Green Shoots Meme in all its Glory

Economy Has Green Shoots From China to U.S. as Data Surprise – Bloomberg.

The Election Is Over And Philly Fed Plunges | ZeroHedge.

Manufacturing in New York Region Shrinks for Fourth Month – Bloomberg.

Jobless Claims in U.S. Jumped Last Week After Sandy – Bloomberg.

Euro Area Slips Into Recession Second Time in Four Years – Bloomberg.

The “Green Shoots” meme has been very popular over the last two years or so. This article is typical of the genre. The writer cherry picks the best data, gets quotes from people who have an interest in promoting an economic recovery and relays a few favorable anecdotes to support his theory of an improving economy. If he is right, he can tell his friends, “I told you so.” When he is wrong, no one will remember the article.

The first paragraph mentions four green shoots: stronger U.S. housing demand and hiring and increased Chinese retail and factory activity.

It’s nice that the Chinese data is looking good, but the totalitarian state’s economic figures are notoriously unreliable. The only Chinese data I would trust are import-export figures from its trading partners. If it’s exports and imports to and from the United States rise, then it is probably growing at a nice clip. These numbers do not belie green shoots.

The stronger U.S. housing demand is a common canard deployed in these articles. The fact of the matter is that housing demand sank so much that even small increases look great:

Even though sales are on the upswing, it will be years until the market fully recovers. It’s better but still bad. Furthermore, new mortgage applications are decreasing dramatically, which points to lower sales volumes to come:

The author also employs testimonials from industry professional who tell us nothing but great news lies ahead. Jim O’Neil and Jim Drayson work for companies that will make more money if they can peddle more investment management services. A bull market is the best way to achieve greater sales. What else are they supposed to say,

The market looks shaky right now. Don’t invest with us. Wait until conditions improve to put your money in the market, and then we’ll collect our fees in a couple of years.

Even better than testimonials from Wall Street executives based on anecdotal evidence is a survey of fund managers. Guess what, fund managers whose job it is to sell you stocks think that that economic news is fantastic and a bull market is right around the corner.

The truth is that it appears that corporate profits are past their peak in the cycle. More companies missed on the downside from the second to the third quarter:

and more companies are revising downward for the fourth quarter:

Cherry picking data that supports the green shoots hypothesis is also used by the author in selecting YUM’s and KMB’s positive sales data. Much larger bellwether’s MCD and WMT poor results are ignored, even though they are more reflective of the world and U.S. economies. McDonald’s is a larger company than Yum Brands, and WMT is larger and sells everything, not just paper goods like Kimberly-Clark.

When you cannot cherry pick the best statistics to support your meme, you can just misinterpret them. The author writes,

In a sign the world economy is emerging from its rough patch faster than economists anticipated, Citigroup Inc. gauges of whether incoming data exceeds or undershoots forecasts show U.S. and China indicators are increasingly proving stronger than anticipated. The so-called surprise index for the U.S. is at 57, up from a 2012 low of minus 65.30 in July…

This figures are taken out of context. Examine this chart:

In order to place the economic surprise index results into context, it helps to know that it is volatile and tends to exhibit a wave pattern.  We are at the peak of the wave right now! Indicators have been beating economists predictions recently, but the trend tells us that the surprises will end soon.

If you check the top of this post, you will see that the Empire State Manufacturer’s Survey, Philadelphia Federal Reserve Business Outlook Survey, U.S. jobs claims and European economic numbers were all miserable and much worse than expected. Three of these articles can be found in Bloomberg the very same day that this article was released.

A more level-headed assessment of the economy is to expect more of the same. Europe and Japan will continue to stunt world growth as they demand less imports. The U.S job market is not doing well, and this will tamp down consumer spending and housing demand. While a recession is not in the cards yet, it is certainly not a bullish economic environment.

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