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Lighthouse Macro Report - 2013 - February

Lighthouse Macro Report - 2013 - February

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Published by Alexander Gloy
Based on a combination of 13 macro-economic variables, the likelihood of the US being in a recession dropped from 11% to 7% in February.
Based on a combination of 13 macro-economic variables, the likelihood of the US being in a recession dropped from 11% to 7% in February.

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Categories:Types, Business/Law
Published by: Alexander Gloy on Mar 02, 2013
Copyright:Attribution Non-commercial

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03/28/2013

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Lighthouse Investment Management
 
Macro Report - US economic indicators - February 2013 Page 1
Macro Report
Economic Indicators - US economy - February 2013
Contents
Summary ....................................................................................................................................................... 2Introduction .................................................................................................................................................. 3Fed Funds Rate .............................................................................................................................................. 7Crude Oil ....................................................................................................................................................... 8Construction: Building permits ..................................................................................................................... 9Employment: Non-Farm Payrolls ................................................................................................................ 10Employment: Jobs Gained / Lost ................................................................................................................ 11Consumer Sentiment: University of Michigan Survey ................................................................................ 12Consumer Confidence: Conference Board Survey ...................................................................................... 13Total Credit Outstanding ............................................................................................................................. 14Electricity Usage .......................................................................................................................................... 15Retail Sales .................................................................................................................................................. 16Manufacturing: Hours Worked ................................................................................................................... 17Manufacturing: Orders ............................................................................................................................... 18Transportation: Miles Traveled ................................................................................................................... 19Orders: Capital Goods ................................................................................................................................. 20Output: Electricity and Gas ......................................................................................................................... 21Manufacturing: Supplier Deliveries ............................................................................................................ 22Transportation: Gasoline Consumption ...................................................................................................... 23Inflation: Consumer Price Index .................................................................................................................. 24Inflation Expectations ................................................................................................................................. 25
 
 
Lighthouse Investment Management
 
Macro Report - US economic indicators - February 2013 Page 2
Summary
January 2013 highlights:
 
The likelihood of recession dropped further to 7% from 11% in December 2012
 
Output by electric and gas utilities is the only variable remaining in recession territory
 
Non-defense capital goods orders were strongest since July 2008
February 2013 trends:
 
Final UoM Consumer Sentiment came in at 77.8, implying 79.3 for the second half of month
 
Preliminary CB Consumer Confidence rose significantly from 58.4 to 69.6
 
ISM new manufacturing orders index rose from 53.3 to 57.8
CONCLUSION:
 
Based on our set of 13 weighted indicators the probability for US recession remains low.
 
 
Lighthouse Investment Management
 
Macro Report - US economic indicators - February 2013 Page 3
Introduction
Recessions are bad for company profits and hence stock prices. Knowing when an economic slow-downlooms can give important clues about asset class selection.In the US, the beginning and the end points of recessions are declared by the NBER (National Bureau of Economic Research). The NBER defines recessions as a "significant decline in economic activity spreadacross the economy" (not, as often believed, as two consecutive quarters of negative GDP growth).The NBER takes it's time to date the beginning and the end of a down-turn; it announced the beginningof the last recession (December 2007) only on December 1, 2008 - one year later. By that time, the S&P500 Index had fallen from 1,575 points to 741. Similarly, the end of the recession in June 2009 wasannounced on September 20, 2010 - more than one year later. By that time, the S&P 500 had alreadysoared from 940 points to 1,142.Waiting for the NBER to declare beginning and end of recessions would have led to inferior investmentresults (the NBER is correct in taking it's time, since many economic indicators are being revised multipletimes as preliminary data gets updated).Traditional leading indicators include values such as the stock market and the slope of the yield curve.However, the stock market does not seem very good at anticipating recessions, as the S&P 500 indexmarked an all-time high in mid-October 2007, a mere six weeks before the most severe recession of thelast 8 decades began.The yield curve has historically been a very good warning sign of recessions, as the Federal Reserve Bankwas forced to increase short-term rates in order to cool an overheating economy (thereby triggering arecession). However, with short-term interest rates near zero for the foreseeable future, the yield curvecould only invert if long-term yields dipped into negative territory. While not entirely impossible(negative yields for up to 2 year maturities have been observed in German, Swiss, Danish and othergovernment bond markets) it is very unlikely to happen in US Treasuries. Therefore, the slope of the USyield curve is unlikely to give any hints about a recession occurring under ZIRP (zero-interest-rate-policy).Indicators published by other institutions, such as ECRI (Economic Cycle Research Institute), areproprietary and not transparent, giving investors only the choice to "believe-it-or-leave-it".The Conference Board Leading Indicator includes questionable values such as the S&P 500 Index, theslope of the US yield curve and M2 money supply (which we have found to have little correlation witheconomic cycles).As most recessions last rarely longer than a year, the economy usually had already exited a recession bythe time the NBER declared it to be in one.

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