The Recession is Over

This is a joint article with my fellow co-blogger at the Bonddad Blog, New Deal Democrat

Most economic observers just project past trends - usually based on data that is coincident or lags the general economy - into the future, and so they miss important turning points. In short, they get it wrong. Even now, many are simply reporting the poor recent trajectories of data between 2008 and 2009 (exactly as could have been done at the end of the 1974 and 1982 recessions), and projecting that there is still an ongoing decline that will continue, or else picking through almost relentlessly positive economic reports looking for a negative number of some subset to grasp onto. There clearly are some nasty negative numbers out there. Jobs are still being lost and wage increases have become almost non-existent. International trade as reflected by the Baltic Dry Index and the LA and Long Beach ports data is negative. States and municipalities are still facing declines in tax revenues -- although the year-over-year comparisons are getting less negative.

What pundits miss is economic cycles run in a typical order including both expansions and recessions, as demonstrated by Prof. Edward Leamer:

The temporal ordering of the spending weakness is: residential investment, consumer durables, consumer nondurables and consumer services before the recession, and then, once the recession officially commences, business spending on the short-lived assets, equipment and software, and, last, business spending on the long-lived assets, offices and factories. The ordering of the recovery is exactly the same.

In fact, many aspects of the economy have stabilized. Many more have actually turned positive, including the most forward-looking aspects listed by Prof. Leamer above.

The best way to look into the economic future is usually just to look at the Conference Board's Index of Leading Economic Indicators, which are: real money supply, average weekly manufacturing hours, interest rate spread, manufacturers' new orders for consumer goods, supplier deliveries, stock prices, consumer expectations, building permits, average weekly initial claims for unemployment insurance, and manufacturers' new orders for durable goods.

The ongoing strength of the LEI's means that a prefect trifecta -- three out of three LEI measures linked with +GDP are positive now. Per Paul Krugman, we may have entered purgatory, but the fact is we are out of hell. While it is certainly possible that speculators could foolishly drive the price of oil over $100 again, and trigger another recession next year, the simple fact is, this Recession is over.

First, in the past, +LEI readings for 3 months in a row has typically meant the start of +GDP. Here is a graph, showing that since WW2, every time there has been a significant (~2%) turn up in the 3 month average of the LEI, a recovery (in the sense of +GDP growth) has started immediately. We got the third positive monthly reading in June. Since March, the index has increased from 97.9 to 101.6, well in excess of 2%.

Second, when the year over year reading of LEI is positive, that typically means the +GDP has begun. In July 2008 the LEI stood at 101.2 (2004=100). As of June 2009, the LEI stood at 101.0 (after a +0.1% revision). July's 0.6% increase puts the index at 101.6, which triggers the second signal. Here it is graphically:

Third, when 9 of the 10 indicators have been positive for 6 months, it has always signaled +GDP:

As of yesterday's +4.9% increase in durable goods orders, 9 of the 10 indicators now meet the criteria. Only new orders for nondurable consumer goods has not turned positve yet. All 9 of the others -- money supply, manufacturing hours, the bond yield curve, stock market, consumer sentiment, ISM manufacturing purchasing managers index, new orders for durable goods, and first time unemployment claims -- all of them are now positive over the last 6 months.

It's also important to note there is a large amount of confirming data. Let's start with the housing market.

New home sales have bottomed as have

Existing home sales. The primary argument made against the existing home sales number is it contains a large number of foreclosures. However, this commentary does not take into account that the market is absorbing this inventory. The reason is that thanks to falling prices homes are far more affordable now than in the past. I should also note that I agree with the blog Calculated Risk's analysis that we'll see two bottoms in the housing market: one in sales (which we are seeing) and one in prices (which we have not seen yet).

In addition, housing starts have also bottomed:

In addition, home builders confidence is currently at its highest point in a year:

The National Association of Home Builders said Monday its housing market index rose in August to the highest point in more than a year, as homebuyers hurried to take advantage of a federal tax credit before it expires.

In addition to the housing market, the financial markets have shown signs of healing.

First, commercial paper spreads have returned to normal levels.

In addition, the stock market has rebounded:

Money has flowed out of the Treasury market:

And into higher yielding corporate bonds:

And junk bonds:

And despite predictions of imminent collapse, the mortgage bond market is still doing well:

The above charts indicate that risk appetite has returned: investors are confident enough in the futre to move out of extremely safe assets like US Treasuries and into higher yielding less secure assets such as corporate, junk and mortgage backed-bonds.

In addition, we've seem commodity price increases in industrial metals:

This indicates that traders and investors feel manufacturing will start to increase. And given the recent numbers from the New York Federal Reserve and Philadelphia Federal Reserve they are probably right. First this is from the latest New York Federal Reserve's Empire State Index:

For the first time in considerably more than a year, the Empire State Manufacturing Survey indicates that conditions for New York manufacturers have improved. The general business conditions index increased 13 points, to 12.1, its highest level since November of 2007. Although the inventories index remained well below zero, the new orders and shipments indexes rose to their highest levels in many months. The prices paid index was positive, while the prices received index continued to be negative. Employment indexes were much improved from their recent low levels, although they remained below zero. Future indexes generally rose from last month and conveyed optimism about the six-month outlook; the capital expenditures index rose to its highest level in over a year.

As this chart of the index shows, this number has been rising since March and is now in positive territory.

And the Philadelphia Federal Reserve's manufacturing index shows a similar turnaround:

As does the Richmond Fed's manufacturing index:

And employment is showing signs of improvement. First 4-week moving average of initial jobless claims is still in a downward trend and has been for several months:

And the rate of establishment job losses is still trending lower:

In addition, now 2 of the 5 coincident indicators that members of the NBER use to date recessions are also up from their bottom, and a third stopped declining last month. Specifically,

real retail sales may have hit bottom in December 2008, and after plummeting for months, industrial production surprisingly turned up 0.4% last month. Personal income is still declining badly, and employment is also still declining, although less so than earlier this year.

And finally, numerous other countries have printed GDP increases in the latest quarter.

If there were only one data point then this article wouldn't be written. But now we have a host of data points pointing in the right direction.

Just to review:

1.) The Leading Economic Indicators are pointing up strongly.

2.) Housing sales have bottomed

3.) Housing starts have bottomed

4.) Home builders confidence is increasing

5.) The stock market is rebounding

6.) Credit spreads are at low levels

7.) Traders have moved out of Treasuries and into corporate, junk and mortgage backed bonds

8.) The manufacturing indexes have been improving since the first part of the year and are now printing positive numbers

9.) Initial unemployment claims -- while still high -- have dropped and the rate of job losses has decreased.

10.) Other countries are now printing positive GDP numbers.

I'm on record as saying we'll have started to see positive GDP numbers between the 4th quarter of this year and the second quarter of next year. These numbers are pointing in that direction.

Let's add an important caveat. I (Bonddad now) am also on record as saying growth will be weak, printing somewhere in the 1% to 2% range with high unemployment. It's extremely important to remember where certain numbers were just recently. For example, an economy that loses over 600,000 jobs over a series of months is not going to print a positive jobs number for some time. That's simply the way an economy the size of the US's works. To expect otherwise is very unrealistic.

However, there are numerous data points that indicate the worst is behind us and the recession is over.

Comments

[iridium53]

Jobless Recovery is still a ridiculous oxymoron.

Only employed economists would consider a recession over when 20% of the population is un- or under-employed and real incomes are dropping - except, of course, for senior executives at banks and big corporations.

Obma is intent on creating a government that extends the personal wealth and political power of government officials and the ruling class (big corporate executives) at the expense of the population, sometimes without even the pretense of honest service.

[mayahbird]

The recession is over for whom? Not for the workers, you know, the ones who keep this country going.

[Mikesacola]

This "recession" is not an Eisenhower era business cycle downturn. This debacle was having our ammunition freighter hit by the torpedoes of greed and other casino traits combined with running aground on the shoals of mindless de-regulation. The new incoming happy-stats tide will simply lift our holed, burning, exploding, and derelict economy off the shoal and into deeper, very deeper, waters. Happy diving!

[lyingtruth]

"The Recession is Over" for Wall Street bankers and AIG executives. (And you know how much they appreciate the taxpayer help!)

[dobberdoss]

I'm sorry, but the 'recession' aint over until the job loses stop completely and the exports increase. Until then your just playing dixie

[DuganS1]

When the Fed stops finishes it's $1.25 trillion mortgage backed securities buying program in a few months and stops printing money to buy treasuries, what happens? When the $8k first time buyers program ends in November, what then? The $4500 CAsh for Clunkers auto rebate is already over. What will auto sales do now? Below is a possibility:

"Aug. 31 (Bloomberg) -- Japanese manufacturers increased output in July at the slowest pace in four months as effects of the global stimulus and inventory restocking began to fade. ..July’s increase marked the third month of decelerating growth, signaling a recovery from the nation’s worst postwar recession may be gradual. ....“Produ­ction so far has been boosted by pent-up demand, global stimulus measures, and inventory adjustments. These effects will be temporary,” said Azusa Kato, an economist at BNP Paribas in Tokyo. Toyota Motor Corp., Japan’s largest automaker, said last week it plans to reduce output by about 220,000 vehicles. The automaker cut domestic production by 29.5 percent in July.

Today’s report adds to evidence that the economy is losing momentum since it emerged from a recession last quarter. Data last week showed the jobless rate reached a postwar high of 5.7 percent in July and household spending fell at the fastest pace in five months. As the effects of the stimulus begin to wane, the deteriorating job market makes it unlikely that domestic demand for manufactured products will recover.

[Pierogi kid]

This is so right on how can you call a housing bottom with a Fed backstop in place on RMBS? Unless of course that backstop is there indefinitely

[Indra]

I totally disagree. The reason is that the effects on the population of this country has just begun to surface. Although technically you might be correct the effects and thus the recession is still in effect and will be so for a very long time. It is a word game that has no substance. The fact is that our economy is hurting and the black death will take its toll the next several years and no one will be spared. It is indeed a gloomy outlook. I hope your right but all indicators (such as the amount of unemployed workers who cannot find work anymore) show that you are a bit off base.

[SvrWx]

I think we are still in for it. What I'm afraid of is that we are in a recovery bubble and it is going to burst because of all the extra money we are printing. How do I know...no clue. Just a feeling from reading different things. Do I hope I'm wrong? Of course. But it still frightens me that we are creating our own possible downfall with the printing of all this cash.

[AmericanFool]

I really hate to say this, because I don't want to have to live it - in many ways the recession may be over, but really, we've got a lot of economic damage to unwind, and it's nowhere near finished. I still think we have another leg down, but even if we don't, a recovery seems a long, long, way away. A lot of people lived for the day, made their cash and got out. The world will be picking up the pieces for a long time to come. The least we can do is protect future generations by limiting the size of the derivative market. When the insurance and the betting activity is 7x the size of the actual assets involved, it doesn't take much in the way of brains to figure out you don't want to be around when the bets go south.

[Oldtimer]

Whoever made those bets should lose their shirt. That is free market capitalism.
I have no stake in AIG, in Big Bank of Whatever, I have no retirement or pension.
I have a whole life policy with New York Life.
I didn't buy into the house and the mortgage and the "American Dream".
All I have is credit card debt and Bank Of America just raised my rate to 37%!!!!!

[AnotherMcIntosh]

"What kind of government do we have when it takes only minimal action to correct the problem ...?"

Good question.

What kind of agressive action is being taken by any of our political leaders?

The relatively passive response indicates that it's rotten from top to bottom.

[jugganaut]

YAYYY, another jobless recovery is about to begin. I get so excited thinking about it that I almost soil myself.

Yippee.

[Chironomid]

What economy is left to recover? We stopped producing things other nations want a long time ago. We've been living on borrowed time since the early 1970's. And we're the only fools in the first world who sold out its manufacturing and middle class on the altar of the free-market. Virtually all other first-world nations retained some amount of protectionist policy to keep their industries at home.

Do you know what our biggest exports are now? Agricultual crops and coal -- the raw-material exports typical of third-world economies. Our "economy" is a bunch of bankers and consultants in tassel-loafers running around trying to sell you the next bill of phony goods. That actually worked with other nations this last go-round, sucking them into our paper-shuffling game, but they got stung and they're extremely pi$$ed about it. They won't be buying into our next scam.

Have fun with your charts and numbers. This nation is circling the drain.

[02bmw76]

I agree.

[Luke3]

According to the information in this article we are still losing over 200,000 jobs per month. How does this mean the recession is over?

[phlashba]

So let's see -- we tried an economy built on selling each other our houses -- what's next, doing each other's laundry? Something must be PRODUCED! This is not hard, and yet we have made zero progress in that direction, not even planning. There is a long way down left to go.

[DuganS1]

We can have a few quarters of positive GDP and still be recession or double dip. Let me remind Bonddad that there is only one reason that the economy has stabilized and that is the Federal Reserve. By the end of December the Federal Reserve would have bought $1.25 trillion in mortgage backed securities. This is why mortgage rates are near 50 years at 5%. And combine the artificially low rates and the $8000 first time homebuyer stimulus and you get a little bump in home buying and new home construction. But the rebound has been minimal even with that stimulus, so what happens when the stimulus is withdrawn or even reversed? We could easily see mortgages rates jump 100-200 basis point in months. That would be our double dip. Some of the other indicators like hours worked and durables has to do with the rebound in auto sales. But that too has occurred only because of stimulus. First the Fed has kept down interest rates (in this case by printing money to buy treasuries) and second there was a $4500 rebate program with the Cash for Clunkers, but that is over now. Will auto sales continue to trend up if the stimulus is withdrawn? How about when it's reversed and we see higher rates and higher taxes to cover that budget deficit? As for the money supply, there is no multiplier. The money is all sitting in reserves, which is useless to the real economy.