Wednesday, December 19, 2012

10 comforting charts

There are plenty of things to worry about these days. The fiscal cliff negotiations and the likelihood of higher taxes on capital and small businesses; the Federal Reserve's massively expansive monetary policy; the recession in the Eurozone; the lingering threat of sovereign defaults; the political deterioration in the Middle East; the prospect of trillion-dollar federal deficits for as far as the eye can see; the gigantic unfunded liabilities of U.S. entitlement programs; the recent decline in industrial production in most developed economies; the slowdown in Chinese growth; the rising regulatory burdens; the onset of ObamaCare; the very weak U.S. dollar; the relatively tepid growth of the U.S. economy; and the huge gap between current and potential growth. 

But all is not lost, and the end of the world is not imminent. Here's a collection of 10 charts that tell a story of an economy that continues to improve on the margin. They don't point to any big growth revival, but neither do they point to an imminent recession. At the very least they are comforting.

Housing starts are up 60% from early last year, and up 22% in the past 12 months. 

Building permits typically lead starts, and they are up 27% in the past year. The future of residential construction looks very bright.

Architecture billings typically lead construction spending by 9-12 months. A majority of the firms surveyed for this index in November reported increased billings activity. The future of nonresidential construction looks better than at any time in the past 5 years.

Industrial metals prices are good indicators of global economic activity. Although they are down from recent highs, they are still orders of magnitude higher than they were 10 years ago, and they are up 113% from their Great Recession lows. At the very least, these prices tells us that global economic activity remains relatively strong.

We all know that the Eurozone is in a recession and that growth prospects are miserable. Yet Eurozone equity prices are up 26% from last year's low. This is not necessarily a sign of strength, but it does suggest at the very least that the situation in Europe is not as bad as many had feared. After all, prices today are about the same as they were in late 1997, 15 years ago! U.S. equity prices have fared better, but still, they have made zero progress in the past 12 years, despite the fact that after-tax corporate profits have more than doubled since then. My take is that equity prices are moving higher because things are not as bad as they market had feared; markets have been priced to a recession, but instead we continue to see that growth is positive albeit disappointingly weak.

Credit Default Swap spreads show no signs of any fundamental deterioration in the economy. Indeed, they are about as low as they have been since the recovery started. They are still elevated by historical standards, but on the margin they are telling us that conditions are improving.

The implied volatility of equity options—the Vix Index—is still somewhat elevated relative to what we would expect to see in "normal" times, but it is far below the levels registered at times of crisis. At the very least, this is telling us that the "fiscal cliff" negotiations are not a do-or-die event for the U.S. economy. Not good, but not bad either.

Swap spreads are very important indicators of financial market health and systemic risk, and have proven to be good leading indicators of economic strength. The very low level of swap spreads today is a reflection of very healthy liquidity conditions and very low systemic risk. It would therefore be very surprising for the economy to dip into a recession.

Inflation is neither too low nor too high. This chart shows the quarterly annualized change in the GDP deflator, the broadest measure of inflation in the U.S. economy. Year over year inflation is running a bit less than 2%, regardless of the measure you wish to use.

The pace of jobs growth is very disappointing, to be sure, but employment around the world, as well as in the U.S., continues to expand. Slow growth is much better than contraction.


McKibbinUSA said...

Thanks for sharing these charts -- I'm amazed at your data sources -- I yearn for a Bloomberg terminal right now -- again, thanks for the charts.

WotzHot said...

Thanks Scott for your insight thru the year. I have learned lots from you as well as being able to navigate and keep up with the market from the inside and avoid all the 'noise' thats out there. Finding your blog has been a true blessing in my life. Keep up the great work and have a Merry Christmas and prosperous New Year with your family.

John said...


Wishing you and your family a Merry Christmas and a Happy and Prosperous New Year.

Benjamin Cole said...

Excellent wrap-up.

There are economists who differ with Scott Grannis on whether the Fed is being expansionary. Scott Sumner and Market Monetarists contend the Fed is passively tight.

The Bank of Japan has also kept interest rates at zero, but no one says they are "loose" or expansionary. So, there is more to life than interest abates. The tried some QE and still face deflation.

Interestingly, ordinary business people in Japan are fed up, calling to limit BoJ independence, and calling for an "unlimited" Bank of Japan assault on deflation.

That may happen someday in the USA too.

marcusbalbus said...

you are not wise enough to understand swaps. stop using them as a cheerleading point.

Scott Grannis said...

WotzHot and John: thanks for the kind words!

Bob said...


Please explain why Scott Granis is not wise enough to understand swap spreads.

(I doubt if we will hear from you)