November 12, 2009
THE RECESSION FADES AS QUESTIONS OF GROWTH LINGER
The news on new filings for unemployment benefits once again favors the idea that economic recovery is continuing. It’s a tenuous rebound, one ripe with caveats, including a big one we’ll discuss below. But it’s a rebound nonetheless.
The Labor Department today reports that initial jobless claims dropped to 502,000 last week, down from the previous week’s 514,000. That leaves us at the lowest level since the week through January 3, 2009. As our chart below reminds, the trend has certainly been our friend this year for the general change in jobless claims.
Back in March, we wrote about the possibility if not the likelihood that a peak in jobless claims would signal the end of the recession. In subsequent months, we revisited the mounting evidence that the initial claims pattern was on a sustainable downtrend, including here and here. Jobless claims alone don’t suffice as a definitive sign of things to come, but this data series is on the short list of clues to watch for judging turning points in the business cycle.
Changes in the yield curve are also worth monitoring, and this too has been flashing a positive signal for some time. History tells us that when the yield curve turns negative (short rates above long rates), the odds of recession go up sharply. The subsequent return of a positively sloped yield curve (short rates below long rates) provides the opposite message: rebound is coming. As we've discussed in the past, when the yield curve turned positive after signaling recession in 2007, the implications were bullish. The signal was early, as it usually is, but proven durable once more.
Today, a variety of economic trends continue to point in the direction of recovery. We routinely dissect and analyze a variety of macro indictors in each issue of The Beta Investment Report, your editor's monthly review of asset allocation, portfolio strategy and economic news. The newsletter’s proprietary set of economic yardsticks are still flashing encouraging signs, as illustrated in the second chart below (republished from the current issue of the newsletter). Based on the last full month of data reported (through Sep. 2009), our composite measures of U.S. economic activity remain upward biased. The October data reported so far, along with today’s initial jobless claims update, further support the idea that recovery momentum remains intact.
The natural tendency of the economy to snap back after stumbling is still alive and kicking, strengthened by ongoing monetary and fiscal stimulus efforts. But this isn’t a normal recovery, in part because the labor market losses have been unusually deep and long lasting. Indeed, the great challenge still lies ahead, as we’ve been discussing for some time. The problem isn’t so much job loss from this point forward; rather, it’s the lack of job creation that may threaten.
In essence, we should distinguish between recovery and growth. The business cycle is now in recovery mode, but growth of a meanginful, sustainable sort has yet to arrive.
There are other ills afoot as well. As we discuss in the current issues of the newsletter, lending activity continues to shrink. Commercial and industrial loans fell nearly 6% in September from the previous month and are off by nearly 11% over the past year. Lending is a critical factor in fueling future growth and so the trend here suggests that expansion will be muted for the foreseeable future beyond the snapback effect that’s prevailed recently.
Minting new jobs and juicing lending are among the last great cleanup actions for mending the Great Recession. But the statistical clues at the moment don’t offer much encouragement for an imminent recovery on these fronts. Yes, the forces of contraction per se are rapidly fading, as suggested in today’s jobless claims report. It's the weakness on the outlook for growth that worries us.
Posted by jp at November 12, 2009 9:31 AM
Where will growth come from? My hope rests with the develpoing world. As economies (and not just the BRIC countries) modernize, they will need American ingenuity and innovation to assist them. At least, that is my hope.
Posted by: David at November 13, 2009 11:55 AM