"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." Winston Churchill, 1942The evidence is mounting and an increasing number of people are seeing signs of recovery, green shoots. The consensus amongst forecasters is that the worst is behind us and that the economy will return to growth in the second half, maybe even by the second quarter. And, there are some promising signs in the data. I’d say I see a glimmer of hope, but no more than that.
By far the strongest evidence of a turnaround is the most recent initial claims data. Initial claims fell 3.4 percent in the month of April. The fall itself was not large, a one standard deviation event. But the implications of the fall may be immense. Initial claims always turn down at the economic trough. In this post, I discussed the ins and outs of employment. I showed that a fall in the separation rate was far and away the timeliest indicator of recoveries. And initial claims are the closest we have to a direct measure of this rate in real time data.
If the trend in unemployment continues, this recession is over (at least for the moment—see 1981). Of course, the movement was quite small by historical standards and does not yet point to a true recovery. False dips in initial claims are quite common and in ¾ of recessions initial claims moves down by at least 4 percent before rising once again. The picture below puts the fall in perspective. If claims fall at their April rate for the rest of the year, the level of December claims remains far above its recent levels and far above its level during the 2001 recession. Claims have to start falling a lot faster for us to be sure of recovery, but the sign is positive. This is my single favorite indicator of upward turning points.
The second most positive piece of news is the manufacturing PMI. As shown in the picture below, the manufacturing PMI for the United States has now risen three months in a row and the increases have been sizable. Any number below 50 indicates a contraction in the sector, but the upward movement is encouraging. Historically, changes in the PMI are tightly linked to both the manufacturing sector and the broader economy. This series is consistent with a return to growth as early as the end of the second quarter (June).
Working against the manufacturing PMI is the nonmanufacturing sector. The PMI for nonmanufacturing is falling again after bouncing off its end of year lows. This series looks like it wants to head down. And since the nonmanufacturing sector accounts for around 70 percent of economic activity, the series cannot be ignored.
More importantly, the data from the manufacturing sector is not nearly as positive as the PMI would indicate. Over the three months that the PMI has risen, shipments and new orders have continued to fall, albeit at a slightly slower pace than in previous months. Still, the level of both of these series remains near the peak prior to the last recession. Like unemployment insurance claims, shipments tend to turn up before the official trough of the recession.
All told, I still do not see a recovery even in the manufacturing sector, although I think there are many hints that the sector is no longer collapsing. That’s good, if it kept collapsing at the rate of the last six months, we would reenter the dark ages before two years passed by. But an end of the collapse is not the same as the beginning of a recovery.
To stick with the WWII theme, the year is 1942; the war is not yet won. But, the Germans have been stopped at the shore, and while we are a long way from total victory, absolute defeat no longer approaches.
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1 comment:
This is the beginning of the beginning. The main problem remains out of the mainstream discussion but is gradually getting recognition. THIS IS A LIABILITY CRISIS. We are expecting too much of assets. Now the government moves into deficit bubble mode BEFORE the boomers hit entitlements further ramping up liabilities.
How much of the spending cuts at the state and local levels are being done to protect pensions? In the next 20 years, the US will add 6mm people between the ages of 40 to 60. In that same time frame the US will add over 35mm people in the 60 and above age bracket.
This is a stock problem and policy continues to treat it as a flow problem. The government has taken asset managers to task for excessive risk taking but indeed the motivation for the excessive risk is the gap between assets and liabilities which is now exploding due to government fiscal policy. My bet is unfunded liabilites are in excess of GDP and have an accrual rate way above trend GDP. This gap cannot be closed by definition without re rating the liabilities!
Until liabilities are renegotiated or extinguished the deflationary trap is accelerating. Interest rates are rising in the long end of the US out of default not inflationary concerns. Assets simply cannot cover the value of liabilities now nor in the future.
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