Why It’s Not A Normal Recovery

By Comstock Partners

In our comment of April 22nd we said that the impression that the economy was undergoing a normal economic recovery was highly misleading, and outlined a number of key economic series that supported our case that the rebound was actually quite weak. Now, six weeks later, after another month or two of updated economic releases, we still believe that the recovery is exceedingly fragile. Below, we will briefly outline ten key economic indicators with attached charts that clearly illustrate our case.

1) While April retail sales were up 9% from the early 2009 low they are still 3.6% below the peak reached 2 1/2 years ago in November 2007. By way of comparison, over the last 43 years retail sales had seldom declined at all, even in recessions. Today’s reports from retailers indicate that May sales were tepid as well.

2) April industrial production (IP) was 6.8% over its March 2009 trough, but still 9% below the late 2007 peak. At its current level, IP is still where it was over 10 years ago in late 1999. Never since the 1930’s depression has IP failed to exceed a level attained 10 years earlier.

3) 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.

4) Initial weekly unemployment claims for the latest reported week are 453,000. 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, as is evidenced on the attached chart for claims.

5) 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.

6) 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 home buyers tax credit that has already expired.

7) 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.

8) 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. .

9) Payroll employment in April increased 290,000, leaving the total still 7.8 million jobs below the pre-recessionary peak. In fact, on a point-to-point basis no new jobs have been added since November 1999.

10) March consumer credit outstanding was 3.4% below a year earlier, the 13thconsecutive 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.

In sum, we reprint our concluding paragraph from our April 22nd comment, which remains just as relevant today:

"The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed. And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy. In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable, and the data discussed in this comment doesn’t even include the fiscal problems of the states, the deteriorating federal fiscal outlook, sovereign debt problems subject to potential global contagion, the Chinese housing bubble and the increased threat of beggar-thy-neighbor nationalistic economic policies. At current levels the stock market is substantially overvalued and subject to severe downside risk."

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