Today’s News

Nothing in the flow of reports alters the view that the economy has begun to recover, even though that recovery will be a very hollow experience for most people. A recovery without job opportunities is both inadequate and, ultimately, self limiting.

“Start lobbying for more stimulus. We need it”

So to the bits and pieces of news:

• Unemployment:

New claims for unemployment insurance rose 11,000 last week back to 531,000. This is disappointing since the overall trend had begun to look firmly positive. So this setback raises a few questions about the economy’s medium term health. We won’t know whether the increase in claims is a quirk for a few weeks: we will hope to see evidence of the continuance of the downward trend next week. Meanwhile we should all avoid placing to much of a burden on that moving average. Yes the trend line has been going the right way, but progress has been very slow. We should all avoid making silly statements about how things have turned the corner until we see more dramatic movements. The reason I mention this is that today’s news was associated, in the Wall Street Journal, with analyst’s comments. One of whom said that the reduction in the moving average – despite this week’s tick up the average still managed to improve – was a solid sign of recovery. Not so. The improvement upon which this bullish statement was made was 750 jobs. On a base of around 530,000 that decline of 750 is as close to meaningless as we could get. I am all in favor of being upbeat, but I also think the news should support that upbeat message. The trend does not indicate a solid recovery at all. What it tells us is that the job market seems to have hit bottom – it is not getting worse and may actually be beginning to improve very slightly. That the moving average has improved for seven straight weeks indicates nothing more than that.

• Leading Indicators

The Conference Board’s Leading Indicator index ticked up 1% last month, making it six straight months of gain and the fastest six month rise since 1983. The problem I have with this report is simply that it focuses on data that don’t give us too much long term information. The index is a composite of many important statistics, but fails to provide us with less regularly quantified information such as the status of consumer balance sheets. Without a bounce up in family finances this recovery looks very likely to stall once the government’s stimulus support wanes. I have mentioned before, but I should repeat: the entire recovery appears predicated on two concurrent sources. First is the ongoing inventory adjustment, which looks as if it will play out by early next year. And second is the stimulus. Take these two out of the equation and there is no substantive change in demand. Without such a change we will had back into recession next year sometime. This raises the possibility of, and need for, renewed stimulus. We turned the crank once. Usually that is enough to get the motor running. But given the financial implosion and the damage the banks wrought last year, it looks like we need to crank again.

• House Prices

From the looks of the latest Federal Housing Authority data, house prices fell last month – about 0.3% – after having risen three months in a row. I take this as evidence that the one time tax credit for new home buyers had the effect we have discussed before: it induced moderate competition for low end priced homes, which was sufficient to drive the average price up while the credit was available. Take the credit away and the basic weakness of real estate is exposed once more. There is no way that the housing market will bounce back strongly. Family incomes and balance sheets have taken such a hammering that the cash doesn’t exist in the necessary flood to force a rebound. At the same time, we seem to have hit bottom. The worst is obviously over and the places where problems persist are well known and will remain stuck for many months and maybe years. We overbuilt homes in a frenzy of stupidity. We overpriced them to boot. Undoing the bubble will take a very long time and so we should expect weakness to linger for an equally long time. Meanwhile attention has shifted towards ameliorating the impact of foreclosures rather than artificially pumping up home sales. The administration is considering new programs to assist in loan modification and thus slow down the rate of foreclosures. In a background way this will also help home values: the fewer distressed properties there are the less downward pressure there will be on prices.

None of this news today alters what I think the outlook remains: there is a recovery underway. GDP growth in the third quarter may well be as high as 3.5% [at annualized rates]. But the is absolutely no sign of job growth. And as I mentioned above all the drive is coming from temporary factors. So this is still a very poor recovery – one that scarcely deserves the sobriquet – and is one that could be de-railed easily. The issues that could alter the course of growth are all on the minus side. In particular the growing pile of loan losses in the big lenders will restrict their appetite for credit extension. Without a strong flow of loans growth could be choked off before it gains a full head of steam. Plus: jobs, jobs, jobs. Where are they? We will need a turn around in the labor market soon if we are to sustain any upward momentum.

Start lobbying for more stimulus. We need it.