My five-year old daughter has a thick mane of chestnut colored hair on her head. By the time she goes to school, it always looks perfect - but few people know about the work involved beforehand. My wife or I usually have to spend 15 minutes untangling the knots in what invariably starts out as a post-sleep bird’s nest.
This is a good analogy for the economy and markets. Our capitalist society is a beautiful thing that rewards entrepreneurs and intelligent risk takers and investors. But for the past few years, we’ve got ourselves into quite a tangle with the housing bubble and credit contagion.
And with such a big mess, it will be a while longer before we can straighten it all out and see an economic recovery. Here are the key areas to keep an eye on for clues as to when we’ll emerge on the other side…
An End To The Recession This Year? Don’t Bet On It…
A recent survey showed that the vast majority of economists believe we’ll come out of the recession in the second half of this year.
I’m not convinced. I think that’s a little too optimistic.
But regardless of my opinion, there are three crucial factors that will tell us that the economy is back on solid footing, regardless of the “technical” definition of recession.
Look To These Three Areas For Signs Of An Economic Recovery
Last week, the number of initial jobless claims fell to 631,000. While that’s certainly better than the 643,000 the week before, it’s still a horrendous number.
The national unemployment rate stands at 8.9% - and if you take into account the number of people who’ve given up looking for work, or those who are under-employed, that figure nearly doubles.
Speaking of the latter, while at Starbucks (Nasdaq: SBUX) last week, I heard the girl behind the counter tell a friend that she’s making one-third of what she made at her last job. At that rate, she’s probably just barely keeping her head above water, yet she isn’t counted in the official unemployment figures.
Stories like this are everywhere - people who’ve been able to keep their jobs, or stay employed somewhere, but needing to take a pay cut to do so.
It’s quite simple: The economy won’t be meaningfully better until those numbers come way down. At the very least, we need to see jobless claims under 500,000 before it looks like we’re even headed in the right direction.
But in the end, though, we want to see jobs created, not just fewer jobs eliminated. If people don’t have jobs, or don’t feel secure in their jobs, the economy isn’t going to get the injection of consumer spending (keep in mind that this accounts for about two-thirds of economic growth) that it needs to recover.
As long as U.S. real estate prices are falling off a cliff, taking homeowners’ equity with them, consumers will feel poorer.
In March, for example, the average national home price collapsed by 18.7% from a year earlier. A CNBC story actually tried to put a positive spin on it by saying, “Some relief appeared to be in sight as, for the second month, prices did not slide at a record rate as they had been doing since 2007.”
Are you kidding me?! An 18.7% decline is relief? That’s like saying banging your head against a wall is “relief” after hitting yourself in the head with a Louisville Slugger.
Unlike the job market, we don’t necessarily need housing prices to rise to lift the economy… just to stabilize. If people have a sense that their largest asset is not going to decline in value, that should help ease anxiety. Until then, homeowners will be skittish.
The Stock Market
The stock market is a forward-looking indicator and typically leads the economy by about six months.
Having climbed by 40% from the lows in March, it’s at a crucial juncture where it now needs to stay up. As I’ve said before, I don’t believe it will, but if it does manage to hold these gains and build a base, that would be a good indicator that things are turning around.
On the other hand, a decline to recent lows would suggest that the economists are wrong once again.
Good thing we don’t take our lead from economists. The best way to gauge the economy’s health right now is to look at these three simple, common sense data points. And so far, two of them are pointing in the wrong direction.
- Marc Lichtenfeld
Disclosure: No positions