The Economic Free Fall Is Over

Gloom and doom is the way of blogs lately. Nothing is good; everything is bad. Unfortunately, lost in this translation is a set of monthly trends that shows the worst is over. Now -- this does not mean everything is roses. Far from it. As I have mentioned in the past the recovery will be weak with slow growth and high (7%-8% minimum) unemployment for the better part of a year. But the data indicates the worst is behind us.

Before I begin, let me make a few observations.

1.) There are two predominant ways to present economic data: year over year and month over month. Year over year removes seasonality. Here's an illustration. Suppose you are looking at the retail sector's employment trends starting in September and you see in increase in hiring. A logical conclusion is things are looking up because companies are hiring more. However, this excludes the possibility of a seasonal effect; namely that retail typically hires more people as the holiday season approaches. As a result, it's better to compare this September to last September -- this removes "seasonality" from the equation.

However, month over month has value as well -- especially when the economy is at a turning point. While the current year over year data is terrible, the current month to month data shows an extended (as in more than a few months) period of stabilization. This tells us the worst is over.

2.) There's been a great deal of debate about employment centered on whether or not the unemployment rate a leading or coincident indicator. As I demonstrate in this article in all expansions save one since WWII the year over year percentage change in GDP has increased before the unemployment rate has dropped. While the past is not a guarantee of future performance, that's one heck of a track record for an economic indicator. In short, the unemployment rate lags GDP growth over 80% of the time. The rate of establishment job growth is thought of as a coincident indicator -- that is the number of people on payrolls increases and decreases with overall economic growth. However, this number has developed a lagging quality over the last few expansions meaning the recession could technically end and we could still experience job losses. Take a look at this chart which shows the increasing lag time for establishment job growth:

If you want a reliable series of employment indicators, look at the 4-week moving average of initial unemployment claims which typically peaks right at or slightly before the end of a recession:

(This is another reason I believe the recession is technically nearing the end; the 4-week moving average of initial unemployment claims has been dropping for several months)

What appears to be happening overall is the following: companies are still letting people go at the "traditional" time in the cycle. However, they are waiting longer before they start to rehire people.

While we're on the topic of employment, let's take a look at the latest jobs report because an important fact was overlooked:

We'd had four straight months of better and better employment reports -- reports that showed the rate of job loss was decreasing. That makes the latest jobs report an outlier in the series. Combine that fact with the following points:

The Challenger Job Cut Survey is clearly improving and

The seasonally-adjusted number of mass lay-offs spiked, fell and moved a bit higher but is still far lower than before you get an improving jobs situation.

Let me add one more point: I am not saying it's wonderful that people are out of work, or that we shouldn't increase the length of time people are on unemployment insurance or anything remotely or even non-remotely related to that. What I am saying is the statistical series are improving.

Now, let's look at some other important numbers.

Real (inflation adjusted) retail sales have bottomed as have

Real (inflation-adjusted) personal consumption expenditures. In addition

auto sales have bottomed.

And maybe new home sales have as well.

But that's not all.

The ISM manufacturing index has been increasing in clear upward trend as has the

ISM non-manufacturing index. In addition

The Philly Fed and

New York Federal Reserve index of regional manufacturing has improved.

The bottom line is there are a ton of indicators saying the worst is over. Now -- this does not mean we have clear skies ahead because nothing could be farther from the truth. There are huge challenges. But, all signs are the worst is over.

Comments

[68-lukeburlington]

Do you fancy charts show the empty box stores (Home Depot Bismark, Every CircutCity, Every Linens and Things, most Bennigans, Ben Franklin Crafts, Ethan Allen Factory, GM Factories, a brand new Dunkin Donuts in Ticongaroga, NY...etc...etc...) No, your fancy charts do not show the empty boxes, the forclosed homes, the brand new, empty office parks, the scores of condo developments that are having to become apartments, the empty condo towers in Miami, the empty lots that dot Flint, and the tent city (s) that now are springing up around Fresno, Merced, and the whole San Joaquin Valley. Nor do you fancy charts show the ruined lives, and the people moving in (on top of each other) with parents, kids, siblings, any family, or friends.
If you pull your (employed) head out of your (computer and television) and took a drive across the country, and I am talking two lane U.S. Highways, NOT Interstates that invite you to explore nothing, and take a GOOD LOOK and talk to people, I am sure you will find the green shoots are just poison ivy, you charts prove nothing, go look at AMERICA on LIFE SUPPORT out there, and read your OPINION again, I'm sure you'll feel a bit less optimistic there hoss.

[bramapanzer]

I see this article says nothing of solving the credit crunch which caused this entire mess. I don't care how many "green shoots" you pick out of arbitrary government indicators, until you show me that the credit crises has been solved I still believe we are in for some chop.

[Mike Garibaldi-Frick - Huffpost Blogger]

The economic free fall for the middle class will continue for years, while the elite class continues to gorge on bonuses and government "stimulus."

There are two economies at work here... one for the middle class: unemployment, underemployment, lack of full healthcare coverage, consumables inflation, etc. and one for the elite.

[prettyinpink]

I and many others would argue differently-

http://finance.yahoo.com/tech-ticker/article/275367/America%27s-%22War-on-Capitalism%22-Why-More-Govt.-Stimulus-Is-a-Bad-Idea?tickers=GE,T,VZ,^dji,^GSPC,TBT,SPY&sec=topStories&pos=8&asset=&ccode

[robinhood1]

You forgot the public employees. They are are in a category by themselves. Although nominally middle class, their defined benefit pension plans continue to pay like clockwork and they continue to keep their jobs and their health insurance benefits. The fire chief of a small fire protection district near San Francisco recently retired on a pension of $241,000 plus great medical benefits. Since it will take the district several months to recruit his replacement, the fire chief was given a generous contract to come back for a few more months. Maybe your mama should have encouraged you to move to California and become a policeman or a fireman.

[taoist]

Yeah and the police chief got 200k a year when she retired!

[Rule Of Law]

Let's just call it what it is, Mike--Class Warfare.

[realpolitic]

It is the far right that has been waging class warfare for years and winning, by stripping the middle class of job security and wage gains. The wealthy are winning the class warfare, as if there was ever any doubt!

[watchTVgetSTUPID]

Here is a graphic that is more obscene than porn. It is interactive and shows the increase in unemployment in California counties.
http://www.sacbee.com/1232/rich_media/1698037.html

Armageddon is not the big one (earthquake)
Armageddon is not the big one (Sanford's heart attack)

It is the Depression brought on by unfair trade. California has lost the electronics industry to low cost foreign competition same as the rust belt lost manufacturing industry to low cost foreign competition. California is following in the footsteps of Detroit.

[watchTVgetSTUPID]

Crash and Burn economics. Even if the economy stabalised, the bottom will fall out when the government stops annualy pumping an extra 2000 billion into the economy in 2010 or 2011. And then there is the need to make interest payments on the corpulant debt as interest rates increase.

See the National Debt Clock
http://www.usdebtclock.org/

[Hailmaryyy]

Hal, you may be right. It is possible the worst is behind us and the economy is turning upwards. However, your own charts are for the most part not supportive of your viewpoint. Auto sales have yet to reach even a 10 million annulaized run rate during any month in 2009 including the month of June. This is because the credit markets are tighter than ever.

Without a dramatic ease in credit conditions it is simply not possible for the economy to recover. You seem trapped in post World War II era economic thinking. Those days are over. We have entered a 1930's debt-induced deflationary depression. Only massive quantitative easing combined with an easing of credit markets can stabilize the economy, no less turn it around.

http://www.escapethenewgreatdepression.com

[hearmeout]

The GOOD NEWS: The free fall is over.

The BAD NEWS: Slow decay and stagnation have officially arrived.

The RATIONALE: Unemployment will climb to and very likely remain in the double digit realm for at least a year and possibly several. Commercial real estate is in the early stages of an epic implosion (according to experts in the industry) while the option ARM shoe remains to be dropped in the residential market. Consumer spending, which drives 70 percent of our GDP, has stagnated for the first time since the second world war and the same dynamic is playing out in the world's other great consumer market, the E.U.; combined our consumers are the engine behind 27.5 % of the world's total GDP.

This isn't doom and gloom, Bonddad - it's called reality. You can drone on all you want about green shoots this, green shoots that, but consumers are the water my friend and without them we all know what happens to green shoots, don't we? They wither.

[Rule Of Law]

Yep. Where are the jobs?

[leduck]

jobs were sucked up by peak oil

[kimk3]

I agree. Plus, the people who are employed a lot are under-employed. Having an economy based on consumser spending is non-sustainable and I don't see any real changes in manufacturing -- hey Big O gave GM $34B to make cars in China, for example. The banks are still zombies. We're stil in giant debt and that ain't changing any time soon. Health care is still eating up the economy and that's not changing, in fact it's going to get worse (they're not even serious enough about reform to fix Medicare Part D).

[JayInDallas]

You just got a new fan. I consistently look for informed, well formulated commentary and opinion only to find the majority produces debatable results. I expect that this article may be too complex for the average GOP supporter, or perhaps even too much for your average GOP Senator or Congressman. However, you have provided a club big enough to hit them over the head with. The response would be akin to either Palin's (What do you think about the Bush doctrine?) or complete ignorance (I haven't read the article, checked the facts, etc.)

[vagabondvet]

Except you failed to note that retail sales were worse than expected in June, or how the job recovery has been getting slower and slower after each recent recession. Your creative cut in the auto sales data http://research.stlouisfed.org/fred2/series/ALTSALESS) shows how disingenuous you really want to be; notice how auto sales can actually peak during recessions?

The fact that we are back to 2002 levels of retail and food sales http://research.stlouisfed.org/fred2/series/RRSFSS) should tell you that we are only back to the previous recession, and should expect it to fall further as this is only wiping out the housing boom and there is still the dotcom bubble that needs to be deflated. In order to clear out that bubble, sales are going to have to fall another 20-25%.

If anything should tell you that we aren't ready for a comeback, it should be the fact that housing starts http://research.stlouisfed.org/fred2/graph/?ss[1][id]=HOUST) aren't coming up along with the existing home data still showing falling prices and sales http://www.realtor.org/research/research/ehsdataa). Or it could be the amount of people that currently have mortgages who are defaulting. Or it could be the record number of credit card holders defaulting. Or you could have a look at the Credit Suisse numbers showing that the Alt-A reset window is just around the corner.

[sabrinaqedesha]

These figures are all very encouraging -- but I think I would add an "all else being equal" disclaimer would be appropriate. We still have a gauntlet to run through -- continuing fallout from GM and Chrysler, more problematic mortgage resets to move past -- and things are really sensitive to shock right now.

[DuganS1]

Regarding the supposed improvement in the monthly jobs numbers, January was reported in the official report as showing a net job loss of 741k, while May was reported to show a net job loss of 322k. But if you disregard the birth/death model, then January showed a net job loss of 385k, while May showed a net job loss of 542k. And if you disregard the 100,000 fake jobs for the 2010 census, then May showed a net job loss of 642k, which of course showed substantial deterioration in the job market from January to May.

[realpolitic]

You sure have your own way of reading whatever you like into any data. Of course, then you thought the Bush handling of the economy was superb, so we may be inhabiting different universes!

[research]

We still have Credit Default Swaps issued without reserves. The slightest downturn will be leveraged into another free fall.

[WIpatriot]

Perhaps the "free fall" is over, Hale, but we are bouncing off the sides of the canyon on our way to the rocky, dried up floor.

[GreedyOldPsychopaths]

You mean where we hit "rock bottom"?

[Rule Of Law]

Greedy, you're alive!!!!!!!!

[WIpatriot]

Yes, Greedy, exactly.

And watch how many proclaim the "green shoots" when we do the "dead cat bounce."

[DuganS1]

As for the real consumption expenditures, that has been rising because of the payroll tax cut and rebate checks from the stimulus. Everyone should know that the idea of the government handing out money to people to spend doesn't show that we have an improving economy. Employers also realize that this little increase in spending is temporary and thus won't invest in new capacity or space and/or hire new workers. This situation is similar to the massive amount of soldiers bonus payments given out by FDR in mid 1936. Sure, it resulted in a big improvement in consumer spending in late 36 and early 37, but then the economy nosedived when the money was spent and gone. ...

[uncleentropy]

Please....you were crowing about second quarter GDP growth in 2008 which was entirely deficit-financed by tax rebates.

Why all the warnings now when we need to do this?

[DuganS1]

Q2 2008 GDP was up because of a boom in exports and commercial construction.

[realpolitic]

isn't the idea of government giving tax breaks to the wealthy, the same idea of government handing out money to people? Only those are the kind of handouts Dugan likes.

[DuganS1]

No, because wealthy people invest, while low income folks spend. It's investment that creates jobs.

[DuganS1]

Yes, things have stabilized. But note that without statistical adjustments from the birth/death model there would have been

134k more net job losses in February
114K more net job losses in March
226K more net job losses in April
220K more net job losses in May and
185k more net job losses in June

http://www.bls.gov/web/cesbd.htm

That's 879,000 jobs that have been magically created in the last five months by a statistical model.!!LOL!!! Most people have to agree that the idea that almost a million new jobs have been created by brand new small businesses in the last five months without showing up on the regular jobs surveys (including ADP as well) is ridiculous. If you don't take into account these statistical adjustments, then the employment situation hasn't improved at all this year.

Also note that the May jobs report showed that 100,000 jobs were created by the federal government for the 2010 census. Those aren't real jobs.

[FoonTheElder]

The birth/death model is nothing more than statistical fraud. They make the stats look much better than they are throughout the year, and then they try to adjust them down each January. They did the same thing last year.

It is no different than the big corporate financial statement frauds where the companies cooked their books for a number of quarters to make the stock price go up so top managment could cash in their stock options. Eventually the 'bad quarter' came and they flushed all of the trash through the statements.

[realpolitic]

Dugan refuses to see through any fraud as long as it backs the claims of conservatives!