The Economy: How to Tell When It's Improving

The stimulus package is finally finished. President Obama is promising a tough new bank-rescue plan to boost lending and limit outrageous pay. Troubled homeowners may even get some relief. All told, the government could spend more than $3 trillion to help end the recession.

So now all we have to do is sit back and watch the economy grow like a beanstalk, right?

If only. One risk of the unprecedented government intervention is that it won’t do all that much to hasten the end of the recession. Another risk is that consumers, expecting a magic-bullet fix, could fail to prepare for tough times that still lie ahead. “This is going to be a difficult year,” Obama himself said at his first press conference. “If we get things right, then starting next year we can start seeing some significant improvement.”

[Read 4 myths about Obama’s bank-rescue plan.]

Next year? Afraid so. Most economists agree that it will take that long, at least, before the biggest problems – mounting layoffs, the housing bust, the banking crisis, and plunging confidence – start to turn around. Here’s what to watch for to tell whether the stimulus package is actually working, and when the economy might start to mend.

An improvement in the unemployment rate. Of all the economic indicators, this is probably the single most important. But you might want to avert your eyes for awhile.

Obama has talked about creating 3 to 4 million new jobs, and if the stimulus plan works, it might come close to that – over several years, combined. But it’s almost certain that through this summer and into the fall, there will be a net job loss, not a gain. Most economists expect the unemployment rate, now 7.6 percent, to hit at least 9 percent by the end of this year. That represents up to 2 million more lost jobs. Many of those cuts are already in the works - just follow the recent layoff announcements from companies like Caterpillar (CAT) (20,000), Boeing (BA) (10,000), SprintNextel (S) (8,000) and Home Depot (HD) (7,000). But the pink slips haven’t all gone out yet, so the layoffs haven’t shows up in the official numbers.

[See 15 companies that might not survive 2009.]

The first sign of an improvement will be … corporate silence. As in no more draconian job-cut announcements. Once that happens (or doesn’t), the unemployment rate will plateau. Then, companies might start hiring again, and a couple of months after that, the unemployment rate will start to fall. Three straight monthly declines would be a good sign that the economy is really on the rebound. That probably won’t happen until 2010.

If you’re wondering what’s the point of the stimulus package if it won’t do much to help workers in 2009, look to 2010. And 2011. That’s where the plan will make a bigger difference. Moody’s Economy.com estimates that by the middle of 2010, the unemployment rate will start to drift back toward 8.5 percent. But without any stimulus plan, it would have hit 11 percent. Viva la government.

More stable home prices. The realestate boom and bust is what torpedoed the economy in the first place, and the economy won’t start to recover until the housing bubble fully deflates. The good news is that housing prices have already been falling for more than two years, with prices down more than 20 percent nationwide. And we might be more than halfway toward the bottom: Moody’s Economy.com predicts that housing prices should stop falling nationwide by the second half of 2009. Overall, the forecasting firm predicts a 30 percent drop in home values from the peak values of 2006.

[See why the feds rescue banks, not homeowners.]

Others think it will take longer, but whenever it happens, an end to the housing slide will mark an important turning point. Hardly anybody thinks that prices will shoot back up or there will be another buying binge. But a boomlet, maybe. Once prices stabilize, buyers will stop worrying that they could be purchasing a costly asset that’s falling in value. As they buy, other kinds of consumer activity – like shopping for furniture and kitchen upgrades – will follow. Slowly.

A consumer confidence rebound. Since consumer confidence closely tracks the job market, the dismal numbers of the last few months probably won’t improve by much until late in 2009, or 2010. Homeowners have lost more than $3 trillion worth of value in their homes over the last three years, and investors have seen their stock portfolios shredded. So even people who feel secure in their jobs are dour.

[See how Wall Street continues to doom itself.]

A turnaround in the housing or stock markets would break the gloom and help some people feel better off. So would easier lending by banks, which would help solvent consumers buy a few more cars, appliances, and other goods. But consumer confidence won’t really start to improve until workers start to feel more secure about their jobs and income. Think 2010.

A less volatile stock market. Every investor hopes that beleaguered stocks will come roaring back in 2009 and regain some of the ground lost since the peak in 2007 – when the S&P 500 stock index was nearly 50 percent higher than it is today. But a better indicator of economic health would be a steady recovery – without the manic swings that seem to come from every hint of undisclosed trouble at some big bank or rumor of new government intervention.

The stock market is harder to predict than most other parts of the economy, since it’s deeply dependent on psychology and other intangibles. The market could bounce back by mid-summer. Or it could remain stagnant for years, like it did for most of the 1970s. The experts can’t be any more sure than you or I.

[See why “Wall Street talent” is an oxymoron.]

One hopeful sign would be less market sensitivity to events in Washington. The biggest market mover these days is the federal government, since fortunes stand to be won or lost – mostly lost – depending on how deeply the government intervenes in the activities of megabanks like Citigroup (C) and Bank of America (BAC), and how much federal spending will be available to stand in for plunging consumer spending. The markets will be back to their old selves when earnings reports, IPO announcements, and M&A deals are what send stocks up or down, and utterings from Washington amount to little more than an echo. Since the government seems to be the only institution spending money so far in 2009, it could be awhile before Wall Street returns to form.

Economic growth turns positive. By economic standards, the current downturn has already lasted longer than the typical post-World War II recession. Yet there’s still a lot more pain to endure. A recent survey of economists by the Wall Street Journal found that the majority think the economy will continue to contract for the first half of 2009, with growth turning positive in the second half of the year. That outlook is much worse than a few months ago, and even when growth turns positive the economy could sputter along without many new jobs or bold moves in the private sector.

[See why lousy unemployment numbers are no surprise.]

It’s always possible that impatient consumers will get sick of holding back, and start running up their credit card balances once again (if the banks let them). The bank-rescue plan might spur more lending than expected, goosing businesses and consumers alike. Or the stimulus plan might spread goodwill and optimism throughout the land. If you get the urge to spend, that might be the strongest indicator of all. Call the economists.

Comments

[The Good Ne...:]

Rick,

I enjoyed the article but have to disagree with your analysis of what is actually happening right now...

>Most economists agree that it will take that long, at least,
>before the biggest
>problems – mounting layoffs,
>the housing bust, the banking crisis, and plunging
>confidence – start to turn around.

Have you been watching the indicators in the last two weeks!?
mast-economy.blogspot....

How about just yesterday?
Foreclosures down 25%
California Foreclosures their lowest in over a year.
Retail UP 1% in January --> that's 12% annualized
Manufacturing and Non-Manu declines have both decelerated in Jan with some industries reporting growth.

And from yesterdays bls employment numbers
>The advance seasonally adjusted insured
>unemployment rate was 3.6 percent for the
>week ending Jan. 31, *unchanged* from the
>prior week's unrevised rate of 3.6 percent.

Initial claims down -8,000%

Where would you like to see the VIX index?

I am not sure what else you need to see, from the Jan retail numbers impatient consumers are *not* holding back...

Thanks for the article!

GNE
goodnewseconomist.com

Feb 13 12:48 PM

[Jay-Dawg, CDA:]

HAHAHA you have no idea what you are talking about Good News Economist!!

You say:

Retail UP 1% in January --> that's 12% annualized

Sorry to say, but retail sales is year-over-year, so it's 1% growth, not 12%... Also, 2 weeks of data does not make a trend. Expect retail sales and the housing market to continue to show weakness in the coming months...

Jay


On Feb 13 12:48 PM Good News Economist wrote:

> Rick,
>
> I enjoyed the article but have to disagree with your analysis of
> what is actually happening right now...

Feb 13 12:52 PM

[Jay-Dawg, CDA:]

I actually checked and it's 1% month to month, but still, don't expect 12% annual growth in retail sales lol...

Let's hope it keeps growing though, although I'm not believing it...

Feb 13 12:56 PM

[Crank Monkey:]

As Reagan said, it's a recession when your neighbor loses his job; it's a depression when you lose your job. And it's a recovery when Jimmy Carter loses his job.

Feb 13 01:05 PM

[Larrysyr:]

I love your outlook, even though I think you're wrong.

Foreclosures are artificially lower because of foreclosure-prevention initiatives, not fundamental market trends.

Headline retail was up because of gas and food inflation, while discretionary consumer spending continued to decline.

The initial claims number is well within the error margins shown by revisions to past weeks' reports. By any measure, numbers over 600,000 are awful.

But, I do enjoy your contrarian viewpoint. I also think "economists" have laid down a truly awful track record in predicting economic trends over the past few years. Your rosy predictions have no less credibility in my book than their gloomy ones. Truth is, we don't know how things will develop.

At least your outlook is an amusing break from the prevailing gloom and doom.

Thanks!


On Feb 13 12:48 PM Good News Economist wrote:

> Rick,
>
> I enjoyed the article but have to disagree with your analysis of
> what is actually happening right now...

Feb 13 01:14 PM

[Tradememe:]

Usually when people start to feel that the economy is improving, it means that it has already been improving for more than a year.

Feb 13 01:17 PM

[TomF75:]

As Jay-Dawg said its 1% growth. Not too mention its 1% growth at what cost? If that "growth" was the result from 50-75% post-xmas sales/BK Liquidations etc. IMHO that's hardly good news.

Additionally the 25% drop in forclosures is the DIRECT result of the Freddie & Fannie foreclosure moratoriums during the holidays.

I wish the news were better, but like the author I think we're in for a rough year, not too mention thanks to the increase in money supply, when V does excelerate, I think the Fed will have to put the brakes on so fast that there's a good chance to kill the recovery will be DOA. Govt intervention or not, I think it'll be at least 2012/2013 before we can ring the all clear bell.

On Feb 13 12:48 PM Good News Economist wrote:

> Rick,
>
> I enjoyed the article but have to disagree with your analysis of
> what is actually happening right now...

Feb 13 01:32 PM

[jack59:]

I don't think we can any kind of prediction on this recession by looking at past ones. This one is a lot different.
First of all this one is global. What worries me the most is that governments are trying to fix it by trying to go back to the past. They are trying to fix it making credit easier, which the root of the current problem. It won't work, I hope. By easing credit they are trying to sustain the leverage that brought us where we are. companies and consumers which have no debt are going through this crisis pretty well. I have no debt, no mortgages, no installment to pay for my tv set or my car and I have no particular problems. I've lost some money on the stock exchange but I don't think I should get repaid for that. The moment I buy a stock I'm a stockholder in good and in bad times, that's my risk and I shouldn't be insured against it by taxpayers money. wall street could go to zero and that shouldn't be a government issue. The guy next door has a mortgage on a house he could not afford, has installments for a fancy car, plasma tv set, holydays he could not afford and so on. He has a problem, but it is not my responsibility if he wanted to live above his income capabilities.
In simple word who is in danger now are people and companies that leveraged their income thinking that they could do it for ever. I do not think they should be saved for they stupid mistakes.
There is a hole in the system, there is no way to fix it with no expense, I don't think we should fix it. The world survived two world wars, one Great Depression... it will survive also this mess. The cleanup is painful but the sooner we clean up, the better. And I'm talking clean-up, not saving who took a bigger step he could afford.
It's painful, very painful but less painful than burning trillions of dollars and just postponing the issue. Who says that the citizen of the world have to get richer every year and if they get poorer we have to give them free money to make them happy?

Feb 13 01:40 PM

[brain:]

Only when interest rates rise; and this isn't going to happen for a long while. The fallout from the enormous amounts of money being "printed" will ultimately tell the tale; if it ultimately means uncontrollable inflation via the fed having to service its own debt, we're talking a decade or more.

Also, I mentioned this fact a couple of weeks back - pump prices have been "inflating" in spite of crude prices "deflating." You should contemplate what this implies - especially those who look at the electronic USDX # and think that reflects the true buying power of the US dollar. It's just a number, and it don't mean jack on the street.

Feb 13 02:16 PM

[Firat Ünlü:]

'But without any stimulus plan, it would have hit 11 percent. Viva la government.'

'The problem with socialism is that eventually you run out of other people's money' would be most fitting here. State-sponsored jobs are eventually no longer sustainable. California's learning that lesson now.

Good article though ;)

Feb 13 02:59 PM

[User 182177:]

Unemployment rate is one of the "Lagging Indicators".

======================...

There are 3 groups of economic indicators:

Leading indicators.
Coincident indicators
Lagging indicators.

Feb 13 03:10 PM

[One Eyed Guide:]

Good article.

There is a leading indicator to recovery that you didn't mention: Increased lending in the shadow and real banking system. This has to happen before there can be a recovery.

This will require some sort of an effective bank bailout -nationalization -whatever. Until this is done, stimulus packages may be wasted money just like in Japan from 1990 to 1998 when they finally fixed their banks.

Feb 13 03:20 PM

[Dr. O:]

Might want to keep your eyes on how the rest of the world is doing. The slow down is world wide. Europe. The Middle East. Asia. The BRIC countries were former bull market leaders.

Feb 13 03:52 PM

[Dave Wrixon:]

There is resilient herd of Bulls roaming Wall Street. It will take a sustained and deep slump to damage their instinctive exuberance. However, we are now entering a phase for which there is no real living experience. The optimism is based on a lack of understanding. Once that has been broken and Americans have an understanding of the new grim reality, the economy will have to be rebuilt brick by brick, often with the level of resources that we have traditionally associated with developing countries. Confidence will have to be fought for inch by inch.

One of the things Obama could do to make bring the US into the modern era is to introduce metrification. This would actually generate a huge number of jobs and leave a lasting legacy, that would help competitiveness. It would also be a very clear sign to the rest of the World that America means business.

Feb 14 03:25 AM

[krsnaKhande...:]

The signals will be contradictory for a considerable length of time before one can see the clear signs of improvement. This period which give contradictory signal for some time is used by thoroughbred to take profitable positions in stock market, cureency market and commodity market.

Feb 14 09:48 AM

[The Good Ne...:]

TomF75 and Jay-Dawg,

Laugh to yourself or outloud. Whatever makes it easier for you to shrug off the retail numbers. The data is there and make no mistake about it the retail segment and consumer sentiment is what will eventually lead us out of this slump - now (or later ;-)

Others laughed at my comments in 1974 too. (Just not on a internet forum board) That's fine. History repeats itself. It was amazing to me back then and also now how easy it was for folks steeped in the negativity of the day, to just ignore the reality of raw numbers indicating a turnaround. I don't know how many times I have had your comment spoken to me when pointing out a positive indicator in negative times... I'll point out a new fact like... "retail sales just grew by 1% in January." and then someone just like you in the crowd will actual chuckle or outright laugh and say, "I hope you are right, but I just don't *believe* it" and the rest of the crowd will nod their heads... just like is happening in the comment stream.... it is incredibly fascinating to me...

Thanks for the comments Larrysyr. While I do make some predictions from time to time, most of the time I try to stick to pointing to the positive data.

It's most fun to see that contrarian data either get dismissed immediately or justified in some way... as you did.

The data remains - retail sales UP 1% in Jan. Foreclosures down 25%. The fun part about this board is that we'll be able to look back on a record of this exchange 6 months from now.

In 1975, the folks who actually laughed or chuckled at my comments later vehemently denied any such action... another very interesting phenomenon of the human condition... very, very short memories.

Fun times,
GNE
goodnewseconomist.com

Feb 14 11:59 AM

[M-P:]

Let's remember what Obama is saying - it's "save or create" up to 4m jobs ... frankly, that's a metric that has some loose ends - some would say "weasel words" - how do you feasibly show that you've "saved" a certain number of jobs. Very difficult given the multiple factors that are occuring at the same time - hard to isolate.

Nevertheless, the index of leading indicators had more than a few false positives in predicting recessions. Reasonable people will continue to disagree about the timing and trajectory of a recovery - L, W, V, U, etc. Given the massive leveraging that has taken place and the coincident negatives savings rates, I think it will take at least a year to see some robust and consistent economic sunshine.

The 10 components of the Index (leading indicators) include:

Average number of initial applications for unemployment insurance
Number of manufacturers' new orders for consumer goods and materials
Speed of delivery of new merchandise to vendors from suppliers
Amount of new orders for capital goods unrelated to defense
Amount of new building permits for residential buildings
The S&P 500 stock index
Inflation-adjusted money supply (M2)
Spread between long and short interest rates (the yield curve)
Consumer sentiment
Average weekly hours worked by manufacturing workers

While this index correctly forecast each of the 7 recessions during the 1959-2001 period it also has forecast 5 recessions that did not occur.

Feb 14 09:01 PM

[a. palmer jr.:]

I'll say the economy has recovered when I get back the money I lost on my Lehman bonds...which is never. Most of us that have savings other than FDIC accounts took a major step back and at my age I probably should just get used to having less. Now if we could get Congress and all people working for government to do the same maybe there would be light at the end of the tunnel for our younger people.

Feb 15 12:03 AM

[Jani:]

While I found this article a very interesting read, I'm sorry to say that this isn't the first place I read it...nor the same author. I have no idea who wrote the original piece (though I strongly suspect that you did, Mr. Rick Newman), but here is where I found a nearly identical piece supposedly written by a Mr. Robin Bal: www.fortunewatch.com/s.../

Being a writer myself, I HATE to see anyone's work copied, which of course (cue shameless plug), I blogged about on my own site.

All that aside, I found the points and ideas very interesting and enlightening as I continue my quest to understand economic recovery.

Feb 19 12:16 AM

[nun:]

What do you mean the stimulus package is finally finished? The NYT just said we may be in for more!

Feb 19 12:48 PM