The ODCE (OCEC? OECD?) … whatever … has announced the recession is over! Hooray!

This is the document itself:

There are a bunch of nice, color coordinated charts to accompany this drivel. “Indicators.” “Stronger signs of recovery.” “More encouraging.” Good grief!

All that is being measured is the amount of stimulus spending of various government plus debt added to the money flows by central banks.

There are two accurate ways to measure economic activity; tax receipts and the cost of oil.

Tax receipts are a good real- time indicator because they parallel individual and corporate earnings in lockstep. As earnings rise people pay more taxes because they are earning more money and do so against a schedule. When people are not earning as much – when they are unemployed, for example – they do not pay any tax.

Taxes collect real money rather than some oblique ‘indicators’ such as are relied upon by the ODCE (or whatever they call themselves.)

As is obvious, tax receipts have nosedived. This chart is of Federal tax receipts.

Let’s look at state tax receipts. States collect taxes from individual earnings along with consumption (sales taxes). If the economy in the US was improving, sales tax receipts would be increasing.

(Chart courtesy Barry Ritholtz)

Since the OCED indicators mentioned above are measuring the expenditures of governments – and presuming that such expenditures are what comprises economic activity these days – it makes sense to compare the means of paying for these expenditures. Doing so requires tax receipts which in turn requires workers earning sufficient funds to pay their own expenses as well as the taxes.

So far, the ability to collect funds to balance the expenditures is lacking.

Looking into the future, one must consider that any economic activity – that would lead to individual earnings and thence taxes – would place demand pressure on petroleum and cause prices to rise.

Part of this reasoning reflects ordinary supply/demand relationships that were damaged during the Great Bust that has just taken place. Another, more ominous reason is that constraints against remain in place and are amplified by depletion while general demand in Asian and Southern hemisphere countries increases. In a world with constrained supplies, any increase in demand or perception of an increase in future demand would be reflected in sharply increasing oil prices. Coming to this conclusion does not require extraordinary analytical skills, only a functioning memory.

Last summer, tight supplies measured against strong US and Chinese/Indian demand drove prices close to $150 a barrel. There are no natural laws that prohibit oil prices from revisiting those levels again.

According to the Energy Information Agency (EIA) figures, oil has remained in a $60 – 72 average trading range since May, which suggests that demand for oil has increased incrementally rather than in a way that would suggest a rapid recovery. The oil market, like others, tends to look and price forward. Increased demand arising from more economic activity in the mean- term future would be priced into the cost of crude.

Keep in mind two things about oil prices.

– Contango or the price premium of oil to be delivered over the cash or spot price indicates that more demand, and an accompanying increase in price is not out of the question to oil speculators. This can be analysed a number of different ways; the energy markets have their own dynamics, with a great deal of hedging between the markets.

With production uncertainties weighing on futures prices even a continued recession will allow a steady increase in oil prices barring any sort of deleveraging event.

– The trading status of the dollar also effects the price of oil. A decline in economic activity increases demand for dollars and constrains the price of crude. Conversely, the perception of recovery worldwide invites speculators to dump dollars and chase risk in other currencies. As prices in dollars are stable it is likely that speculators are exhibiting more caution than is indicated by the OCDE.