chicagoThis morning, the Chicago Fed National Activity Index came out “better than expected” for the month of July. This measure is released with a bit of a lag and is one of the last July data points to be released. The measure is comprehensive and incorporates national activity relating to inflation, employment, consumption, and housing. So while it may not reflect the sharp selloff in the market (market dropped in August), it does provide additional evidence that the economy remained stable up to the point of this recently heightened uncertainty. This is good news, because a couple of weeks of uncertainty aren’t enough to tip the US economy into a recession. In October 1987, the market crashed and pulled back 24% in a day, and there was no recession in 1987. A market decline, heightened uncertainty, and surveys taken during the height of the angst don’t indicate an actual recession. For an actual recession, we need to see actual new rounds of dramatically increased layoffs (possibly taking the unemployment rate to 12%) and we need to see the consumer stop spending (negative consumption growth). Be careful analyzing the indicators of things vs the actual measurement of things. Since the market is pricing in a greater than 50% probability of an imminent recession at about 1,100 (S&P 500) it should not be surprising to see sharp bounces on any news that is consistent with “not being in recession”.

For perspective, the Chicago Fed came out at -0.06.

The average value for 2010 (a period of very strong economic growth) was -0.03

  • Q1 2011:           +0.12
  • Q2 2011:           -0.54
  • July 2011:         -0.06

In order for the Chicago Fed National Activity Index to be consistent with a recession we would need to see measures of about -2.0.

If the US economy can avoid a recession this year with the kitchen sink being hurled at it – political ineptitude, fear of defaulting on debt, a stock market semi-crash, fears of defaults in Europe and an unwind of the Euro, a nuclear disaster in Japan, and the Arab spring – then the economy may actually be very resilient and well positioned for stability next year. This is now a minority view, but if it transpires, the stock market will respond very well from here to a stable economic environment during the rest of 2011, and a slight pick-up in activity in 2012.

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