U.S. Economy: Time is Running Out for Q3!
My GDP-weighted ISM PMI Employment (manufacturing and non-manufacturing combined) in October bounced to 53.3 after contracting for the first time in 17 months in September and falling to below 50 - the neutral level.
In the past a fall below 50 not only coincided with a peak in the Bureau of Labor Services' non-farm payroll employment but also coincided with the official peaks of previous business cycles that were followed by recessions, according to the NBER.
Sources: FRED; ISM; Plexus Asset Management.
My research indicates that consumer confidence is an excellent indicator of the direction in which private employment is heading and leads the latter by approximately seven months. This is especially true regarding the peaks, as in the past cycle lows in consumer confidence coincided with cycle lows in the employment situation, except in 2009 when consumer confidence turned seven months before employment.
Consumer confidence has been in a downtrend since June this year. The historical relationship therefore indicates that should the downtrend continue, BLS non-farm private payrolls are likely to turn lower by January next year. That would also mark the start of the next recession in the U.S.
Sources: FRED; ISM; Plexus Asset Management.
Please note that the boxes in blue indicate official peaks of previous business cycles that were followed by recessions, according to the NBER.
Sources: FRED; ISM; Plexus Asset Management.
But what are the markets saying? The smoothed annualized growth rate of Robert Shiller'sten-year trailing, inflation-adjusted PE ratio or PE10 leads the smoothed growth in BLS non-farm private payrolls by approximately six months. The smoothed annualized growth rate of the PE10 fell 2.1% in September, improved somewhat to -0.7 in October, but resumed its fall in November to -1.3%. Yes, there were slight falls in the past while non-farm private payrolls were expanding but falls of this magnitude were always followed by a contraction in payrolls. The magnitude of the fall in the smoothed annualized growth rate in September indicates to me that the stock market is anticipating a contraction in non-farm private payrolls by March next year.
Sources: FRED; ISM; Plexus Asset Management.
Sources: FRED; ISM; Plexus Asset Management.
It is clear to me that to avoid a recession in the U.S. in the first quarter of 2012 the FOMC needs to do something spectacular without hesitation. It can only be Q3!
Sources: FRED; ISM; Plexus Asset Management.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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