is that companies will decide to invest in rebuilding inventories and service capability in anticipation of further economic gains. My fear is that the recovery is already petering out for many of the reasons Comstock has provided, and that job growth in the second half of the year will be muted as a result. My expectation is that a greater percentage of firms will miss earnings forecasts as the recovery weakens. This will pressure share prices.