What passes as normal? Well, today, that is an interesting question.
Just reading the newspapers from the past few days, does "More Workers Face Pay Cuts, Not Furloughs" from The New York Times get you all hot and heavy over a new cyclical bull market? How about "Tech Gadgets Steal Sales From Appliances, Clothing" from the Wall Street Journal - hey, who cares if the spin cycle on the washer-dryer don't work no more, I got me an iPad! Amazing.
Meanwhile, there is excitement in the air over the view that all we have on our hands is a pause that refreshes. More interesting, however, is how the bond market just isn't buying it. Why should it when MasterCard processed transactions are flat from where they were a year ago?
Nothing we are seeing in this post-bubble credit collapse is normal.
What is "normal" in the context of a postwar recovery in the U.S. is that four quarters into it, real GDP expands at more than a 6-per-cent annual rate. That puts today's 2.4 per cent into a certain perspective. And, with the revisions now showing that the downturn we were in was even deeper than previously thought, the level of economic activity in real terms now is still 1 per cent below the pre-recession peak.
Again, when you look back at 55 years worth of postwar data, what is normal 2½ years after a recession begins is that by now we are at a new peak (on average, breaking above the prior high in GDP by 8 per cent). Real final sales - representing the rest of GDP (excluding inventories) - came in at a paltry 1.3-per-cent annual rate last quarter and average out at 1.2 per cent since the economy hit rock bottom a year ago in what is clearly the weakest revival in recorded history.
Normally, real final sales expand at closer to a 4-per-cent annual rate in the year after a recession officially ends. Then again, we haven't heard anything official just yet about the one that began in December, 2007. So, the fact that it is averaging at around one-third the typical pace in the face of unprecedented policy stimulus is rather telling and frightening.
As for employment, typically (back to 1945), payrolls are 1.1 million above the peak, or 2.3 per cent, fully 31 months after the recession starts, Currently, were are down 7.7 million jobs or 5.6 per cent from the December, 2007, peak.
The S&P 500 is locked in this technical battle between 1,000 and 1,200 but the bond market has already said "enough is enough" as the 10-year Treasury note yield remains stubbornly below 3 per cent.
Moreover, consider the odds of seeing the following:
- It is a 1-in-20 event to see successive declines in durable goods shipments and orders.
- To see the CPI down for three months in a row is a 1-in-40 event. To see the PPI falling three months in row carries 1-in-25 odds. But to have both PPI and CPI fall three months in a row is a ... wait for it ... 1-in-85 event.
- As for retail sales, posting back-to-back declines during expansionary periods is a 1-of-35 event.
- And as for the deflationary waves hitting the shores of the labour market, a decline in average hourly earnings, as we saw in last month's payroll data, is a 1-in-50 event.
Wall Street economists and strategists are all so busy telling us how normal things are that it can be quite unsettling. Look at measures of confidence, for crying out loud.
The University of Michigan consumer sentiment index - currently at 67.8 in July - is the lowest since November, 2009.
What is the average during recessions? 73.8.
What does it average in economic expansions? Try 90.9.
So you tell me where we are in the cycle?
Ditto for the U.S. Conference Board consumer confidence survey. It was 50.4 in July - a five month low.
The average during recessions is 70.4, and 102 in expansions. In other words, it is still 20 points below the recession averages.
The National Federation of Independent Business small-business optimism sentiment was 89.0 in June - a three-month low. The average during recessions is 91.9. The average during expansions is 100.2. Again, you be the judge.
The consensus is looking for $76 (U.S.) on reported EPS for the S&P 500 for next year. Let's assume for a second that write-offs do matter, and that an appropriate multiple in a highly uncertain and more regulated financial and economic backdrop is around 10-times or 12-times earnings on a reported basis, and you can see why it is that it is quite possibly far too early to overweight the equity market. That day will come - when things are more "normal."
David Rosenberg