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.
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Hal....
I'll call your 4 week moving average of initial claims and raise it by hours worked: just went from 33.1 to 33, worst ever and still in a downward trend. Sorry, but that trumps initial claims.
The loss of one tenth of an hour times the total number of employed persons is equivalent to losing 400,000 full time 33 hours per week jobs. We lost a tenth of an hour the previous month also. If the seasonal and birth/death adjustments are factored out and the above loss is factored in the total job loss for June was over one million.
Just in case anyone is interested.
I can't say I am optimistic, Bonddad, but as ever your graphs are helpful. My greatest worry, recovery or no, is that no real reform has occurred, the financial sector leaders have consolidated into fewer firms with even greater power, and that Morgan Stanley and others have started the iffy loan bundling - magic - AAA rated bonds shuffle all over again. I see the good trends, but I fear a short remission before the cancer continues to spread.
Wow... so last week Mr. Stewart said "The recovery is on the horizon" and now he says "The economic free fall is over". Hmmmm... I would say someone is back paddling here.
Those two statements aren't mutually exclusive. The economic free fall can be over at the same time recovery is on the horizon.
Two jobless recoveries in a row? No, not likely. Consumer spending depends on well-paying jobs or home equity to fritter away. Americans have neither for the most part.
I wish you are right but fear the worst is yet to come.
The debt-based system is a Ponzi scheme where new victims are not joining in by borrowing.
Game over is more like it.
I am very disappointed in you Mr. Stewart. You run the risk of making yourself irrelevant. A massive job mobilization program that can put 500,000 to work per month must ensue. No jobs, no recovery. The present admin. must stop the bail-out of Wall St. and associates. The states and the population must be bailed out or we are in big trouble. A self imposed delusional mindset has most people believing that there is nothing we can do but continue in the same direction we have been going. Put the Fed in bankruptcy, create the U.S. National Bank. Credits and currency will be issued into the population's physical economy. Jobs and purchasing power will be introduced into the economy. Stop the foreclosures, enact Homeowners and Bank Protection Act. Expand Social Security and Medicaid. Excess auto industry capacity can be used to construct a modern mass transit system. Start the construction of 100 nuclear generation and distribution systems: water harvesting and distribution systems. A change of perception is necessary: the monetary financial usury debt based economic engine is a killing machine and we must activate a war-time response to insure the lives of the population and preservation of the nation.
Just as job losses lag behind a downturn, job gains lag behind a recovery.
Business will not hire until they are back at capacity with their current labor levels.
we all know that charts take into account human emotion and moods
This really isn't a Democrat vs. Republican issue. Plenty of economists of both persuasions disagree right now on where the economy is at regarding a recovery.
Some points to note here. Even if a "recovery" is right around the corner, unemployment will continue to increase into next year, and possibly beyond. No economist disagrees with that.
What caused this "recession"? A stock market bubble? No. It started about 2 years ago when house prices started to fall. What caused that? Collapse of the house price bubble. It continues to deflate. House prices are nowhere near bottoming. Why? A huge surplus of housing, and an incoming wave of option-Arm / alt-A defaults and foreclosures over the next 18-24 months. At least equal in size to the subprime wave, this will further depress home prices, as will continuing unemployment. More defaults and people walking away from their underwater mortgages.
I agree with you, but I think our problems may be bigger than that.
Consumption during this decade was largely fueled by using our homes as atm machines. Even if home values do manage to stabilize (which they are in some places,) the equity loans that fueled consumption aren't coming back anytime in the foreseeable future.
Well so what? People lose homes all the time, don't they? The problem here is the magnitude of the losses, and the fact that those banks that "passed" the stress tests hold so much of this mortgage-backed debt. The accounting standards board was recently pressured into changing the rules such that the banks can value this junk debt at par, or whatever they think it's worth. Guess what they thought? Try to actually sell it? About 40 cents on the dollar. Thats why these banks don't want to sell it. Actually they are insolvent, but have been propped up by the Fed, the influx of bailout money, and the change in accounting rules. So they will remain "zombie" banks until we face the music about them. Problem is that it is absolutely clear that Geithner / Obama will never do this.
This massive bad debt (soon to get much, much worse with more mortgage defaults) will hang over any attempt at recovery.
Let's not forget commercial real estate (CRE). This lags the residential problem, but is now in the process of cratering. Malls, hotel chains. Read about any CRE bankrupcies lately? I have. Lots of them.
What about the consumer? Hard to have a "recovery" without increased spending from Joe Six-pack. Well with more unemployment, decrease in work hours and actual wages going done, this is really asking a lot.
The bottom line is that this "recession" is really a different beast from previous ones.
The economy was reinflated by Greenspan with cheap money. Debt increased to outrageous levels. Real estate speculation / collapse followed by stock market collapse. Where have we seen that before?
Now we really have nothing but printing money left to try and turn things around.
Talk of a recovery assumes no further economic shocks. No more GM bankrupcies. That was quite a shock right there, and will continue to be one. What about bank failures? The big banks need to be propped up indefinitely, even though Krugman, Roubini, et al. say that worsens the problem.
Recovery. Good luck to all. We're going to need it.
I'm guessing calling the bottom is going to be even more tricky because we have not seen a great deal of price discovery in the jumbo home price range (say greater than $400k). When these start to show up in greater numbers from Alt-A and Prime foreclosures, he median price trend may actually start to increase even though the market may have a long way to go on the down side. Some think looking at new home price trends is more pure because they cannot be distorted by a small number of outliers sold at discount. Just guessing lioke I said.
The recession under Reagan was worse. Unemployment peaked at 10.8% in December 1982, two years into Reagan's presidency. Indications are that we will not hit 10% this time.
The current formula for calculating unemployement has been changed from 1982. Using the 1982 formula, we are near 16%.
Nonsense. If we were at 16% unemployment, under any formula, there would be blood in the streets.
excellent retort-since reagan the following admins. have skewed the real #s. every time you look at europe's #s and swoon -theirs are accurate
any recovery starting in late 09 or early 10 will be as false as a three dollar bill.
The basic problem I have with this "cyclical" analysis is that it is based on the assumption that this recession is similar to all previous recessions; therefore, when certain signs appear, we can be assured of a recovery to....? What? 2006 housing prices? Full employment, other than say 4% unemployed? 3% GDP growth and a balanced federal budget? Solvency in all 50 states? Nouriel Roubini, who makes a full-time job of deep analysis of economic trends, just put out another forecast today. He does not share Bonddad's optimism in the least. He thinks it's very likely employment will reach 11% or so during 2010 and stay there, perhaps through 2012, and we may be in for a W-shaped double recession. Americans were financing the economy on debt, and a great deal of that debt was based on home equity. That's virtually all gone. Meanwhile, offshoring of jobs and the reduction of the American workforce to "service workers," many making minimum wage, are very, very different factors from a recession, say, in 1972. A valid analogy compares factually similar situations - I think what we're in now is a uniquely ugly situation and we may be in for a long period of painful restructuring.
Agreed. Excellent points.
While I am always interested to read Bonddad's posts and see the charts and figures, wldnsmmr seems to have a much better handle on the situation.
There is one thing missing for capitalism to work in the United States: a proletariat. The end of WWII started us on the road to where we are now: Total "false consciousness" (no one thinks of him or herself as working class). The belief that every American deserves a college education, and that every family deserves two cars and to own its own home. These are not middle class aspirations exclusively, because we are all middle class. We all feel entitled to these things. We don't want to work in sweatshops making iPods and iPhones for two dollars an hour, like they do in China. Or even for five dollars an hour. We want twelve, or fifteen, or twenty . . . so the jobs go overseas. And we buy our iPods and iPods on credit.
In my neighborhood, despite the bad economy they're bulldozing single-family homes to build cheap apartments. In my state they are strangling the public higher education system.
This is the future. And the irony is, our president got elected by promising to support the interests of "the middle class." Whereas it is the myth that we are all middle class that has put as where we are today. Namely, bankrupt.
Now lets talk about that "jobless recovery", and a new bubble for Wall Street to inflate.
The new bubble will be cap and trade, run by the same guys who ran the derivatives bubbele--Goldman Sachs. They'll make trillions, and we'll see the cost of everything, but especially energy skyrockett! Watch.
Cap and trade will be good for the economy. It will improve efficiency.
The worst is always over......
Until it gets worse!
BUSH PEOPLE ARE STILL PASSING OUT FALSE INFO !!!!!!!!
It will take Obama at least a year to get all the info and the right info !
Send all Bush Appointees to Alaska with Palin.
We're starting to see a little pickup in the air freight business, which is also considered a leading indicator. Loads are still way down from previous years, however.
I agree, we are no longer in free fall...at the moment. There will be NO RECOVERY. Within the next 18-24 months our national debt shall exceed our GDP. Our deficits will probably remain above $1T until 2018, when Social Security will pay out more than it receives. Our deficits will really rise when that happens. The Chinese have begun to balk at purchasing our debt. If (WHEN) they stop buying it, we will be forced to pay higher interest rates or simply put more worthless money into circulation. Inevitably, we will enter a period of 1920s German type hyperinflation, 1930s like Depression or both. The only good news is that misery loves company & as was proved last fall when our economy died, we are still quite capable of taking the entire world economy with us.
The ride is just BEGINNING!!!
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