Dividends: U.S. Economy Now Out of Recession

According to the number of publicly-traded U.S. companies announcing cuts to their dividends, as of August 2013, the private sector of the U.S. economy has now fully exited the period of microrecession that it first entered in July 2012.

This new data confirms our call last month that the U.S. economy was exiting the recessionary conditions that had bogged it down since the third quarter of 2012.

Not uncoincidentally, this period of time also coincides with the Fed's latest quantitative easing programs. If not for the Fed's QE efforts, the U.S. economy would have experienced a full-fledged recession, rather than the more limited microrecession that it did.

Now that the U.S. economy is leaving those recessionary conditions behind, is it any wonder that the Federal Reserve is ready to begin trimming back the acquisitions of mortgage-backed securities and U.S. Treasuries that make up its current quantitative easing programs?

If you're looking for something fun to consider, try answering this question: If the Federal Reserve had not intervened to avoid the effects of a full-fledged recession in the U.S. economy in 2012, would President Obama ever have been re-elected?

References

Standard and Poor. Dividend Action Report. [Excel spreadsheet]. Accessed 10 September 2013.

Dividends: U.S. Economy Exiting Recession

The number of public U.S. companies announcing that they would be cutting their future dividend payments fell from 20 to 14 in July 2013. While this level of dividend cuts announced in a single month is still consistent with recessionary conditions being present in the U.S. economy, it does represent an improving situation as it appears that the U.S. economy is beginning to exit the microrecession that began back in July 2012.

By our definition, a microrecession represents a period of slow or negative economic growth for the nation that is either too limited in scope, severity or duration to qualify as an official period of recession, as might be determined by the National Bureau of Economic Research.

We'll note that the Bureau of Economic Analysis' recently revised GDP data now confirms what our dividend indicator has been communicating in real time - the pace of economic growth in the U.S. has been in the "cold" recessionary zone, as indicated by our two-quarter GDP growth rate temperature gauge:

Prior to its revision, the BEA's GDP data had indicated that the U.S. economy was growing at a somewhat faster pace.

As best as we can tell, it appears that the microrecession peaked in the fourth quarter of 2012. The U.S. economy would now appear to be exiting this period of microrecession, which has now lasted for over a year.

References

Standard and Poor. Dividend Action Report. [Excel spreadsheet]. Accessed 5 August 2013.

U.S. Commerce Department Bureau of Economic Analysis. Current-Dollar and "Real GDP". [Excel Spreadsheet]. Accessed 31 July 2013. - Note: Inflation-adjusted figures are actually presented in terms of chained 2009 U.S. dollars (not chained 2005 U.S. dollars).

U.S. Dividends: Recessionary Conditions Continue in February 2013

Where does the condition of the U.S. economy now stand as measured by the number of companies acting to cut their dividends each month?

As reported by Standard & Poor, the total number of publicly-traded companies acting to cut their dividends fell to 21 in February 2013 from the 44 that was recorded in January 2013. Both figures are down from the record number of 93 companies that acted to cut their dividends in December 2012. We've updated our chart tracking the number of U.S. companies cutting dividends below:

Here, we consider recessionary conditions to exist in the U.S. economy whenever there are more than 10 companies from the more than 6,000 publicly-traded companies in the United States announcing such actions in a given month.

That doesn't however mean that the U.S. economy is in a full recession. We would instead describe the condition as being at least consistent with the U.S. economy going through a microrecession, which is characterized by slow rates of growth or by contractionary conditions that are either too limited in scope, duration or severity to qualify as a recession as defined by the National Bureau of Economic Research (NBER).

That contractionary forces are currently present and active in the U.S. economy is confirmed by the number of S&P 500 level companies announcing dividend cuts in February 2013, which we first noted last week.

Since the S&P 500 represents the 500 largest and most well market-capitalized publicly-traded companies in the United States, seeing more than three of these companies acting to slash their dividend payments to investors in a single month is consistent with a level of economic contraction that the NBER might likely qualify as a recession.

On the whole, we think its still too early to declare that the U.S. economy is in recession, however we would not be surprised if the NBER were to make such a determination that includes the month of February 2013 some 12 to 18 months from now.

There's a lot more going on with dividends than we've indicated in this post, which we'll take on in a special post on 6 March 2013 (when this link will work!)

Previously on Political Calculations

• Dividends, Recessions and Records


• S&P 500: Dividend Cuts Hit Recessionary Levels in February 2013

Data Sources

Standard and Poor. Monthly Dividend Action Report. [Excel spreadsheet]. As last updated 28 February 2013.

Standard and Poor. S&P 500 Dividend Rate Change. [Excel Spreadsheet]. Accessed 3 March 2013.

S&P 500: Dividend Cuts Hit Recessionary Levels in February 2013

For a publicly-traded company to be able to pay out dividends to its shareholders, it has to have two things going for it:

1. Earnings (also known as Profits)


2. Cash Flow

If a company doesn't have these two things going for it, it's not going to be able to sustain paying out dividends on a regular basis for very long.

Combined, these two things provide a big reason why dividends are so important to investors in assessing the health of a company. That's also why a company's stock price will often take a major hit whenever a company's management announces that they are going to cut the cash dividends they had previously indicated they would pay - they're acknowledging that they don't expect to have either the earnings or the cash flow to pay them.

As a result, because cutting dividends has such a negative effect upon stock prices, which can make up a large share of the compensation of the leadership at publicly-traded companies, the managers of these companies will seek to avoid dividend cuts until their business situation makes them unavoidable.

That's what makes dividend cut announcements such a big deal. They don't happen unless things aren't going the way the leaders of the companies that are forced to announce them had expected when they set their dividend policies.

All this background is extremely relevant today, because the number of dividend cuts announced for S&P 500 companies, the 500 largest publicly-traded companies in the United States, in the month of February 2013 has hit a level that has not been seen since the U.S. economy fell into recession after December 2007:

Through 25 February 2013, five S&P 500 companies have announced dividend cuts during the month. The last time there were that many S&P 500 level companies announcing dividend cuts was in July 2009, just one month after the "official" end of the so-called "Great Recession" in June 2009.

In the chart above, we can also see that the number of dividend cuts announced by S&P 500 companies frequently spiked to more than three per month after December 2007 that coincides with the period of time defining the "Great Recession".

As such, the number of dividend cuts announced monthly for the companies that make up the S&P 500 index may work very well as an early indication of any period of time that the U.S. economy may be officially declared to be in recession by the National Bureau of Economic Research.

That focus differs from our previous looks at the number of companies announcing dividend cuts each month, which is drawn from the full list of all 6,000+ publicly traded companies in the United States. We have been using that data to simply determine whether the U.S. economy is experiencing recessionary conditions.

We'll be updating that analysis as soon as the data for February 2013 becomes available after the end of this month. As for what to expect, we'll simply observe that S&P 500 companies through this point in February 2013 have already accounted for half the number needed for us to determine that recessionary forces are at work in the U.S. economy.

Data Source

Standard and Poor. S&P 500 Dividend Rate Change. [Excel Spreadsheet]. Accessed 25 February 2013.

Record Dividends as the U.S. Creeps Deeper Toward Recession

According to S&P's latest Monthly Dividend Action Report [Excel spreadsheet], the month of November 2012 was a record month that saw some 3,327 U.S. companies make some kind of declaration involving their dividends (that's not the record!) Here are the astounding numbers:

197 companies acted to increase their cash dividend in the 8th best month on record (since January 2004), and the most in any November on record. The all-time record for regular dividend increases announced in a single month is 246, which was set in February 2007.

228 companies acted to make a special cash dividend payment to their investors, the most ever. To put that number in context, the most announcements that companies would pay an extra dividend in an entire year was 233 in 2007. For the period of time for which we have data, the average number of extra dividends announced per month from January 1994 through October 2012 is 33. The previous record of 97 in one month was set in December 2010.

But this drive to pay out dividends in 2012 before the tax rates on them goes up in 2013 masks the deteriorating situation for many companies in the U.S. The number of companies announcing they would cut their cash dividend payments in the month of November 2012 rose to 27, up one from the previous month.

To put that increase in perspective, the average number of companies that act to decrease their cash dividends in a non-recession month is 4. The 54 dividend cuts that have been announced in just the last two months alone is more than would be expected in an entire average non-recession year.

In the chart above, it takes at least 10 companies announcing dividend cuts in a given month for the U.S. economy to be considered to be in recessionary territory. Through November, U.S. companies have announced 151 dividend cuts in 2012.

Dividends: U.S. Deeper in Recessionary Territory

As promised, we're updating our chart showing the number of publicly-traded companies that have acted to decrease their dividends through the end of October 2012 - providing what might perhaps be the simplest and best near-real time picture of the state of the health of the U.S. economy (our thanks to S&P for the updated data - that was quick service!):

In October 2012, S&P recorded that some 2,471 publicly-traded companies making declarations regarding their dividends, with 165 announcing dividend increases and 26 announcing they would cut their dividends.

To put that level of dividend cuts for the month of October 2012 into context, we calculated the average number of U.S. companies that have announced dividend cuts outside when the 2007 recession started until after the level of dividend cuts returned to their pre-recession levels for all of S&P's available data from January 2004 through December 2011. We excluded data after December 2011 in our calculation of the average because we wanted a clear sample of data to set a non-recession period benchmark that wouldn't be affected by what has been developing in the economy through much of this year.

Here's what we found. On average, a non-recessionary month will have only four announced dividend cuts during these periods of economic expansion. The most dividend cuts that were ever announced in any of these months that fall outside an official period of recession in the U.S. is nine.

If we then set the value of ten companies per month that act to cut their dividends as the threshold at which a recession in the U.S. is likely to exist, we find that the U.S. economy first dipped into recessionary territory in May 2012, exited briefly in July 2012, and re-entered more deeply into that recessionary territory again in August, going deeper in each month since.

So no matter what you might hear in the mainstream media or from the White House, this isn't a situation that developed overnight because of the aftermath of Hurricane Sandy or the so-called "fiscal cliff". Recessionary forces have been at work in the U.S. economy for many months now....

Previously on Political Calculations

Our previous posts on the rising likelihood of recession based on the number of U.S. companies acting to cut their dividends, presented in reverse chronological order:

• Dividends: U.S. Deeper in Recessionary Territory


• A Rising Probability of Recession in the U.S.


• Dividends: U.S. Continuing Descent Toward Recession


• The Present According to Dividends: U.S. Entering Recession


• Declining Dividends Hinting at Recession

A Rising Probability of Recession in the U.S.

On 30 October 2012, a recession forecasting model developed by Marcelle Chauvet and Jeremy Piger reached what appears to be a critical threshold for anticipating a recession in the U.S. in the very near future:

The Reformed Broker's Joshua Brown comments (HT: Abnormal Returns):

Do you see the percentages on the left side of the chart? 20% is the line in the sand. We've never hit that level and NOT had a recession. In 2006 we got close (18%?) but that particular Great Recession would be a year and half in the making. Note that we're back at that 20% line again. And I can't think of anything that keeps the leading indicators from going through it to the upside - the Fiscal Cliff stuff could only speed its ascent.

One thing we should note is that the data in the chart only covers the period through August 2012 - this is a delayed reaction to a developing situation. The probability of recession in the U.S. suddenly surged to the 20% level from the 2% level recorded a month earlier pending future revisions.

As it happens, we have another indicator which gave a slightly earlier signal that the U.S. economy is trending toward recession: the number of publicly-traded companies that have acted to cut their dividends. Here is what that data showed through the end of September:

We'd like to be able to update the chart through October 2012, however the aftermath of Hurricane Sandy has impacted Standard and Poor's operations, which has delayed the update of S&P's dividend action report [Excel spreadsheet].

As soon as that report has been updated, we'll post an updated version of our chart. In the meantime, we should note that this trend toward recession would seem to be occurring independently of whatever noise is going on in Washington D.C. with respect to the so-called fiscal cliff, which is confirmed by the Chauvet-Piger recession forecasting model, which does not consider that scenario.

We'll close by noting that what we're seeing in dividends now is not a result of the reactions to what we've described as the "dividend cliff". Here, there's really no hurry for companies to announce dividend cuts this year. Instead, the incentives are such that companies would more likely be announcing special dividend payments to beat the clock on the higher taxes for dividend income scheduled to begin in 2013, delaying the announcement of any plans they might be developing to cut dividends until the new year.

Previously on Political Calculations

Our previous posts on the rising likelihood of recession based on the number of U.S. companies acting to cut their dividends, presented in reverse chronological order:

• Dividends: U.S. Continuing Descent Toward Recession


• The Present According to Dividends: U.S. Entering Recession


• Declining Dividends Hinting at Recession

References

Chauvet, M. and J. Piger, "A Comparison of the Real-Time Performance of Business Cycle Dating Methods," Journal of Business and Economic Statistics, 2008, 26, 42-49.

Standard and Poor. Monthly Dividend Action Report. [Excel spreadsheet]. As last updated 28 September 2012.

Update 10 November 2012: Added "pending future revisions" as shown in boldface text above.

U.S. and China Trade Growth Hits Zero

Looking at the just published trade data between the U.S. and China, it would appear that both the U.S. and China have fallen into recession. Both nations are now showing near-zero annualized growth rates for the value of goods and services traded between them in August 2012:

That's a change from what we observed back in August, when it appears that China's economy had rebounded somewhat from a slow spring, based on the data then that only covered the period through June 2012.

Since then, the annualized growth rate of U.S. exports to China has fallen back to the low single digits that are consistent with that nation's economy being in recession. Going by international trade data, China entered into recession back in December 2011.

Meanwhile, the year-over-year growth rate of U.S. imports from China has turned negative for the first time since November 2009, when the U.S. was still coming out of recession.

So far, that's consistent with our earlier observation that the U.S. economy was in a microrecession in the second quarter of 2012, as the trade data collected and reported by the U.S. Census tends to lag the actual state of the economy by a number of months. The growth rate of the U.S. imports from China had last been negative in the period from November 2008 through November 2009, although officially, the previous recession in the U.S. ran from December 2007 through June 2009, with fairly mild recessionary conditions prevailing through the first half of 2008.

Dividends: U.S. Continuing Descent Toward Recession

We have been tracking a new potential indicator of the level of economic distress in the U.S. economy: the number of publicly-traded companies declaring whether they will act to cut their dividends each month. The data is now out for the just completed month of September 2012, which Standard and Poor has published in Excel spreadsheet format, which we've used to update our chart tracking this measure of economic health:

According to the Economist, through 2011, there are just under 5,000 companies whose shares are traded on the major stock exchanges in the United States. For their September 2012 dividend report, Standard and Poor's data covers 3,098 of them.

What's important to note is that in a relatively healthy and growing economy, there is very little reason for companies to act to cut their dividends. Looking at the available historic data, we find that for any given month outside a period of recession, that there are fewer than ten companies that have taken this action.

The reason dividend cuts are so significant is because firms are very reluctant to reduce their cash payouts to shareholders, as the action communicates that the company may either be struggling to continue to operate profitably or that it lacks financial flexibility, which is the ability to tap either cash reserves or to borrow money to meet its expected business needs.

What the dividend data for September 2012 indicates is that whatever negative situation is affecting the decision of U.S. public companies to act to reduce their dividend payments to investors, it is affecting more of them. The number of companies taking that action in September 2012 is well over the line that would suggest an oncoming recession.

Previously on Political Calculations

Our previous posts on the topic, presented in reverse chronological order:

• The Present According to Dividends: U.S. Entering Recession


• Declining Dividends Hinting at Recession

Jobs Fade in April 2012

After stalling out in March 2012, the employment situation for April 2012 in the U.S. faded across the board.

We see that for all the age groups we routinely cover. The number of teens (Age 16-19) recorded as having jobs fell by 14,000 from the level recorded in March 2012 to 4,321,000 in April 2012. Likewise, young adults between the ages of 20 and 24 saw their numbers fall by 42,000 to 13,329,000 in April 2012, while those Age 25 or older saw their numbers in the U.S. civilian workforce decline for the first time since October 2011, falling by 113,000 to 124,215,000.

Compared to November 2007, when the total employment level in the United States peaked just before the peak in economic expansion marking the beginning of recession in the following month, there are 4,730,000 fewer individuals being counted with jobs as of April 2012. There were 141,865,000 people counted as being employed in April 2012.

Of the decline in jobs since November 2007, just over 1 out of 3 of the jobs that have disappeared from the U.S. economy in the time since may be accounted for by individuals between the ages of 16 and 19. Today, these individuals represent 3.0% of the entire U.S. workforce, down from a percentage share of 4.0% in November 2007.

Another 1 out of 7 of the decline in jobs since November 2007 may be accounted for by young adults (Age 20-24). These individuals represent 9.4% of the total U.S. workforce today, which is almost identical to their percentage share of 9.5% in November 2007.

The remainder of the decline in jobs since November 2007 is obviously accounted for by those Age 25 or older, who account for 51.8% of the decline in jobs. Unlike teens and young adults however, the percentage share of these adults in the U.S. civilian labor force has risen to represent 87.6% (just over 7 out of 8) of all working Americans), which is up from 86.5% in November 2007.

The April 2012 jobs report is consistent with what we would describe as a microrecession, which we first forecast for this quarter in June 2011.

By our definition, a microrecession is a period of relatively slow or negative economic growth for a nation that is either relatively minor (say of limited scope, affecting some but not all regions across a country) or is comparatively short in duration.

We continue to anticipate that the U.S. economy will not enter into a full blown recession in 2012, and will rebound in the third and fourth quarters of 2012. We do not anticipate at this time that this expected rebound will extend very far into 2013.

China Enters Into Recession

China entered into recession in December 2011.

We base that observation upon our analysis of international trade data collected by the U.S. Census Bureau, where we have calculated the year-over-year growth rate in the value of goods and services that the United States has both exported to China and which the U.S. has imported from China.

Here, we observe that the year-over-year growth rate of U.S. exports to China has fallen into negative territory. Since a growing economy is one that draws an increasing level of exports from other nations, while a contracting economy is one that draws a falling level of exports, the year-over-year decline of U.S. exports to China in December 2011 indicates that China has indeed fallen into recession.

To help put that observation in context, the chart below reveals the annual growth rates of both U.S. exports to China (shown in blue) and U.S. imports from China (shown in red) since January 1985:

Meanwhile, we observe that the U.S. economy, as measured by the growth rate of China's exports to the United States, shows signs of very slow growth, indicating that it is near recession.

Our doubling rate charts present the value of U.S. exports to China and the value of U.S. imports from China. First, for the value of U.S. exports to China:

Here, we directly observe that U.S. exports to China have followed a seasonal pattern in recent years, topping out in December of both 2010 and 2011. However, in 2011, the value of those exports topped out at a lower level than they did in 2010.

Since the U.S. dollar has fallen in value with respect to China's currency over that time, effectively increasing the "dollar value" of U.S.-produced goods and services, that outcome indicates a falling quantity of exports being sent from the U.S. to China.

By contrast, the U.S. economy appears to be growing a bit more strongly than the Chinese economy:

Still, that growth in 2011 appears to be fairly anemic, as it is up only slightly from 2010 levels, indicating continued sluggish economic growth.

Using Miles to Measure Recessions

Can we use the odometers in the vehicles driven by millions of Americans to tell if the United States is experiencing an economic recession?

Let's find out! Each month, the U.S. Department of Transportation publishes a report on Traffic Volume Trends in the United States, where it adds up all the billions of miles that have been traveled on the nations roads over the preceding twelve months. The most recent report extends through November 2011.

But how can we use that report to tell if Americans are experiencing an economic recession?

Recessions are periods where economic activity is either greatly reduced or even turns negative. Since traveling is an economic activity, we should expect to see the distance that Americans collectively travel in a recession to follow a similar pattern, which we would observe in the form of a slower rate of growth or even a negative rate of growth.

Since the U.S. Department of Transportation has been publishing its Traffic Volume Trends report, there have been three recessions, as determined by the National Bureau of Economic Research: July 1990 through March 1991, March 2001 through November 2001 and December 2007 through June 2009.

We've created three graphs from the DoT's data, each spanning an eight year period, which show each of these recessions. The first covers the period of time from November 1989 through November 1996:

Already we're off to a good start! Here, for the period of recession from July 1990 through March 1991, we observe that the slope of the line showing the billions of miles traveled by Americans in the previous 12 months went flat during the period of recession, indicating a period of low economic growth. Outside of the recession however, we see that the number of miles accumulated by vehicles on America's roads generally rose, which is what we would expect during periods of economic growth.

Our next chart examines the eight year period from November 1996 through November 2003:

Once again, we observe that most of the periods of time where the U.S. economy was growing coincides with periods of increasing miles being driven on U.S. roads. And we see that the rate at which that increased slowed dramatically during the period of economic recession that officially ran from March 2001 through November 2001, at least as compared to what we typically observe in periods of growth.

We also see that the volume of traffic in the United States slowed significantly in advance of the official recession, beginning in September 2000. That's significant in that this month has been advanced by some economists as being the actual beginning of the 2001 recession, although not by the NBER, which uses a number of measures to make its official recession call.

Our final chart brings us up to to the most recently published data:

Here, we can see that the most recent official recession, running from December 2007 through June 2009, was especially severe compared to the previous two recessions, in that the number of vehicle miles accumulated on U.S. roads fell dramatically.

We can also see that an economic recovery has taken place in the months following June 2009, as the number of vehicle miles has generally risen following that period, although with some significant dips indicating an uneven pace of recovery.

But then we run into a real obstacle: we find that the total number of miles that American drivers have put onto America's roads over the previous 12 months has been falling steadily since March 2011.

If the number of miles driven by Americans is a contemporary indicator of the relative economic health of the nation, that falling number of miles driven suggests that the U.S. economy has been effectively in recession during that time, although the NBER has not yet made any such determination.

At the very least however, it does indicate a high degree of economic distress during that time.

Scheduling the Next U.S. Recession

Thanks to the Fed's excursion into Zero Interest Rate Policy (aka "ZIRP"), we can't use our dedicated tool that reckons the odds of a recession up to a year in the future.

But we can do the next best thing and listen to what the stock market is trying to tell us:

Here, we find that the private sector of the U.S. economy is set to slow down in a big way going into the second quarter of 2012, which we see as the decrease in that quarter's expected dividends per share.

Keep in mind the extremely slow growth of just once cent per share from the second to third quarters of 2011 directly coincided with what we've described as a microrecession in the United States, which we've since confirmed using international trade data.

But what does that mean for jobs? After all, as we've seen previously, the big job losses following the beginning of a recession often occur quite a bit after it has begun.

Fortunately, we have another tool we can use to predict how the U.S. unemployment rate will change, up to two years in the future! The relationship between inflation-adjusted motor gasoline prices and the unemployment rate in the U.S.!

Here, we've shifted the red curve indicating the level of real motor gasoline prices in the U.S. some two years into the future. Here, we see that the recently announced unemployment rate of 8.6% for the U.S. is right about exactly where the gas prices of two years ago would predict they would be.

(Technically, they had been higher than anticipated until the most recent employment situation report, but then, remember the U.S. went through that whole microrecession thing!)

Looking into the future, we see that the unemployment rate through 2012 is likely to fall into the range between 8.5% and 9.0%. But very early in 2013, it would seem set to skyrocket back up over the 10% mark, after beginning to rise sharply toward the end of 2012.

That won't be any microrecession. And now, you can't say you weren't warned about what now looks like is coming this way!

Elsewhere on the Web

Doug Short compares the track record of two leading economic indicators and notes that the two have diverged in recent months, with one signalling recession and the other chirping along merrily - only one can be right!...