Friday, March 18, 2016

What the Business Sector is Telling Us About the Economy

The latest press release from the Federal Reserve shows us the level of confusion that reigns at the world's most influential central bank.  This becomes particularly apparent when we look at what has happened to the dot plots which show FOMC participants' best guess about future interest rates over the past year:

4.) June 2015:

That amount of variation from quarter-to-quarter in their interest rate prognostications would suggest that the Federal Reserve Board Members and Bank Presidents would be just as accurate in their "best educated guesses" if they tossed a dart at a board with random numbers scattered across its surface.

Unlike the eternal optimists at the Fed, those of us who live in the real world are getting a sense that all is not particularly well, a fact that the business world has known for some time.  By merely looking at three charts using Federal Reserve data, a thinking person can see where the economy is becoming increasingly weak and get a strong idea of where it's headed.

Let's start with the dollar value of manufacturers' new orders (excluding aircraft):

You'll notice that prior to the 2001 and 2008 recessions, the dollar value of new orders showed significant levelling off.  In the current cycle, the dollar value of new orders has been more or less level since early 2012 as shown on this graph which shows year-over-year growth in manufacturers' new orders since just prior to the Great Recession:

The data shows us that the dollar value of new orders have actually been declining on a year-over year basis since February 2015, hardly a good sign for strong (or any) economic growth.

Now, let's look at the dollar value of total business sales:

Total business sales have been more-or-less flat since July 2014 and have really not shown much growth since early 2013 as you can see on this graph which shows the year-over-year growth in total business sales since just prior to the Great Recession:

The data shows us that the total dollar value of business sales has actually been shrinking since January 2015.

Lastly, let's look at the business inventory-to-sales ratio, a measure that provides us with a sense of how much inventory is sitting unsold compared to how much is selling (i.e. a low number is better):

At a ratio of 1.4, the inventory-to-sales ratio is at its highest level since May 2009 and prior to the Great Recession, we have to go all the way back to October 2001 to see a ratio that was as high as it currently is.

These three measures, alone, show us how precarious the state of America's economy has become and would suggest that the next recession may be coming sooner than the Federal Reserve projects, throwing out all of their dot plot "best educated guesses".  With the current economic trough to peak cycle of 69 months being significantly longer than the post World War II  average of 58.4 months, we are overdue for another economic slowdown, no matter what "monetary witchcraft" the Federal Reserve has employed or may employ in the future.

In closing, all of this begs the question "Has the Federal Reserve ever predicted a recession or do their powers of observation only allow them to see one in the rear-view mirror?".

1 comment:

  1. Being involved in inventory management the chart I find most interesting is inventory-to-sales ratio in my opinion nearly all of the downward progress was to due western introduction of the Kanban or just in time inventory model(JIT). The fact the even with models heavily reliant on computer programs designed to eliminate excess inventory that in general inventories are growing cant be good sign.