An Economic Turning Point? It’s not in the data yet.

Earlier this month Trichet, President of the ECB, said central banks are beginning to see the signs of an economic turning point. If true, they are certainly not alone. An increasing number of economists are reading the tea leaves and calling for a bottom.

I’ll admit there has been some good news, especially in the household sector. Retail sales in January and February were both better than expected with the January data being downright good. My estimate of real retail sales puts the level of sales in February up 1 percent from December. Whatever happens going forward, two months of respite from plummeting sales and abysmal consumption is a relief.

Housing also bounced back somewhat from January’s horrific freefall. According to the FHFA house price series (formerly known as the OFHEO house price index), quality adjusted housing prices rose 1.7 percent in February. Housing starts, especially multifamily starts, rose nicely and this week we learned that new home sales rose 4.6 percent. Each of these series has measurement issues and volatility issues but I think we can safely say that February was a good month in the housing market.

Enough cheer. My (self-appointed) lot in life is to put good news in perspective.

In my view, while we may be at a bottom, there is no indication of it in the current data. The labor market has not turned around, indeed it seems to be getting steadily worse. We now have initial claims data through the 21st of March. Claims are hovering around 650,000. And worse, while initial claims have hit a plateau, continuing claims have continued to grow, they have increased almost 10 percent in the last four weeks alone. Continuing claims are now 20 percent above their previous-episode highs. That continuing claims are outpacing initial claims indicates falling matching rates: if you lose your job, it is much harder to get a new one.

Plain and simple, the household sector cannot recover with this level of job losses and the business sector cannot recover without a healthy households sector. Again we saw some upticks (from record low levels) in most business survey data. None of it pointed to expansion and none of it is sustainable.

Nonetheless, if household and employment data were all I had in hand, I might believe the bottom is near. But, in addition to bad IP numbers in the United States, global production appears to remain in freefall. IP in Europe fell at a record pace in January and the February fall in the German IFO survey indicates it is not done yet. And, of course, Asian data continues to be absolutely horrific.

Krugman posted a picture of U.S. IP in the current recession against IP in the Great Depression. No surprise, the Depression won by a landslide. I replicated his plot using Japanese IP in the current episode against U.S. IP data in great depression: Japan is almost 20 percentage points ahead.

February will be even worse in Japan. Take a look at this picture of Japanese exports. At the peak, exports accounted for 15 percent of Japanese GDP. The decline in trade is unbelievable. Macroeconomic data series simply do not look like this.
As I have said before, most of Japan’s exports go to the United States, Europe, and China. This decline is an extremely negative indicator for forward looking demand in these regions. By the way, this decline is not driven by motor vehicles—they contribute, but in nominal terms every major category of Japanese exports is down 40 percent (yoy).

In an even worse indicator for Japanese production, real imports are now falling at a comparable rate. Without inputs, factories cannot operate.

Remember the Asian Financial Crisis? It was 1997 and Asia was falling to pieces. With the data over the last few months, the Asian Financial Crisis barely even shows up as noise on charts.

Asian (and lots of other) data is trying to tell us we are not done with this recession yet. By not listening, we only forestall adjustments that need to be made.