Submitted by Edward Harrison of Credit Writedowns
If you recall, at the end of May, I wrote a post “Both initial claims and continuing claims now pointing to recovery” that said jobless claims data were pointing to an imminent recovery. The general gist of my argument was recovery would come by year’s end or early in 2010. But we needed to focus on the shape that recovery would take. Although claims data suggested recovery was right around the corner, we should be sceptical as to how soon this recovery would come and how robust it would be due to the overhang of low savings and high debt – what Richard Koo calls a balance sheet recession.
That post generated a lot of negative commentary because it has become fashionable to be all bearish all the time in the econoblogosphere. But, reality is almost never as extreme as some would have you believe. In that vein, do re-read the jobless claims post. Three months on, it is looking a lot more on target than it might have done in May.
I mention this because James Hamilton over at Econbrowser has a nice post up called “It’s not over yet” which dovetails nicely with the themes in my May post. In May, I ended the post saying:
The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal. Now, initial claims has been sending a recovery signal since January. Yet, continuing claims continued to rise more quickly until last week. In the past, one had seen these two series as harbingers of imminent recovery. But, I am talking Q4 here. Why? Deleveraging.
In the end, consumers are going to be forced to reduce debt and save more in this more cautious financial environment. Team Obama does seem intent on re-kindling animal spirits but the personal savings rate has gone up nonetheless. This will be a drag on GDP growth going forward and means that the economy’s rebound will be more tenuous and slower to develop. In my view, this means recovery will be delayed and once it gets going it will be weak. The potential for a double dip is very high.
So, to be clear, first derivatives are starting to turn up and since recession is a first derivative event, we are probably going to see an end to this recession soon enough. But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.
And I still hold to those comments. If anything, my comments were too bearish regarding when a technical recovery would take hold. Just yesterday, Hamilton made a similar argument:
Some are greeting Friday’s employment report as an all-clear signal. But my advice is, keep your helmet on– they’re still shooting real bullets out there.
Let’s start with the good news. I first called attention to the favorable turn in new claims for unemployment insurance on April 9, noting that in each of the previous 6 recessions, an economic recovery began within 8 weeks of the peak in new claims. On May 7, I concluded we had enough statistical evidence to predict with 85% confidence that new claims for unemployment insurance had indeed peaked at the beginning of April. Although there was some concern as to whether seasonal adjustment could be confounding the July readings, it’s pretty clear now that the substantial decline in new claims is the real deal.
And many cheered Friday’s BLS release showing that nonfarm payroll employment fell by 247,000 workers in July, the smallest drop since August, 2008. But the problem is, if a traditional economic recovery had actually begun in June (8 weeks after the April peak in claims), the number of people with jobs should have increased in July rather than fallen by another quarter million.
Hamilton goes on to say that he has done some figures on where employment numbers should be in comparison to previous peak in unemployment claims. The chart below shows where he comes out:
Notice how much of an outlier to the negative 2009 data is. What does this mean? For Hamilton and a lot of other economists (Krugman, Roubini, and Stiglitz for example), it means just what I said in May – “we are probably going to see an end to this recession soon enough. But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.”
To my mind, the real question now is whether weak consumer demand couples with other lingering problem areas like commercial real estate to bring any technical recovery down before it starts. If we do experience a double dip, the second leg of the recession will likely be even worse than this leg. Policy makers would be well-advised to address these problems here and now rather than waiting for them to take full form.
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Unemployment is such a doctored indicator, especially post Clinton. I would want to see positive growth in jobs before calling for recovery. Further, a quarter or two of potential positive prints in GDP doesn't necessarily amount to the end of the recession. Most people would characterize the Great Depression as a decade-long event, but GDP was on an upward trajectory since 1933. When we head back down in 2010, most people won't care that we had a short-lived technical recovery.
"To my mind, the real question now is whether weak consumer demand couples with other lingering problem areas like commercial real estate to bring any technical recovery down before it starts."
Whether? The imbecile enthusiasms of a light weight like Paul Krugman are that influential? My, all it would seem to take these days to get people like Krugman and Roubini to sing from the Regime's song book is a little TV exposure. Ego-centrism is a funny thing. Like pride, it "goeth before the fall".
"Notice how much of an outlier to the negative 2009 data is. What does this mean?"
It means you are wrong that the recession is ending.
Most of us do not consider a feeble dead-cat-bounce to constitute "recovery". To most, "recovery" means "return to normal" — to the status quo ante. We aren't going to return to the status quo ante, or even get anywhere near it, for a very long time.
jm, that's the purpose of the "technical recovery" link:
http://www.creditwritedowns.com/2009/07/technical-recovery-wont-feel-like-a-recovery-to-most.html
The fact is things are much worse today economically than they were when the recession began in December 2007. And they will be worse for a long time to come. This is one reason any 'technical' recovery will not feel like one. Another is the fact that recovery will not be as robust as some are anticipating.
Ed:
At a 247,000 loss of jobs in July, we should celebrate??? I don't think so, this is like the network broadcastors announcing Florida going to Gore prematurely in 2000.
Look, you had a decreased subset of the NonInstitutional Civilian Population called the Civilian Labor Force from which Unemployed was measured against. 422,000 workers dropped from the Civilian Labor Force into Not In labor Force. They are measuring against a smaller subset as shown by a lower Participation Rate. July's Report gives all the appearance of a numbers shuffle.
When Participation Rate stays in the 66 percentile, preferably 66.5% and the Unemployed stays 5.0%- 5.5%; then the economy will be humming. We have not seen 66.5% since early 2002 and it dropped as low as 65.5% since then and again now.
I am not as excited Ed. Didn't you posyt on Vitamin D deficiency? Thank you for creating awareness of that health issue.
run,
losing 250,000 jobs is never a cause for celebration, especially when we need to be adding 150,000 jobs because of an expanding population. We are nowhere near a recovery when one looks at the employment market.
Are we on our way to a technical recovery (a period when GDP is lower than when recession began but output is growing)? Maybe. I expect by Q4 or Q1 we will. But, let's see what happens in the Fall.
Irrespective, any recovery is bound to be weak and that means vigilance is still required in terms of asset writedowns at banks, credit crunch, economic stimulus, etc. Rather than focusing on the potential for recovery, we should focus on what could come afterward.
I'm actually not nearly so interested in America's employment statistics as I am in China's. In a global labor market, with the RMB solidly pegged, American employees will have to reach some form of cost/productivity parity with Chinese workers.
American wages can fall, or Chinese wages can rise. There can be deviations from the primary trend. But in the longer run, any thoughts of a return to a closed labor market or closed economy is pure nostalgia.
Chinese wages as officially measured have done pretty well; but these metrics are heavily mistrusted by the public. I have no idea which is more accurate, but the gap remains extraordinarily large, and it's not closing all that rapidly.
We may very well be at a cyclical upturn, but in the longer term, this is really just noise. It may not even be important in the short term, if we see savings rates rise as well. Don't watch for the American consumer to lead us anywhere. China's consumption must rise, not ours.
Federal income tax receipts are down 20% y-o-y, after adjustment for tax breaks. That's all ye need to know….
Ed,
1) I love your posts. Thanks
2) I nonetheless take exception to the comment that, "with structural problems still remaining, the U.S. economy will be weak for a long time to come.”"
To me, the main reason for a recession is the underlying structural problems that arise. I don't think that you can get out of a recession while all of those structural issues remain. A few consecutive quarters of GDP growth may occur, I guess, just because of the insane amount of spending, but those will very quickly be erased, imo.
In any case, thanks for the post (and the prediction that I unfortunately ignored when you first posted it), and I hope to continue reading more of your articles in the future.
I take "technical recovery" to mean the effects on the economy of the various programs by the government and the Fed. We all knew there would be such effects. Most of us think these efforts, however, weren't directed at the underlying problems in the economy so they will not have long term positive impacts and will consume resources that could have been better spent addressing the fundamentals.
BTW L. Beria, I too am quite down on Krugman at the moment. He keeps going back and forth. He makes some good criticisms on the economy and then turns around and puts a positive spin on Obama programs where there is a lot less there than meets the eye.
But what has me seriously pissed off is that he is backing Bernanke for re-appointment to the Fed.
http://www.calculatedriskblog.com/2009/08/krugman-reappoint-bernanke.html
He says that Bernanke deserves this but Krugman does not say anywhere that he owes his job at Princeton to Bernanke. If you go back through his columns, I don't think you will find any where he criticizes Bernanke directly. Where Bernanke is concerned Krugman lacks any objectivity. He would have served his reputation better if he had stayed out of this or stated his bias to begin with.
"He says that Bernanke deserves this but Krugman does not say anywhere that he owes his job at Princeton to Bernanke. If you go back through his columns, I don't think you will find any where he criticizes Bernanke directly. Where Bernanke is concerned Krugman lacks any objectivity. He would have served his reputation better if he had stayed out of this or stated his bias to begin with."
I'm personally a huge fan of Bernanke's, even though I disagree with many of his policy actions. Even so, you're right, this looks a bit conflicted on the surface.
But I think the schism between Krugman/Stiglitz and Summers/the Rubinites is not to be underestimated. To me, Krugman's willingness to come out — he would, after all, know how this looks — is the strongest indication I've seen yet that Summers is the heir designate for the Fed chairmanship.
EH,
My comment about "recovery" related to yours that "… it has become fashionable to be all bearish all the time in the econoblogosphere. But, reality is almost never as extreme as some would have you believe."
I've just downloaded the S&P earnings spreadsheet for the 419 companies reporting so far on Q2, and find that their aggregate gross revenues are down 17.3% YoY, and aggregate earnings are down 33.2% YoY. Meanwhile, although the rate of job loss is decelerating, even with continued deceleration it will be many months before unemployment even bottoms out, let alone starts to turn up. And looking at the housing market, one of the engines normally depended upon for a climb out from recession, I see a mind-boggling glut of homes in the mid and high ranges of the market that have been on the market for about two years now and are surely going to become REO this fall, crushing the market price structure and putting millions more Americans underwater. And a huge number of people continue to be unemployed, falling farther and farther behind on their debts and depleting whatever savings they have.
This reality seems pretty extreme to me. Why shouldn't people be bearish? How are we going to get even a feeble bounce off the bottom?
That stocks are being bid up in this environment because earnings down 33+% are "beating analyst forecasts" is simply bizarre.
You are missing the point. the real non-farm payrolls was -669,000 not -247,000.
422,000 people gave up and no longer are looking for job 247.000+422,000=669,000
Sorce:
FT.com
"US jobs report spurs stocks"
http://www.ft.com/cms/s/0/dec8704c-83b0-11de-a24e-00144feabdc0.html?nclick_check=1
Leverenti Beria, fascinating moniker. Do you know who and what he was?
For the media, continuing gloom and doom is a hard sell. Facing up to reality is always difficult; so, lets face it, our reality is that we are in the deepest hole since the great depression.
Lets call this one the great recession and be done with it. Lets start by spending less and saving more. lets start by demanding performance on the part of our regulators. Lets demand that our elected officials dispense with the theater of the hearings and do some real work toward creating a dialogue that illumiates our problems, their source and how we might realistically deal with them.