Last week, the markets responded to further evidence of a slowing in economic activity, including a further deterioration in new claims for unemployment. Given that the sharpest deterioration in leading economic measures such as our Recession Warning Composite and the ECRI weekly leading index growth rate occurred in the May-June period, we will remain concerned about deterioration in employment conditions through the October-November time frame, based on typical lags in the data. Weakness in the ISM data typically follows leading economic measures more quickly, so the August and September readings will be important data points. Clearly, we are in the window where the market would be expected to be very sensitive to changes in the economic outlook, which is largely what we observed last week in both stocks and bonds.
Among modest positive signs, the growth rate of the ECRI Weekly Leading Index ticked up slightly to a -9.3% reading, but still at a level that would be consistent with an ISM Purchasing Managers Index in the low 40's by October or November. While the ECRI has expressed increasing economic concerns, it has not yet warned conclusively of a double dip. This is not a heated disagreement, simply a difference in analysis and statistical interpretation. For our part, we view the recent few quarters of economic expansion as the result of enormous fiscal and monetary stimulus, without much "intrinsic" private sector expansion at all. Now that inventories are replenished and the fiscal stimulus is tapering off, my impression is that the underlying and still uncorrected fragility in the economy is likely to reassert itself for a time.