Stupid Economist TricksPosted: October 29, 2008
Some times I feel like I spend a lot of time reading entrails or the lay of chicken bones. I pour over numbers, announcements, and signs of momentum much like Marie Laveaux–that great voodoo priestess buried not all that far from my own house–would check for auspicious signs. In academic terms, I’m analyzing the fundamentals for signs of bottoms or inflections looking for some hint about this downturn. Some how, however, I still find myself relying on a lot on intuition in the end. This still makes me feel less like a scientist and more like a modern voodoo priestess.
So, what do the fundamentals say right now? There are several markets that might give us a glance at the entrails of the U.S. economy. The first is what households (consumers) are planning to do. The biggest component of US spending in the economy belongs to consumers. They are responsible for about 70% of sales of all goods and services. The last time consumer spending decreased was during 1991 during the post Gulf War 1 recession. Most economists expect that they went negative some time this fall. One of the measurements we check to see if this will become a trend is the Reuters/University of Michigan index of Consumer Sentiment. This is basically and index that summarizes the results of a survey of how optimistic or pessimistic households are about their economic future. If they are optimistic, they usually spend more. This blurb of bad news is from the Wall Street Journal.
After hitting its lowest level in nearly 30 years in June, the gauge had begun to improve as oil and gas prices fell from their record highs. But that improvement was wiped out this month as financial and economic conditions worsened.
Unfortunately, we just hit an all time record low on the measurement for this month. That is not a good thing. If you look at where the economy is soft, it is on those businesses that provide big item tickets to households. This includes things like cars and washing machines. Households are less likely to buy big ticket items when they feel unsure about their future. Companies that have announced lay-offs and plant shut downs recently include GM and Whirlpool. This confirms our suspicion that consumers are laying low. Kraft, however, is doing well. It posted a third quarter gain. That’s because folks that tighten their belt eat a lot of those mac and cheese boxes. This also is something that says we’re looking at a recession.
The good news is that business orders of some of this big ticket items appears to be looking up. This is good news because businesses tend to order these things if they see next year being better than this year. Civilian aircraft orders appeared to be the mover in this statistic. Also transportation equipment. Durable goods orders by manufacturers are considered a ‘leading indicator’ of future economic health, compared to consumer sales which are considered a look into the current economic health. This is because businesses buy based on what they expect to do next year. This gives us slight hope that next year might be better than right now.
Another fundamental to watch for indications of a sluggish or recessionary economy is the job market. Most economists follow a number of statistics here. We usually don’t rely on the unemployment rate because it hides a lot of information. Two of the big things it hides are folks that still want jobs but have given up on their job search and folks that are working part time jobs when they really want full time employment. Here is some information on jobless claims from that same WSJ article. That statistic is another indicator followed by economists.
Many economists more closely monitor the Labor Department’s weekly report on initial unemployment insurance claims, which measures the number of people filing for new unemployment benefits. A rule of thumb says that when claims stay above 400,000, the economy is slipping into recession. That started happening in July. The latest weekly claims figure is 478,000.
Unemployment tends to ‘lag’ or move behind a recession. It will frequently increase even when the economy rebounds. So, expect unemployment to be a problem for some time.
By following some of the statistics, economists get a good sense on how deep and long this downturn may be. Again, it is a bit like Marie LaVeau reading entrails. From some of the things we see so far, we expect this downturn to be longer and deeper than the last two which occurred in 2001 and 1991. However, because of little glimpses of hope, like the uptick in Manufacturer’s Durable good orders, most economist do not believe we’re about to see the Great Depression again. Because economists have gotten better at reading the entrails, economic advisers on policy have gotten better at recommending policies to government to stymie the worst of possibilities. So I’d just like to say again that you should act with prudence moving forward but not panic. This is, after all, a very resilient country with an economy that has survived a lot worse things.
PS: No chickens were harmed in the writing of this thread.