ISM Manufacturing Report on Business: August 2016

Today, the Institute for Supply Management released their latest Report on Business for the manufacturing sector indicating that manufacturing activity worsened notably in August with the overall PMI falling into contraction.

At 49.4 the purchasing manager’s composite index (PMI) declined 6.08% from July and slumped over 6% below the level seen a year earlier.

ADP Manufacturing Meltdown

Looking a bit deeper at today's ADP Employment Report, one finds yet another clear signal that the current expansion may have topped-out making recession as a distinct possibility in 2016.

The ADP Total Manufacturing Payrolls series has continued to remain weak falling 0.02% on an annual basis.

Keep in mind that while manufacturing is clearly also showing strong secular weakness, this is a very sensitive series that should not be ignored.

Also, a revitalization of the nation's manufacturing sector was a important goal of the current administration's economic policy and a particularly key focus of 2009's American Recovery and Reinvestment Act.

Industrial Production and Capacity Utilization: March 2016

Today, the Federal Reserve released their monthly read of industrial production and capacity utilization showing continued weakness in March with total industrial production declining 0.59% from February falling 2.03% below the level seen in March 2015.

Capacity utilization also weakened falling 0.66% from February declining 3.23% below the level seen in March 2015 to stand at 74.8%.

It's important to note that industrial production is still showing significant weakness which, if all past periods were to serve at least as a rough guide, now clearly indicates notable trouble for the macro-economy.

ISM Manufacturing Report on Business: February 2016

Today, the Institute for Supply Management released their latest Report on Business for the manufacturing sector indicating that manufacturing activity remained weak in February continuing to contract for a fifth consecutive month.

At 49.5 the purchasing manager’s composite index (PMI) rose 2.7% from January but slumped 6.43% below the level seen a year earlier giving a solid indication of contraction for manufacturing.

The Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey: February 2016

Today, the Federal Reserve Bank of Dallas released their latest read on manufacturing in their region indicating that assessments of manufacturing activity remained in contraction in February with the current general business activity index improving slightly to a recessionary level of -31.8 while the future general business activity index improved to a weak lecel of -2.1.

These results are an indication (consistent with other regional and national manufacturing activity data-points) that the U.S. manufacturing sector has clearly slumped into recessionary levels as of late and provides yet another likely harbinger of what is to come in 2016 for the general economy.

The Chicago Fed National Activity Index: January 2016

The latest release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that the national economic improved in January with the index rising to a level of 0.28 from a level of -0.34 a month earlier while the three month moving average improved to a level of -0.15.

January's improvements came as a direct result of improvements of the "Production and Income" component of the CFNAI with the latest reading rising sharply from -0.38 to 0.27 on the month.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

Measures of Stress: January 2016

Various regional Federal Reserve Banks routinely publish measures of financial stress which seek to distill many indications of financial turmoil down to convenient single "stress" data points.

As periods of financial stress come and go a whole host of fundamental economic indicators immediately adjust to meet the near and long term expectations of market participants

Interest rates, yields spreads, popular market volatility indices all move in real time giving observers unequivocal evidence of changes general sentiment.

The Federal Reserve Banks of Chicago, Kansas, St Louis and Cleveland all publish similar series which combined, offer a unique view of current financial conditions.

In January, all measures of stress appear to be on the rise with Cleveland's index, at a level of 1.52, giving the most notable indication of deteriorating conditions.

The Philly Fed Business Outlook Survey: February 2016

The February release of the Federal Reserve Bank of Philadelphia Business Outlook Survey (BOS) indicated continued weakness in the regions manufacturing activity with the current activity index improving but still remaining at a weak level of -2.8 while assessments the future activity weakened, falling to a level of 17.3.

The above chart shows the current and future activity indexes both with their corresponding 3-month moving averages. The red line marks the threshold between contraction and expansion for these diffusion indexes.

The Empire State Manufacturing Survey: February 2016

The Empire State Manufacturing Survey consists of a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Today’s report showed a slight improvement for both current and future assessments of manufacturing activity with the current activity index rising to a still recessionary level of -16.64 while future activity rose to a weak level of 14.48.

Current prices paid declined to 2.97 while current new orders improved to a notably weak level of -11.63 while assessments of future new orders rose to 22.15.

ADP Manufacturing Meltdown

Looking a bit deeper at today's ADP Employment Report, one finds yet another clear signal that the current expansion has topped-out making recession as a distinct possibility in 2016.

The ADP Total Manufacturing Payrolls series has continued to trend negative dropping 0.14% on an annual basis, the second year-over-year decline since the waning days of the Great Recession in 2010.

Keep in mind that while manufacturing is clearly also showing strong secular weakness, this is a very sensitive series that should not be ignored.

Also, a revitalization of the nation's manufacturing sector was a important goal of the current administration's economic policy and a particularly key focus of 2009's American Recovery and Reinvestment Act.

Kansas City Fed Manufacturing Survey: January 2016

The Federal Reserve Bank of Kansas City, like other district FRBs (New York, Philadelphia, Richmond and Dallas), tracks its region’s manufacturing activity by surveying a number of important indicators such as general activity, production, shipments, orders, employment and prices for raw materials and finished products.

The latest results are indicating that the assessments of manufacturing activity remained at a contraction level of -9 in January with more component measure declining than increasing while prices paid for raw materials declined to -14.

It's important to note that the current level of the Composite index is roughly equivalent to the level seen during the middle of the Great Recession seemingly indicating, yet again, that our current expansion has drawn to a close.

The Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey: January 2016

Today, the Federal Reserve Bank of Dallas released their latest read on manufacturing in their region indicating that assessments of manufacturing activity plunged in January with the current general business activity index declining to a recessionary level of -34.6 while the future general business activity index collapsed to -24.0.

These results are an indication (consistent with other regional and national manufacturing activity data-points) that the U.S. manufacturing sector has clearly slumped into recessionary levels as of late and provides yet another likely harbinger of what is to come in 2016 for the general economy.

You’ve Gotta ask Yourself One Question

Do you feel your economy will get lucky? … Well do you, punk!?

I for one believe that the path of least resistance is down at this point and to that end I offer the following data-point coming from today’s release of the Chicago National Activity Index (CFNAI).

The following chart shows the very sensitive diffusion index that the Chicago Fed distills from the other CFNAI measures.

Notice that while this measure improved slightly from last month, its current level of -0.12 is notably weak as well comes just two months after the October level of -0.23, the lowest level seen during our latest economic expansion and caps an entire year of values that appear to be generally trending down.

The Chicago Fed considers the crossing of -0.35 of this measure as a “[signal] of the increased likelihood of the beginning (from above) and the end of a recession (from below)”, so while we are not yet at that threshold, given the current trends (recessionary manufacturing sector, mounting inventories, deflating commodities, falling stocks and wealth effect, etc.) you’ve got to ask yourself one question… will the economy get lucky?

Yellen’s Myth (Part 2)

While Fed Chair Janet Yellen is apparently not able to “see anything in the underlying strength of the economy that would lead me to be concerned” about recession, let’s take a look at just a few data points that may support the apparent myth that expansions "die of old age".

First, as part of the Census Department's "Manufacturing and Trade Inventories and Sales" report we find that the general ratio of inventory to sales has been climbing since late 2014 to currently stand at the highest level since mid-2009 indicating that inventories are likely mounting in the face of diminished demand.


Rail Freight Carloads, as published by the U.S. Bureau of Transportation Statistics, is currently reflecting a similar likely pullback in general demand with carloads registering annual declines for all of 2015, falling to a level last seen in early 2010.


Finally, the Dow Jones Transportation Average, a stock index representing the U.S. transportation sector, is now down over 20% from it's most recent high, the most substantial pullback seen since 2008's Great Recession.

ADP Manufacturing Meltdown

Looking a bit deeper at today's ADP Employment Report, one finds yet another clear signal that the current expansion has topped-out making recession as a distinct possibility in 2016.

The ADP Total Manufacturing Payrolls series has turned negative dropping 0.09% on an annual basis, the first year-over-year decline since the waning days of the Great Recession in 2010.

Keep in mind that while manufacturing is clearly also showing strong secular weakness, this is a very sensitive series that should not be ignored.

Also, a revitalization of the nation's manufacturing sector was a important goal of the current administration's economic policy and a particularly key focus of 2009's American Recovery and Reinvestment Act.

Recession Watch: Chauvet-Piger and Term Spread Probabilities January 2015

For forecasting oncoming recession, from a purely statistical standpoint, we have two interesting data series to follow, the Chauvet-Piger Recession Probabilities and the Term Spread Probability of Recession

In the latest release of the Chauvet-Piger Recession Probability indicates that the probability of recession has increased to 0.78% currently indicating minimal risk of looming recession.

In 2008, Marcelle Chauvet of the University of California and Jeremy Piger of the University of Oregon published a paper titled “A Comparison of the Real-Time Performance of Business Cycle Dating Methods” which outlined two novel statistical methods (most notably the markov-switching method) for distilling recessionary turning points out of the very same macro data series that the NBER uses to make it’s cycle assessments.

As for the Term-Spread Probability of Recession, the latest data indicates that the probability for recession appears to be on the rise with late 2016 probability (the probability that there will be a recession by that date) of 3.56%.

Spearheaded by economist Professor Arturo Estrella of the Rensselaer Polytechnic Institute, this method derives a probability of recession from the spread between long and short yields (10-year and 3-month) and is by all accounts the standard for recession probability forecasting.

Keep in mind that a positive indication using this method would require this probability to reach 30% so while the probability is clearly rising, the current probability is still quite low.

Yellen’s “Bernanke Moment”

In Mid 2007, then Federal Reserve Chairman Ben Bernanke apparently (as he recently suggested in his book about the crisis) completely missed the significance of the housing decline when he asserted that the subprime implosion and the wider housing troubles were “contained” and economic growth would continue.

In her most recent statement following the Feds decision to raise interest rates, the current Federal Reserve Chair, Janet Yellen, made just as significant a blunder.

“It’s a myth that expansions die of old age,” Yellen said. “I don’t see anything in the underlying strength of the economy that would lead me to be concerned” about a recession.

If you have spent any time evaluating macroeconomic trends you will know that this is more than just a preposterous statement… it is wishful thinking or willful neglect… but in either case, Yellen invoked this statement for the same reason as Bernanke before her.

Just as Bernanke should have had the total implosion of the nation’s housing sector as his top concern in 2007 and 2008 (very obviously by this point), Yellen’s priority should be on the looming recession and the potential systemic shock it could bring (particularly in light of the weak expansion from the worst recession since the Great Depression) and NOT attempting to bluff her way through the inevitable.

In 2016, we may well see the end of the current expansion… there are, in fact, the beginnings of “old age” signals starting to show in the macroeconomic trends and we DO know with absolute certainty (from past experience and common sense) that periods of expansion do, eventually, all “die” and give way to periods of contraction.

So the question is, now that Yellen has indicated that she plans to go with the same failed “bluffing” strategy as her predecessor, is she up for the challenge of what is inevitably going to come?

Based on her recent performance addressing the University of Massachusetts-Amherst, I think not.

Recession Watch: Piger and Term Spread Probabilities

For forecasting oncoming recession, from a purely statistical standpoint, we have two interesting data series to follow, the Piger Recession Probabilities and the Term Spread Probability of Recession

In the latest release of the Piger Recession Probability, the April data (... there is a reporting lag) indicates that the probability of recession has increased to 1.69%.

In 2008, Marcelle Chauvet of the University of California and Jeremy Piger of the University of Oregon published a paper titled “A Comparison of the Real-Time Performance of Business Cycle Dating Methods” which outlined two novel statistical methods (most notably the markov-switching method) for distilling recessionary turning points out of the very same macro data series that the NBER uses to make it’s cycle assessments.

As for the Term-Spread Probability of Recession, the latest data indicates that the probability for recession appears to be on the rise with the January 2016 probability (the probability that there will be a recession by that date) of 4.4%.

Spearheaded by economist Professor Arturo Estrella of the Rensselaer Polytechnic Institute, this method derives a probability of recession from the spread between long and short yields (10-year and 3-month) and is by all accounts the standard for recession probability forecasting.

Keep in mind that a positive indication using this method would require this probability to reach 30% so while the probability is clearly rising, the current probability is still quite low.

Recession Watch 2013: Term Spread Probability Series

With the weak economic recovery lagging through its fourth continuous year, its sensible to start looking for clues, however so slight, of the possibility of oncoming recession.

First, let’s remember that while the NBER makes the official call of both the “peak” of a business cycle expansion and the “trough” of the subsequent recession, their officiating is delayed to say the least.

For a more “real time” assessment of the prospects of recession, various methods of number crunching have been formulated to distill out a basic probability assessment from several underlying macro series data sets.

One popular statistical method is the yield-curve based “Term Spread” probability method.


Spearheaded by economist Professor Arturo Estrella of the Rensselaer Polytechnic Institute, this method derives a probability of recession from the spread between long and short yields (10-year and 3-month) and is by all accounts the standard for recession probability forecasting.

The latest data indicates that the probability for recession is remains elevated with a January 2014 probability (the probability that there will be a recession by that date) of 4.4%.

Keep in mind that a positive indication using this method would require this probability to reach 30% so while the probability is clearly rising, the current probability is still quite low.

Recession Watch 2013: Piger Probability Series

Last year I reported on a relatively new recession probability indicator (… the “markov switching” series recently introduced to the Fed FRED/Blytic) that was giving a pretty clear, though preliminary, indication of probable recession.

While I noted that the series was highly revised, I pointed out that even taking into account the revisions, the series was giving a recession signal since using just the "maximum" reported values (values that had been all been revised lower) the reporting 20% probability was very unusual and typically associated to oncoming trouble.

In the latest release, the April data (... there is a reporting lag) indicates that the probability of recession has increased to 3.08% while the standout August 2012 value (that initially peaked interest in this series) has now been revised to 1.22%.

It's important to note though that the point of my prior post was to highlight just the "maximum" reported values and while the latest release revises down August's 19.6% and reports an additional low probability for the latest month, it makes no difference... the fact remains that this series has NOT given such a significant over estimate of recession without there being a probable recession ahead.

Now clearly, there could always be a first time... this is just estimated data... but the prior 19.6% reported figure clearly argues for following this series very closely in the coming months.