More Mixed News
Today’s data consists of the Leading Indicators index complied by the Conference Board, and the usual weekly report on first time unemployment claims compiled by the government. As has been the case for a while now two different stories are emerging.
First the Leading Indicators.
The index rose 0.6% last month. Following May’s 1.2% and June’s 0.8% increases the leading indicators are firmly pointing to an imminent economic recovery. The index is a composite – it is made up from the results of ten subsidiary and more specific data series – so it is useful sometimes to dig down to those details to determine which parts of the economy are providing the lift.
Of the ten components six made a positive contribution in July. They include interest rate spreads, the first time unemployment insurance claims I will mention below, the length of the average work week and so on. The advances in these series has been steady and sustained enough to lift the overall index by 3.0% over the past six months. So that recovery we have been talking about is just around the corner.
The news is not all good of course. The components holding the index down include consumer sentiment, which, as I have talked about many times, does not bode well for the recovery’s strength.
The Conference Board also publishes two other similar indices: one that is coincident with the economy, and one that lags the economy. Not surprisingly they are entirely consistent with notion that we are reaching the bottom of the recession and are about to turn up. The Coincident Index is just beginning to flatten out, while the Lagging Index is still dropping. If the relationship between the indices holds up and matches the economy’s actual performance, then we are now at the very bottom of the cycle and will start to climb this quarter, accelerating a bit in the fourth quarter.
Unfortunately the unemployment claims data that was released today tempers that rosy outlook somewhat. New claims rose 15,000, reaching 576,000, last week which means that the moving average over the past four weeks has also risen very slightly, by 4,250. The total number of people claiming unemployment benefits also rose slightly to 6,241,000.
This data suggests that the improvement in the job market we were beginning to see a month or so ago has stalled. It has not worsened dramatically but the rate of job losses which had been slowing markedly in the early summer has now become stuck in the half million range. This stalling could be a result of the seasonality of the data and the way in which it is adjusted – this has been a very peculiar summer because of the very different job cycle in the auto industry – so we will have to wait until September to get a better read on whether this is a real halt in improvement or merely a statistical blip.
Either way, at the moment, the job situation hangs heavily over the economy and could easily derail the recovery now getting underway.
What should we make of today’s data?
The main point that emerges is that the recovery has all the makings of being very abstract and ‘statistical’ from the average person’s point of view. Without a strong turn in the job outlook the recovery will show up as nice growth in things like GDP, but as tepid, to put it mildly, in things like wage raises and job opportunities. Since it these latter measures that are real to consumers the recovery will feel weak if not non-existent for a while.
In other words all the hoopla about recovery being published in the financial press and being lauded on Wall Street, has very little relevance to Main Street. It will be a long time before the improvement trickles down that far.
Why?
Because the economy has fallen so far into a hole that the amount of slack is enormous. That means businesses have ample opportunity to grow sales and profits before they are forced to hire new workers or invest in new machinery etc. Until that slack is worked off we are effectively running two simultaneous economies: one for businesses and investors, and another for workers and average families. These two economies only come into contact in the form of consumption. So the slack can be worked off and businesses thrive only for a while: once capacity is reached growth beyond that point has to be fueled by an increase in demand fed by wage and job growth. Conversely prior to that point there will be GDP growth but it will not generate jobs. This is the dreaded ‘jobless recovery’ that many analysts fear.
This jobless period of growth may last quite a while. But it has limits. If the basic wage and job part of the economy doesn’t kick into gear fairly quickly after the recovery has begun, we will probably see a dip back down into a ‘double dip’ recession. The odds remain less than 50/50 in that regard, but they are rising as long as the job market stalls. Today’s data reinforces the view that it is stalling.
So all eyes are on the job market. Everything else is beginning to look better.
