Friday, November 6, 2009

Reading the Tea Leaves

Let's look at the economy like a good GP would look at your chart, and look at more than just the one headline number (that unemployment rate of 10.2%, released yesterday).

• Just over 40% of the stimulus money has been spent, and the impact lag for fiscal policy is between 6-18 months. It's going to work more like an anti-depressant than crack cocaine.
• Reagan's highest UE rate was 10.8% in the early 80's, with double-digit inflation,and some short-term interest rates in the 20% range. We won't match that pain. And they didn't have a global financial meltdown to deal with.
• For the current recession, employment peaked in December 2007and begain to increase during the last full year of the Bush Administration. This recession was a somewhat slow starter (in terms of job losses and declines in GDP). The lowest UE at the start of this recession was in Nov. 2007.
• The Bush 2008 tax cuts didn't stop the recession, and didn't keep unemployment from rising. It almost certainly slowed the increase. UE rates from the start of the recession:

Nov. 07 4.7%
Dec. 07 4.9%
J 08 4.9%
F 08 4.8%
M 08 5.1%
A 08 5.0%
Jun 08 5.5%
Jul 08 5.6%
Aug 08 5.8%
S 08 6.25?
O 08 6.6%
N 08 6.8%
D 08 7.2%
J 08 7.6%

• More currently, the four-week average of weekly unemployment claims decreased this week by 3,000 to 523,750, and is now 135,000 below the peak in April. Such a significant decline from the peak strongly suggests that initial weekly claims have peaked for this business cycle.
• Outstanding consumer debt fell at a 7.2% annual rate in September, the eighth consecutive decline, the Federal Reserve reported Friday. Consumers are making significant progress in repairing their balance sheets, a necessary step before spending increases.
• Retail sales were up slightly year-over-year in October.
• The economy is performing better that the stress test baseline scenario for GDP and house prices. This is good news for bank balance sheets.
• On the BLS diffusion indexes for total private employment and manufacturing employment: both the "all industries" and "manufacturing" employment diffusion indices are trending up - meaning job losses are becoming less widespread.
• The Fed expects inflation to remain low for some time, and has announced that it will maintain the target range for the federal funds rate at 0 to 1/4 percent.
• Productivity -- output per hour worked -- increased at a sizzling 9.5% annualized rate in the latest quarter, well above the 6.5% rate that had been expected. GDP rose at 3.5%, so fewer workers are producing more output. This can't last. Hiring will begin to rise; first, with more part-timers, then an increase in hours-per-week worked, and last the UE rate itself.

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