Coincident or Not?

"Between stimulus and response there is a space.  In that space is our power to choose our response.  In our response lies our growth and our freedom." - Viktor E. Frankl

In order to track economic growth or contraction economists use three types of indicators - leading, coincident and lagging.  The first two point to where we are headed and where we have come from and the middle one points to where we are now.  These measures are relatively vague but are used to estimate the future and are used to determine whether an economy is in an expansionary or a recessionary (contraction) cycle.  Normally people focus on the leading indicators, but as the economy is dragging along at a snails pace of 1.5% annual growth it is worth taking a look at the coincident indicators.

So what components of the economy makes up the coincident indicator?  There are four components; employment, real income growth, real wholesale sales and industrial production.  It is clear that the economy has not recovered in terms of employment.

Also in comparison to other recoveries the employment picture continues to lag and this has impacted real personal income (people have less discretionary income to spend on luxuries).  In fact the current cycle has the auspicious title of being the worst recovery in real personal income on record!  There are not many people that can look in their wallet and see extra cash, in fact most people are wondering how they will be able to cover their bills let alone take a Caribbean Cruise.

Real wholesale sales appear to be holding up fairly well but I expect that these numbers will start to trend lower as this recovery cannot continue without a marked improvement in real personal income.

So the last index to look at is industrial production which amazingly is firing on all cylinders.  So if that is going well then we should be able to stave off a recession right?  Well it is hard to imagine that with the drags of a struggling consumer and Europe that industrial production can last.  You need to be able to sell the products that you are creating.  Also in the past this growth in industrial production resulted in more employment as factories started to hire, but as you saw above this has not happened this time around.

So what is the outlook?  As I have been saying for a while now it appears that for the present time the United States is relatively insulated from the rest of the world's problems but a hiccup in Europe could push us into a recession.  Furthermore until Europe can fix its problems and the United States can wean itself off the intravenous support of printing money there will be a fiscal drag on economic growth that will continue to mute any form of a recovery.

The long and short of it is that if we are in a recession it should be mild and if we are not in one then the slow growth and constant personal struggles will continue for an extended period and will feel much like a prolonged recession.  So now is not the time for pressing the accelerator.  Prepare yourself for a long slow recovery by making sure that wherever you invest it is protected from any bumps in the road.