Track The Turnaround

What's Leading the "Recovery"?

Is the global economy really recovering? Who knows?

The U.S. recession might not be over yet, according to quarterly GDP estimates. Even if it is over, what comes next seems unlikely to meet any conventional definition of a U.S. recovery or expansion since the financial crisis has "left deep scars" that could affect the economy "for many years to come," as the IMF's chief economist bluntly puts it.

Well founded concerns linger that a broke FDIC, a second round of financial crisis, a U.S. dollar collapse and national bankruptcy may lie around the corner as a government -- not particularly distinguished for its prescience, competence or immunity from short-term pressure -- faces the daunting task of taking a feeble economy off life support before inflation breaks out as the 2010 congressional elections approach.

Still, the U.S. economy has clearly stabilized from its free fall late last year. With the stock market rallying big-time on expectations the worst is behind us (fingers crossed), it's worth taking a look now at whatever industries, regions and countries are currently "leading" us into... well, into wherever it is we're headed.

Below are several Top 10 lists of industries that are so far showing the most improvement or stabilization in factory use rates, revenue growth, profit prospects (judging by P/E ratios) and job growth; states showing the biggest increases in payrolls; and countries that enjoyed the most economic growth in the second quarter.

This could provide a glimpse into what the next U.S. expansion will look like if and when it gets taken off of government life support and gets back into high gear.

Change in Factory Utilization Rates
since January 2009 (in percentage points)

1. Artificial and synthetic fibers and filaments	4.05pp
2. Nonmetallic mineral mining and quarrying	2.67
3. Paper	2.28
4. Iron and steel products	2.01
5. Chemical	1.31
6. Food	0.39
7. Food, beverage, and tobacco	0.25
8. Nondurable manufacturing	-0.09
9. Oil and gas extraction	-0.15
10. Beverage and tobacco product	-0.38

_{Source: Federal Reserve}

Best Top-Line Growth:
Quarterly Revenue Growth (year-over-year)

Multimedia & Graphics Software	94.58%
Mortgage Investment	64.67
Broadcasting - Radio	57.42
Wholesale, Other	54.33
Money Center Banks	37.70
Investment Brokerage - National	36.09
Diagnostic Substances	35.75
Waste Management	35.53
Education & Training Services	32.41
Auto Parts Stores	28.11

_{Source: Morningstar/Yahoo}

Best Profit Growth Prospects:
According to Stock Market P/E ratios (trailing 12 month)    

1. Medical Appliances & Equipment	820.80
2. Computer Based Systems	360.30
3. Computer Peripherals	324.40
4. REIT - Office	317.20
5. Biotechnology	256.10
6. Sporting Goods Stores	198.00
7. Apparel Stores	167.60
8. Meat Products	124.80
9. Gold	86.40
10.Semiconductor - Integrated Circuits	79.30

_{Source: Morningstar/Yahoo}

Best Job Growth:
Change in payrolls in '000s (Dec. 2008 - July 2009)

Health Care	149.8
Federal Government	62.8
Education	26
Social assistance	12.6
Local government	8.6
Accounting	6.6
State Education	5.4
General merchandise stores	4.5
Assoc. & Organizations (incl. lobbyists)	3.4
Utilities	2.1

_{Bureau of Labor Statistics}

Top Job Growth By State:
Biggest Percent Change in Payrolls (Dec. 2008 - July 2009)

D.C.	1.63
North Dakota	0.76
Alaska	-0.59
Maryland	-0.65
New York	-0.79
Mississippi	-0.82
Vermont	-1.11
Arkansas	-1.23
Louisiana	-1.24
Virginia	-1.27

_{Bureau of Labor Statistics}

Economic Growth
Percent Change in GDP (2nd Quarter)

China	1.7
India	1.6
Korea	2.3
Slovak Republic	2.2
Japan	0.9
France	0.3
Germany	0.3
Czech Republic	0.3
Israel	0.2
Sweden	0

What's taking shape so far is a recovery (if you can call it that) led by:

• profit or sales growth of exportables (including commodities, perishable goods and high-tech);
• job growth in government and heavily government supported, regulated or influenced industries (health care, money center banks, education, utilities, interest groups and lobbyists);
• job growth in the government-driven megalopolis of D.C./Maryland/Virginia.
• economic growth in Asia and Western Europe, highlighting the importance of exports.

Most of everything else continues to shrink or deteriorate. How far the recovery evolves beyond this remains to be seen.

Credit Demand: Thanks, But No Thanks

The credit drought might or might not be breaking, but it looks like many potential borrowers couldn't care less.

More than a year into Washington's massive effort to restore credit availability, many U.S. businesses and consumers are shunning loans.

It has been reported that the Federal Reserve's recently released loan officer survey showed credit remains tight. Less attention has been paid to weakening credit demand.

The Fed's survey suggests interest in consumer, mortage, business and commercial real estate loans is still weak and, in most cases, continues to shrink.

The survey showed more lenders reported weaker than stronger demand for C&I loans.

The report continued to show a near-record balance of lenders reporting less of a need for commercial real estate loans.

More lenders reported weaker interest in consumer loans.

The best news ("best" only in a relative sense) was that a larger percentage of firms continued to report greater rather than weaker demand for prime mortgage loans, but that balance of sentiment shifted toward weakness again in the third quarter. Firms reporting less interest in nontraditional mortages continued to outnumber those reporting more, and by a greater extent than in the second quarter.

In other words, even if credit weren't tight, fewer want it.

It's another sign the top priority now for many in the U.S. is to pay off debt, rebuild savings and restore balance sheets while adjusting to the "new normal." Borrowing to spend and expand operations -- you know, the things that make an economy grow -- doesn't seem to be much of a priority at this point.

This isn't a recovery yet. It still looks more like bottom fishing.

----

^{_{*The Fed didn't have enough lenders reporting subprime lending to produce a constitent time series for all mortage loans going further back in time.}}

_{^{**The net percentage figures are calculated by taking the percentage of firms reporting stronger demand minus the percentage of firms reporting weaker demand. In other words, it shows the balance of lenders seeing stronger demand versus firms seeing weaker demand.}}

Super-Glut: Economy's Only Quarter-Way Through A Massive Inventory Correction

Some reporters took as positive news Thursday's report that U.S. business inventories fell again in June. The Commerce Department said the value of stockpiles -- at the retail, wholesale and factory level -- dropped 1.1 percent to $1.35 trillion.

That's been taken by some as good news that the inventory glut is being worked off, which is what we need to clear the path to real growth in production and the overall economy again.

How do I put this politely? Whoop-ee-doo.

The drop in inventories is meaningnless without context. The context is sales. Retailers, wholesalers and factories still have quite far to go to get their stockpiles back in sync with sales. They're still chasing a falling target and have made little headway in closing the gap.

The relevant measure is the inventory-sales ratio, which tells you where your inventories are versus sales, or how bloated your stockpiles are. That's what matters. Producers and distributors strive to keep stockpiles in line with sales through booms and busts. They try to keep supply in sync with demand or expected demand. In a recession-recovery period, it's the ratio that gives you a rough sense of how much liquidation needs to be done.

And this is what the I-S ratio is telling us: However much stockpiles have been run down, they remain very bloated against sales. Absent a miraculous jump in sales, there's more retrenchment to come...beyond the painful downsizing we've seen so far.

That's why a closer look at the updated inventory-sales ratio chart* is sobering. Very sobering.

While the ratio sank to 1.38 in June from 1.41 in May, it was still more than 5% above its pre-recession level of about 1.31.

It gets worse.

The "right" I-S ratio is a constantly moving target -- a falling target. There was at least one enduring development, one real technological advance, through all the bubble-hype of the past 20 years: I'm talking about "just-in-time" manufacturing or the drive to make lean inventories ever leaner. It means, through the best and worst of times, the "right" I-S ratio has been continually falling as companies successfully squeeze out more waste from  operations, constantly defining down the benchmark of what's considered a "healthy" inventory-sales ratio.

Here's the chart again with the trend line.

The trendline shows the I-S ratio on a generally downward path through booms and busts. The trend line is a rough guess of where the ratio "should" be at any given time, given the long-term trend.

The chart suggests the current I-S ratio is high compared to pre-recession levels. And it's very high above trend levels -- above the "right" level, or where the ratio should be.

At the very least, the bloat -- the gap between what the I-S ratio currently is (1.38) and what it should be (1.27 according to the trendline) -- remains above 8%. That means sales either have to go up more than 8% from where they were in June, inventories have to drop by roughly the same amount, or there has to be some mix in between.

To get a better feel of what kind of inventory liquidation that means, think of what an 8% drop in economic activity can feel like, just for comparison. Consider that the U.S. economy as a whole has shrunk (only) 1% from its peak so far during this two-year recession. And that's been painful enough. Consider that's about the same drop we saw through the ugly 1970's. And those are the two biggest 2-year GDP drops I can find in quarterly records going back to 1947.

On the flip-side, To get a better feel of what kind of sales boost we'd have to see to avoid that kind of retrenchment, think of what an 8% jump in overall economic activity feels like. That was China's growth rate -- at its height -- through the go-go years. America's best annual growth rates during the boom years were around 4% or so. In other words, getting rid of this glut in one year would require double the growth rate enjoyed through the boom years. Aint gonna happen.

Take one last look at the inventory-sales chart again.



It suggests we're only a quarter of the way through the inventory correction -- progress paid for with gigantic bailouts that have bought us temporary, artificial relief at future cost. The current Super-Glut, despite recent progress towards reducing it, remains more than twice as big as the inventory bloat seen during the 2001 recession.

The recession might not be over, folks. And even if it is, and we are in a recovery, it doesn't look like a return to real growth in production is around the corner.

Invest (or divest) accordingly.

You Call This "Good News"? Percentage of Americans Working Sank To 25-year Low

Forget the "good news" about the jobless rate dipping from 9.5 to 9.4%, reported Friday. That figure leaves out discouraged Americans who've given up the search and are therefore not counted as "unemployed." That statistical quirk often makes this widely-watched stat misleading during recessions (when it can understate weakness), recoveries (when it can understate strength) and turning points (when it can send false signs of a rebound).

There's an easy way to get through the noise: Take a look at the Labor Department's employment-to-population ratio, which is included in the same monthly report. It's the share of the population (16 and older) still employed. It gets to the heart of the matter, and it does not paint a pretty picture.

The ratio fell from 59.5% to a new 25-year low 59.4% in July, extending an unprecedented free fall that began more than two years ago. This chart shows the sharpest, longest plunge in this statistic ever in records going back to 1948.

In other words, it's been at least a half-century since the job market got this bad, this quickly for this large a share of working-age Americans. And the bloodletting didn't end in July. It didn't even slow much. The situation is more than just "troublesome," as some have described it.

It borders on horrific.

The unemployment rate generally grabs headlines because it helps filter out social, demographic and cultural changes that can cloud the picture of the job market's health: like more women entering the work force through the '70s, or teenagers abandoning it through the '90's.

But demographic changes like those evolve slowly over a generation or more -- not months or years. Besides, the picture doesn't look much better when you slice and dice for different demographics and especially for men (where things look even more abysmal). 

See the additional charts below. In short, it's pretty ugly out there (terrifying for men), and as of the July reporting period, the situation was still getting worse -- still in free fall.

Working-age women have fared much better than other groups, but haven't seen this fast a drop in their employment-to-population ratio since 1955.

Working-age men haven't seen this fast a drop in their ratio since the government records going back to 1948.

Working-age teenagers (16-19) have seen the steepest 1-year drop in their ratio since 1954.