May 14, 2009
SLOW AND SLUGGISH, AND THAT'S THE OPTIMISTIC FORECAST
Today's update on wholesale prices and new filings for unemployment benefits strengthens the case for thinking that the worst of the economic crisis is behind us. Or perhaps it's better to say that the numbers du jour don't derail the case for optimism. But as we opined yesterday, and repeat today, there's likely to be a longer-than-usual gap between the recession's trough and a return of what the crowd recognizes as a sustained rebound in growth of some magnitude.
Meantime, there are two more data points that support a somewhat brighter outlook of our still-speculative forecast that the cyclical low point, if not imminent, is near.
Let's begin with the producer price index (PPI) report for April. Wholesale prices rose 0.3% last month, the government reports. That's in contrast to the 1.3% drop in March. Yes, PPI remains volatile, and on a year-over-year basis there's outright deflation. But as the monthly readings suggest, maybe, just maybe, we've found some stability in prices.
Still, as the chart below reminds, there's still quite a bit of play in the month-to-month numbers. It wouldn't be surprising to see a sharp decline next month or the month after. We'll just have to wait to confirm, or deny, our suspicion that wholesale prices are in the process of stabilizing after the earth-shattering blowback from the financial and economic crisis of late.
That said, news that monthly prices aren't in free fall is encouraging for thinking that the deflationary threat is passing. As we've discussed repeatedly since this crisis began, including here and here, preventing deflation from taking root is the essential first step for returning the economy to something approximating a normal state. If prices are allowed to decline, the headwinds for growth become far stronger. But there's reason for mild optimism.
It's still too early to declare the deflation battle won, but neither is there reason to think that we're losing the war. But let's wait and see what tomorrow's news on consumer prices brings.
Meanwhile, today's update on initial claims for jobless benefits continues to suggest that we're at or near the recession's trough. We've written about the value of this data series as an early indicator of the cyclical bottom, including our review of the historical record. The basic lesson is that new filings have a tendency to peak at or just ahead of the technical end of the recession, as per NBER's definition. For a couple of months now it appears that jobless claims are peaking, and so we've been writing about the possibility since March that NBER will eventually label the current period as the end of the current economic contraction.
On the other hand, today's news that new filings rose by 35,000 last week to 637,000 appears to throw cold water on the idea that the recession may be technically at an end. But as the chart below shows, new jobless claims of 635,000 are still within the range of what may prove to be the peak for this cycle. The high point so far was set in late March at 674,000. Last week's total, although up from the previous reading, is still comfortably below the peak.
Nonetheless, we're still in a period of erratic economic behavior and it remains to be seen if we're merely in a temporary lull that precedes another round of pain vs. a true cyclical bottom. Hope springs eternal, but we still need more data to make a stronger declaration that the worst has passed. And even if it has, patience is still required.
The official end of the recession isn't likely to bring a material change in the discouraging economic news. The technical end of recessions still bring plenty of pain for Joe Sixpack in the ensuing quarters. The fact that this recession is the deepest since the Great Depression suggests that the recovery period, whenever it commences, will be unusually slow and sluggish. And that's the optimistic outlook!
Posted by jp at May 14, 2009 9:53 AM
While initial claims may, or may not be slowing down, NO one is finding a job, as evidenced by the continuing claims exploding. That would be the second derivative, and it ain't turning positive. There is NO good news is this.
Posted by: me at May 14, 2009 12:21 PM