Choppy Waters?

The Conference Board loves the publicity it gets whenever it releases its Index of Leading Indicators. Today it entered the ranks of those trying to manage expectations downwards. It told us that the drop of 0.3% in the index during April portends choppy waters ahead. This was the first time the index had declined in almost a year. So, I agree. Something is not quite right. But then again we all knew this didn’t we?

One of the main components of the index is claims for unemployment assistance. They went in the wrong direction in the last few weeks before improving last week, and then again today – more on that in a moment. I have been arguing for a long time that the recovery is nowhere near the scope or size we need to bring the labor market back to satisfactory levels. In my opinion there has been a major policy failure in this regard. The emphasis was twofold: first to prevent disaster; second to nudge the economy back towards health. Both at the time, and in retrospect, this seems to have been a weak response. It has left us with a legacy of stuttering growth and a very elongated recovery time. Yes, history tells us to expect weak and awkward recoveries in the wake of a bank created crisis, but that should have led policy makers to be bold, not tepid. Meanwhile unemployment as expressed in all the associated measures of the labor market will continue to create a drag on activity. Today’s leading indicators report simply captures that drag in vivid detail.

Adding to the gloom this morning was the news that the Philadelphia Fed’s measure of industrial activity also slipped back. This index is designed to measure the extent of growth and any reading over zero is positive. The higher the number the better the news. In March this year the index stood at 43.4, the best reading since 1984. It has now sunk to 3.9. Clearly things have slowed down. There is still growth, but the margin for error from a policy perspective is very narrow.

While we are piling on the weak news we also heard today that sales of existing homes sank back again. They slipped to an annual rate of 5.05 million in April, which is a drop of 0.8%. While that decline is not enormous and could be explained by any number of weather related excuses, the fact that sales failed to increase is a sure sign that real estate is still mired in the doldrums. To make matters worse, home prices show no sign of stemming their slide: they are down about 5% since this time last year. At one point prices firmed slightly last year, but they have since resumed their decline. In the absence of a stronger general recovery, higher wages, and a healthier jobs market, I see no reason to assume that prices will not continue down.

Now for the good news. Back to those new claims for unemployment assistance. Today’s report showed a decline in claims to 409,000. This a much better improvement than most people expected, especially in view of the upward revision to last week’s total to 438,000. It has been very difficult to spot a trend in this data in recent weeks, claims had reached a low of 375,000 in February, but had shot back up to 478,000 in April. If ever there was choppiness, to use the Conference Board’s description, the claims data embodies it. The key point to make about the employment situation as that there is no rapid improvement developing. Nor is there any sign of help arriving. On the contrary, with Washington focused on all the wrong issues, and distracted by the spectacle of competing debt reduction plans, I cannot see a reason to be upbeat about the jobs market at all. No one cares. Perhaps they are all embarrassed by their failure to deal with it in 2009 and 2010. I would like to think so. But I have my doubts.

One last thing: if you ever want to disabuse yourself of the sensibility of the stock market, consider today’s reaction. Stock prices rose. Why? Because the market embraced the improvement in claims as being the relevant news of the day. All the rest? Too gloomy, and therefore ignored. No wonder stocks move all over the lot. It makes more sense to argue for higher stock prices on the basis of profits. Corporations are doing well. Cash flows to shareholders are strong. They ought to be: wages are lousy, and hiring weak, so all benefits of what growth there is flows asymmetrically to capital.

Yet the stock market reacted to better jobs news. Clearly the traders know that if all the gains go to capital, eventually their gravy train runs out of steam. Somewhere along the way workers need to get a piece of the action too. Without growth in worker incomes there is no growth in sales. It’s all about aggregate demand. So maybe our traders are all closet Keynesians. Maybe not. But at least they acknowledge something the politicians don’t seem to understand. Without demand this recovery will go nowhere.

And that’s where it seems headed.