The president is on his ranch in Texas, Congress has recessed for the summer, baseball is at its zenith and most of the nation is suffering from the heat.
Taken together, that means the dog days of summer are upon us. But are these the real dog days or the cloned version of dog days? And has anyone noticed that the economy seems to be getting in on the cloning craze by cloning its own recession?
It was the Romans who first called this sultry period in July and August the dog days (caniculares dies). They named them not after the canine creature but after the brightest star, Sirius (also known as the Dog Star), which appeared in the sky over the Mediterranean Sea during these months. The Romans were thinking about stagnation from the heat caused by the combination of Sirius and the sun shining at the same time.
This summer of 2005, we can contemplate another kind of stagnation — the economic stagnation (and recession) that results from the combination of an inverted yield curve and increasing layoffs.
Not to rain on anyone's sunny parade, but current signals are mimicking signals from other pre-recession times in the past 40 years and suggest that the economy is in full cloning mode:
Inverted Yield Curve on the Horizon
Since June 13, 2003, when yields on the two-year Treasury notes and the 10-year notes were most recently at their farthest reaches, rates on the two-year note have been steadily marching toward the 10-year rate. Last week, they stood only 24 basis points apart (a basis point is 1/100th of a percentage point).
Since the Federal Reserve seems committed to more short-term rate increases, the inevitable should happen: the rates will cross and the yield curve — which has already been flattened — will invert outright. The last time that the yield curve inverted, the U.S. economy kept on marching — right into a recession in February 2001.
In fact, as Elliott Wave International's analysts point out: "Given the fact that a full inversion has preceded every single U.S. recession over the past 40 years, one would think that at least some economists would be forecasting a recession."
But are they? Nope, the hazy heat of these dog days seems to have gotten to them. In the most recent survey of 56 economists in July, The Wall Street Journal reports that not one foresees even one quarter of negative gross domestic product for the next four quarters.
That result is fairly predictable for economists as a whole, because they rarely see a recession coming but are always ready to tell us when we've just come out of one. Forecasting by hindsight is not the most useful of the mantic arts, though.
Layoffs and Weak Payroll Growth
Surging layoffs are another telling parallel between today and the 2001 recession. According to an Aug. 3 report by Challenger Gray & Christmas, layoffs in July 2005 were up 48 percent from last July. In addition, planned layoffs are up by 18 percent year to date. Because this economic recovery from the 2001 recession has essentially been a jobless recovery, it's more unsettling when companies like Hewlett-Packard and Eastman Kodak announce large layoffs.
Also, in the past, the economy has slipped into recession following sharp dips in the three-month rate of change in U.S. non-farm employee payrolls. The August issue of The Elliott Wave Financial Forecast points out that surging layoffs and nonexistent payroll growth have preceded or accompanied each of the last eight recessions. The current rate of payroll growth is around 3 percent and appears to be heading toward 0 percent. If it does go into negative territory, the economy may find itself falling into a recession just as it did following the dip below 0 percent in early 2001.
As if that's not enough to curl your hair, here's what could make the heat from these factors more difficult to deal with: our personal savings rate went down to 0 percent for the month of June, according to the Commerce Department. Even though month-to-month personal income was up 0.5 percent in June, consumer spending increased at a rate of 0.8 percent. Over the last 12 months, real disposable personal income increased 2.9 percent, while real consumer spending increased 4.4 percent. Spend more than you earn, and you don't save anything.
Consumption can exceed income for a while, as people make their purchases on credit, refinance their home or take out home equity loans. But what happens when homeowners can't refinance anymore (or don't want to because the rates have gone up), and their paychecks still aren't big enough or — worse yet — they get laid off from good-paying jobs?
During the dog days of summer, nobody wants to sweat about such dire outcomes. So most of us will keep our heads low, hoping that the economy will act differently this time and not clone the 2001 recession.
One cooling thought: Since a recession usually lags behind an inversion of the yield curve (last time, it took 12 months from February 2000), we might have enough time to clone some jobs and income to shore up our personal savings. That kind of behavior might help us get through the difficult dog days of next summer.
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She received her B.A. in Classics from Stanford University.