A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Cold Facts Are Getting in Investors' Way

IN the middle of a hot summer, the last thing anyone needs is more bad news about the economy.

Mountain breezes and ocean waves, ice-cold beer and frosty ice cream — these refreshing things bring a smile when the temperature rises. But bleak economic reports? No one really wants to hear about them.

Yet the unpleasant news has been pouring in anyway, and not just from the usual trouble spots, like Greece and Spain and other battered countries in the euro zone. In the rapidly developing economies of China and Brazil, the rate of growth has been slowing.

The numbers in the United States have been worrisome, too. The growth rate of the gross domestic product fell to 1.9 percent in the first quarter, down sharply from 3.0 percent in the fourth quarter of 2011. Preliminary data for the second quarter suggests that growth was quite weak, and that the sluggishness could deepen in the months ahead.

Of course, you don’t need to crunch numbers to know that the state of the economy is hardly cheering. Not if you’re looking for a job or running a business or trying to decide whether to save, spend or hire (and certainly not if you’re an incumbent seeking re-election in November).

In the belief that simply ignoring these problems won’t make them go away, I took a closer look at some of the recent data and reviewed the work of some of the economists who are sifting through it.

The American economy is so vast and complex that it’s hard even to measure it and impossible to predict its direction with any certainty. Still, this much is clear: An economic recovery that had not been very rapid in the first place has lost some momentum. Whether this is just a temporary stumble or something deeper — the sign, perhaps, of an incipient recession — is an open question.

Michael Thompson, managing director of S.&P. Capital IQ Global Markets Intelligence, says that he isn’t sure which way the economy is heading, but that the flood of negative numbers made him decide last week to switch “from a glass-half-full to a glass-half-empty point of view.”

He sharply upgraded his estimate of the probability of a recession to 50 percent from 20 percent, and downgraded his estimate of economic growth this year to the range of 1 to 1.5 percent — low enough that an actual economic contraction could easily occur. “It wouldn’t take very much to push the economy into a negative quarter,” a downturn that would feel like a recession to just about everyone, he said.

At the very least, the economy has hit another soft patch. He said that was evident in the labor market, which has never fully recovered from the last recession. The unemployment rate is stuck at 8.2 percent, after all, and unless growth picks up, the jobless epidemic will persist for the foreseeable future. In June, the Bureau of Labor Statistics reported, United States employers created only 80,000 jobs, far fewer than needed just to keep up with population growth. It was the third consecutive month of significantly subpar jobs numbers.

Mr. Thompson also cited the June Purchasing Managers’ Index report from the Institute for Supply Management, which dipped to a reading of 49.7 — the first time it was below 50 since July 2009. A number that low implies a reduction in G.D.P., which “could be a game-changer,” he said.

Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, an independent research firm, has been predicting a recession since September, and says that the recent spate of weak data “unfortunately supports our view, which is that a recession has, quite likely, already begun.” Mr. Achuthan said it was possible that “sometime at the end of the year or early next year the data will be revised and we’ll start to get some clarity about when the recession actually started.”

This kind of delay in recession dating is nothing unusual, he observed. For the last six recessions, he said, there has been a six-month median lag from the beginning of a recession to the first quarterly decline in G.D.P. In other words, he said, it’s quite possible that the United States is in a recession but that it won’t be obvious until after the November election.

At the Federal Reserve, the perspective is more upbeat than this, without being entirely positive. The consensus is that the economy — which had not been growing briskly — has slowed further and is likely to grow at only a “moderate” pace for an extended period and then “pick up very gradually,” according to the minutes of the Fed’s June policy-making meeting, which were released last week.

“Most participants saw the incoming information as indicating somewhat slower growth in total demand, output, and employment over coming quarters than they had projected in April,” the minutes said. At that last meeting, Fed officials also said they expected growth of only 1.9 to 2.4 percent this year, half a percentage point lower than they forecast in April. That’s roughly the same as the Wall Street consensus.

OF course, the Fed isn’t merely an observer. It could try to spur growth itself through yet another round of monetary stimulus. That might not do much for economic growth, but it could easily set the stage for a stock market rally. And while fiscal stimulus before the election is unlikely, Congress and the White House could improve conditions by averting the so-called fiscal cliff that looms at year-end, when taxes are scheduled to rise and spending is to fall.

Furthermore, while the recent data has darkened the short-term outlook, not everyone believes that this situation will deepen or persist. James W. Paulsen, chief investment strategist at Wells Capital Management, says he believes that the clouds are likely to lift soon. “This economy is healthier than you think,” he said, “and I expect it to pick up speed in the second half of the year.”

Stocks are already priced for trouble, he said, so it may not take much to get a rally started. Mr. Paulsen, for one, advises investors to find ways to stay cool — and to stay in the market.


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