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By New_Deal_democrat October 6, 2015 12:27 pm
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Houses and cars: why the overall US economy is still OK

Steve Hansen wrote a post pretty much summarizing my thoughts as well:  US Economic Outlook Mainly Stable.  
http://seekingalpha.com/article/3549246-u-s-economic-outlook-appears-stable
Hansen says: 

"You have heard the saying "this time is different." One never should be certain that you are not facing a situation which will yield a different result th an the data would indicate. In fact, if I were using the economic models I used last century, I would be screaming RECESSION. Last century commodity price decline combined with commodity demand decline were the bellwether of USA and global recessions."

That's basically my take as well.  But let me add a few graphs of my own.

Perhaps most importantly, here is a graph comparing the number of manufacturing jobs (blue, right scale) and service jobs (red, left scale):
 

In 1940, there were about 2 service jobs (18 million) for each manufacturing job (8 million).
By 1980, the peak for manufacturing jobs, that ratio had grown to 3:1.
By 2000, that ratio had expanded to 6:1.
And by 2015, that ratio has exploded to about 10:1. In other words, there are now about 10 service jobs for every manufacturing job.
 
If this were 1940 - or even 1980 -- then the big decline in commodity prices would be signaling a big manufacturing downturn in the US. There would be big US manufacturing job losses, and consumer buying of houses and cars and other stuff would decline significantly on a per capita basis.  In other words, the classic onset of a recession.

But now those manufacturing job losses are mainly occurring overseas.  While there are some US manufacturing job losses, they are a trickle compared with the overall flow of the US job market.  With 70% of the US economy being consumer based, a shallow manufacturing recession such as we are now seeing doesn't appear to be enough to tip the overall economy into a recession.

To see if the overall economy is set to start suffering, watch the leading signs of the consumer.  And that means, watch the big durable products that consumers buy:  houses and cars.

Housing typically tops 1 year or more before a recession begins, with cars following about 6 to 9 months before the onset of the recession.

Here's what housing looks like through August:

While August was below June and July, it was above every other number before then.  Combined, the 3 last months show a surge in housing.

Cars set a new post-recession record of 18+ million in September:

(h/t Calculated Risk, http://www.calculatedriskblog.com)

Just how good is that?  This historical chart, normed to "0" at the level of 18 million SAAR sales:

shows that over 18 million vehicles have only been sold less than 10 times before.  Ever.

The US consumer is busy buying houses and cars.  So while I accept that a shallow industrial recession is real, I don't think it is enough to tip over the US economy, when less than 10% of all jobs are tied to industry.

One obscure indicator to watch for the direction of that shallow industrial recession is the wholesale inventory to sales ratio, which will be reported this Friday.

Here's one way NOT to watch this number, cribbed from a Doomer:

Notice that (1) the I/S ratio was above 1.4 during both of the last 2 recessions, and (2) the current number of 1.3 is consistent not with recession, but equal to 2003 when the economy was slow, but *not* in recession!  The Doomer claimed that this meant that recession was imminent.  Well, they should have also noticed (3) that the number peaked after both of the last recessions started, so if is going sideways, that would be consistent with us already having gone into recession - which we haven't.  Oh well, typical Doomer poor analysis.

But what you "should" look for is to see if this number gets worse or better.  If it gets worse, then the industrial recession is getting less shallow.  If it improves - as for example it did throughout the first half of 2009 and the ending months of the 2001 recession - then the inventory correction is abating.

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