- Baz Ratner/Reuters
This sense of security, however, may be a bit misplaced, says Jeremy Klein at FBN Securities. According to Klein, one indicator points him to the conclusion that a recession is coming to the US.
“While I am encouraged by the positive inertia exhibited by stocks, some dark clouds sit on the horizon,” Klein wrote in a note Monday.
“The Empire Survey has enjoyed its biggest two-month sequential jump since July 2005. However, Capacity Utilization, which presents the smoothest trending growth barometer on the economic calendar, cannot reverse its downward momentum.”
Capacity utilization is a measure of the output of existing factories. Measured as a percentage, if factories are cranking on all cylinders, so to say, utilization would be at 100%. As it drops lower, that means that factories are sitting idle or not producing as much as they could be. This could then be read as a measure of demand – if people are buying less than factories will not produce as much.
“The reading has declined 4.8% from its November 2014 peak,” wrote Klein.
“Throughout the near five decade history of the series, a slip of a commensurate amount has always coincided with a recession. The second derivative of the chart has also turned more negative to counter any hope for an imminent shift upward in the data.”
If you wanted to take a more positive note on manufacturing, you could easily point to the ISM manufacturing index, which has shown recent improvement. Klein, on the other hand, thinks that capacity utilization is a more “objective” measure than the survey method used by the ISM, and thus paints a more complete picture of the economy.
Now, for those that are a bit more upbeat, here is your “yeah, but …” caveat.
As noted by George Pearkes of Bespoke Investment Group, the recent decline has come from one sector: energy.
Breaking out the subindices, both nondurable- and durable-goods manufacturing have stayed relatively flat. Mining and electric and gas-utilities utilization, however, has dropped off the table.
As seems to be the case with a good many indicators lately, it really depends on where you stand on the “ex-energy” debate.
On the one hand, it’s only outlying industry dragging the rest of the rather placid sectors down, and as oil prices stabilize there could be a recovery. On the other hand, stripping out all of the bad stuff could be blinding you to the full economic picture.
So it’s either a recessionary warning or just another example of how hard the energy industry has been hit. There’s something for the bulls and the bears.