Archive: Economy

Capacity Utilization

St. Louis Fed: Series: TCU, Capacity Utilization: Total Industry

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Capacity Utilization

St. Louis Fed: FRED Graph

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Corporate Profits

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St. Louis Fed: FRED Graph

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Credit Spreads Showing Modest Signs of Easing

The spread between the return on 10-year Treasuries and Baa-rated corporate bonds was 336 basis points last week. In historical terms, that is very high. In fact, the only times in the last 50 years that it was higher were the trough of the tech wreck and the 1982 recession/stagflation busting cycle.

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High credit spreads make it harder for corporations to borrow and invest. As spreads widen, the economy tends to slow.

For investors, however, high spreads represent additional potential returns for a given unit of risk-taking. Peak levels of risk premia typically precede strong returns on risky assets – even if the strong returns are short-lived, as was the case in 2003.

Spreads have hooked down slightly as the credit woes that peaked following the Bear Stearns (BSC) debacle may finally be stabilizing. Time will tell whether that was “the” peak or whether the current easing is simply a lull.

Topics: Bear Stearns (BSC), Economy, Investment Services, Risk Premia | No Comments

Capacity Utilization Still Not Signaling Recession

Overall capacity utilization rose to 80.5 percent in March, from 80.3 percent in February and compared to the market expectation of 80.3 percent. According to Econoday, the report overstates strength in the industrial sector with the March gain almost entirely due to large gains in utilities and in mining.

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Still, we have yet to see the spike down in capacity utilization that has accompanied every recent recession.

Topics: Capacity Utilization, Economy | 1 Comment

On Recessions and the Lack Thereof

With all the talk about how the GDP shows we aren’t yet in recession, recall that recessions are determined by the NBER. I’ll let them speak for themselves:

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER’s recession dating procedure?

A:: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. According to current data for 2001, the present recession falls into the general pattern, with three consecutive quarters of decline. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in economic activity.” Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

Q:Could you give an example illustrating this point?

A:On July 31, 2002, the Bureau of Economic Analysis released revised figures for gross domestic product that showed three quarters of negative growth in 2001-quarters 1, 2 and 3-where previously the data had shown only quarter 3 as negative. This revision shows why the committee does not rely on a simple rule of thumb such as two consecutive quarters of negative growth, nor relies on GDP data alone, in making its determinations, but rather looks at a broader array of statistics. In November 2001, the committee determined the date of the peak in activity in March 2001 using its normal indicators. The two-quarter-decline rule of thumb would not have allowed the declaration of the recession until August 2002, let alone a declaration that it had begun early in 2001, as in the statement that the committee made in November 2001. It was not until eight months later that revisions in the GDP data showed declining real GDP for the first, second, and third quarters of 2001.

Topics: Economy, GDP | No Comments

Are Durable Goods Orders Really So Bad?

According to the Census Bureau, new orders for manufactured durable goods in February decreased $3.6 billion or 1.7 percent to $210.6 billion, the second consecutive monthly decrease following a 4.7 percent January decrease. Tony Crescenzi says this report is consistent with a recession, and the market seems to agree.

However, suppose the news release had read “new orders for manufactured durable goods in February increased $8.4 billion or 4.3% to $208.1 billion compared to the year-ago period. This marks the third consecutive monthly increase, following year/year gains of 4.2% in both December and January.” 

Would the market have reacted more kindly to that rephrased release? It isn’t an academic question, because either paragraph is technically correct. The Census Bureau, as is its custom, reported the one-month change after making seasonal adjustments. My alternate version simply takes the one-year change in the data before the adjustments are made.

Topics: Durable Goods, Economy | 1 Comment

Think the Financial Crisis is Over? Credit Spreads Say “Think Again”

Regular readers know I follow the spread between Baa-rated bonds and Treasuries to get a feel for how much they are willing to accept risk.

Last week, as the market rallied on the initial news of the JP Morgan (JPM - Annual Report) and Fed-led rescue of Bear Stearns (BSC) I said “The big questions are whether, how much, and how quickly the spreads will begin to narrow again. That will be the real signal from bondholders that the worst is behind us from the current crisis.”

Instead, credit spreads continued to widen. They averaged 343 basis points last week, up from 340 in the prior week.

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It remains a double-edged sword. As long as the spread continues to widen, risky assets will perform poorly. However, the abnormally high risk premia we are currently seeing indicate that longer-term investors will be paid more handsomely for accepting such risks than they have been paid on average in the past.

Topics: Bear Stearns (BSC), Economy, JPMorgan Chase (JPM), Risk Premia | No Comments

Credit Spreads in Rarefied Territory

Regular readers know I follow the spread between Baa-rated bonds and Treasuries to get a feel for how much they are willing to accept risk.

Right now, it is not much.

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Last week the spread widened to 340 basis points, a level seldom seen over the last 50 years.

Of course, we knew that already. The big questions are whether, how much, and how quickly the spreads will begin to narrow again. That will be the real signal from bondholders that the worst is behind us from the current crisis.

It is something of a double-edged sword. As long as the spread continues to widen, risky assets will perform poorly. However, the abnormally high risk premia we are currently seeing indicate that longer-term investors will be paid more handsomely for accepting such risks than they have been paid on average in the past.

Topics: Economy, Risk Premia | 1 Comment

Capacity Utilization: Weaker, But Not At Recession Levels

Somehow, other news seemed to overwhelm yesterday’s release of industrial production and capacity utilization.

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At 80.9% in February, capacity utilization continues to weaken but is far from the sharp declined that typically accompany recessions.

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