When Will The Economy Recover? These Three Key Areas Will Tell You

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

Jobless Claims
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.

Housing Prices
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.

And finally…

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

Comments

[Jasper M:]

Um.
Raging Bear that I am, even I have to admit that the first two are lagging indicators. By the time they turn up, potential participants will have missed much.
Which brings us to the third, which tends to anticipate - so well, that it will likely give us Several 30's-esque false-positives before things actually improve.

May 28 04:21 PM

[Larry House:]

Thanks for a thoughtful piece. This is a time to avoid emotion and keep an eye on the indicators. You have the proper tone of caution.

May 28 04:47 PM

[Prudent Man...:]

After the economy "recovers" (it must stabilize first) then what happens to all of the debt that our government saddled the writers child with? It and its debt service must be paid or the Treasury cannot roll it. That will mandate increase taxes and how do you think that is going to affect the economy? Or, the bureaucrats can monetize the debt which means no one will want to buy it if they are going to get lower purchasing power dollars in the future.

The point, in my estimation, is not the recession. Recessions are good in that they reign in speculation, waste, poor management (theoretically of course), constructive destruction, etc. unless government gets its nose under the tent and replaces reason with politics.

Well government has not only its nose in it but has given us what the collectivists love an Industrial Policy and the destruction of Economic Freedom and the Free Enterprise System. Do you really think the Feds can run G.M. or anything else? Evidently a lot of stock buyers do. I wish them luck but they better change the political landscape if they wish to see a better country. Congressional Term Limits would be a good start but don't wait for the incumbents, who ruin this country, to inaugurate them.

If you wish to play the "Greater Fool Theory" I can only hope you find a greater fool for you to dump your positions on. Chances are you won't. Take you changes and don't whine.

We now have government choosing losers and winners (see GM bond holders v. UAW) based upon politics. If you think China, France, Russia, have a great standard of living you must be loving it.

Isn't it pathetic that politics is more important in investment strategy than corporate and economic fundamentals?

May 28 05:16 PM

[Fitz919:]

Exellent points. But you should have picked apart the nonsense that has driven the market upward the last few months. Green Shoots. Banks with paper profits masquerading them as real profits due to relaxed mark to market rules. Stress Test Garbage. Public/Private Partnership Garbage. CEOs being threatened and canned. The Fed buying our own Debt. The homes being bought, are being bought at auctions. The list goes on and on.

May 28 07:18 PM

[cameroni:]

Thanks, good points whoever you are.

I cannot bear to hear any more "economists" tell me that employment numbers are a lagging indicator anymore. As though lagging will suggest we are about to recover. So on that logic, a staggering job loss figure of 631,000 would seem absolutely positive because it is less than last months 643,000, a fractional difference. Losses are still losses though and I am not really interested in their theories until the lagging indicator shows job gains.

We are still headed for a national face-plant. Job losses are certain to increase over the summer and into the fall as publicly traded companies pare staff to boost earnings in a vain attempt to maintain stock values. What else can they do without selling off assets and disgorging themselves of non-performing interests. A huge sell-off is in the cards though. I have a lot of doubts about quarterly earnings going forward if consumer numbers do not improve (and they will not while real-estate continues it's decline and unemployment increases)

Who are these people kidding anyway. Jobs are still being lost and they are being lost in large numbers. The so-called lagging indicator is only valid for an improvement in the economic outlook when job losses cease and we start to see improvements in the employment picture. In other words, theses statistics continue to lead us down the wrong path of assumptions for as long as they remain as dismal as they are. Lagging indicators are not a suggestion of improvement in the general economy as long as they stay as bad as they were this week. Does this make sense?

I am really mostly annoyed with the crowd that dismisses our current economic trajectory by claiming that the "lagging" portion of lagging indicators is somehow an indication that everything is improving when it is not.

Let's not get stupid about the numbers. Unemployment numbers are going up every month and it is relentless. Plus or minus a fraction of a percent in losses in an escalating big-picture of losses is not an improvement in the jobs picture. It is not lagging from that perspective. Rather, It is telling us where we are headed as an economy. The ebulliance of spring is on us and home sales have increased somewhat as has consumer confidence. But don't get too excited yet.

The fall and winter of 2009 will be a very different kettle of fish and when those numbers start to come in, despite the coming Christmas season we will surely know that we have entered the decade of discontent, diminished expectations and loss of entitlement.

Cam

May 28 10:13 PM

[doubleguns:]

Between Fitz919 and Prudent Man CFA there isn't much else to add except taxes, taxes, taxes will kill any recovery.

I dont think Washington wants a recovery just yet. They still have BIG plans for this crisis. So they will propose taxes to keep the crisis going.

We have and are being played for fools. Patriots dont run we must stand and fight.

May 28 10:14 PM

[Dirk McCoy:]

It's very easy in this environment to panic and blame this administration and congress for the coming destruction of capitalism and slide into Soviet-style economy thanks to their policies that started being discounted into the market years ago-higher income taxes, capital gains taxes, carbon taxes, higher minimum wage, union strengthening, protectionism, government-run health care, welfare/entitlements increase, and government spending.

But the same folks who thought these would be good ideas are also impatient, and if they don't see immediate progress in economic matters (which, sadly, they won't), they'll start looking for another answer, perhaps as soon as next year.

Personally, I think you'll know the economy is turning around when we see that carbon taxes, welfare/entitlements increase, government interference in business, protectionism, and wage non-competitiveness are addressed and discounted out of the market- and our economy.

May 28 10:32 PM

[Fighting Yoda:]

'Green shoots' is the biggest PR hatchet job since Goebbels - Stress-free stress tests, even the confidence number (who rigged those). There are no green shoots anywhere- weeds and more weeds - job losses, pay cuts, home price drops - not the stuff any V recovery is made of - not even a U maybe a VL( Very Long).

And by the way GM is going bankrupt – 10s billions already lost, 100s of billions will be additionally sunk, and then 50/100K jobs will be lost

May 28 11:09 PM

[Alan Young:]

"consumer spending accounts for 2/3 of economic growth" is HISTORY. Over-spending got us into this mess; it's not going to get us out. The next economy is going to have to make producing things at least as important as consuming them.

But, yeah, it's better when people have jobs.

May 28 11:15 PM

[Jasper M:]

Patent,
Yup, that's what I thought.
Changed his name. Changed his slant (ANYthing for a 'hit'). Even changed his style a little. And changed his domain name(s). And STILL identifiable.
Man, talk about profiling . . .

May 28 11:17 PM

[CJJ:]

Wait, so the economy will go from 66% consumer spending to what? Is the historical average of 60% okay for you?
So the economy is going to move from consuming things to producing them or at least doing those two things in a balanced manner. Ah yes, the fallacy that the US doesn't produce anything and some fallacy that all of a sudden prosperity will come from not consuming anything and producing a bunch of stuff that in actuality you don't want people to actually consume because that's bad. Really say your thoughts out loud and I'll check back in about 3 years from now and see if you've emerged from the illogical circular reference.

How about we just produce Gold. Oh yea, we already have most of it. So there we go. Easy end to the crisis. Kill all currencies, everyone will go to gold and the US is back on top.

On May 28 11:15 PM Alan Young wrote:

> "consumer spending accounts for 2/3 of economic growth" is HISTORY.
> Over-spending got us into this mess; it's not going to get us out.
> The next economy is going to have to make producing things at least
> as important as consuming them.
>
> But, yeah, it's better when people have jobs.

May 29 12:24 AM

[socrateazz:]

Interesting. Loss of jobs under 500,000 being good. That will happen but what I want to see is added jobs! And I want to see real statistics not fact manipulating which is pervasive. As long as the US economy is not adding 50,000 to 100,000 jobs average over six months, a sustained recovery is more a dream of hope than actuality. Government jobs can help short term but they are poison long term. Efficiency increases that we saw the last ten years helps short term but causes longer term lack of need in businesses. Propaganda can convince people things are better or worse than they are. adding a boost or crushing a boom for the short term. but the trend will continue after the effects are digested. What will help? Most of what will help long term will hurt short term. The things government often fails to do. Minimum wage increase. Short term poison, Long term if properly implemented some help. Cut government size and cost. Short term problem, Long term economic help. Quit changing the rules. This would help in businesses being able to plan continuity. Only add rules that are really fair and will make substancial improvements instead of rules to help specific groups. Court system needs to clean out judges who think law is to be made and interpreted by the courts. There job is to judge whether the law is actually followed. The constitution says what each branch of government should be doing. It should be followed. What do I see? An executive branch essentually running all other branches when its job should be more limited. A legislative branch is so busy playing attack the enemy within and boost the idiot. Not enough time is spent actually deciding real legislation. The judicial system thinks they need to create laws because the legislative system is too heavy into the games. Ironic. The executive system is trying to create legislation for the legislative system and trying to control the courts. The legislative system is a popularity contest that has little to do with actually making fair equal laws. And more to do with being elected again! The court system is not getting good laws to make decisions on. So they base their decisions on what they think is fair. Actually acting as little dictators. Most decisions are good within that branch. But some are clear overstepping of power. The first one I remember was Roe verses wade. That needed to be made. But once courts think they have power they should not have, more is usurped and taken for granted. Housing prices are a symptom of how many can currently afford to buy at the current price. Housing only drives the economy as long as more can afford to buy at that price. Many think stock market is forward thinking. I disagree. The market operates on actuality, beliefs, and their interactions. As the market goes down more people believe the price is cheap for what ever reason and they buy or refuse to sell. that pushes the price up. Ads prices go up people think the price is getting too high, so they sell When either belief is more prevalent then that will cause an approriate move. When profits are increasing in companies, the overall move is up. When companies profits are falling, then the prices fall. There are many influences, but forward thinking is no more prevalent than past thinking. Some buy because of some new product. Some sell because some other company became more efficient. Any number of reasons can be found. P E or other past numbers has just as much influence.

May 29 06:13 AM

[Jimbo:]

I am in general agreement with the author and most of the responders. I believe we are going to face a wave of shocks to the economy. The stock market may look better now but how will it respond to a continued decline in the dollar? How will it respond to the expected wave of mortgages resetting in 2010 and 2011? Any "recovery" looks to me like a "W' and we may be at the middle of that figure now. Many will say that a cheaper dollar makes us more competitive but a cheaper dollar also raises the cost of energy. It seems that our government would rather send depreciated dollars abroad for energy than produce that energy at home. I sure hope those new "green" jobs show up soon!!

May 29 10:36 AM

[Fitz919:]

I would say that the timing for the recovery would need to coincide with Obama's re-election for him to get the greatest effect. If he can set things in motion so that he can take full credit for the recovery while he's campaigning, he'll win by a landslide. This ofcourse means that we will all be expected to suffer greatly for at least another three years. The more we suffer, the more profound the turnaround will appear to be. Expect lots more smoke and mirrors from Obama's team, and plenty of arm twisting.


On May 28 10:14 PM doubleguns wrote:

> Between Fitz919 and Prudent Man CFA there isn't much else to add
> except taxes, taxes, taxes will kill any recovery.
>
> I dont think Washington wants a recovery just yet. They still have
> BIG plans for this crisis. So they will propose taxes to keep the
> crisis going.
>
> We have and are being played for fools. Patriots dont run we must
> stand and fight.

May 31 01:51 AM

[untrusting ...:]

Here is an excellent free video summary of what the big picture may well be:

www.chrismartenson.com...


On May 29 03:50 PM WAKEUP wrote:

> "The list goes on and on." AMEN. While the points mentioned in this
> article are important, trying to single out specific touchstones
> as guiding lights in this mess is pointless. This economy, with all
> its attendant vagaries, double-dealings, false data output, and outright
> criminality on the part of financial types makes it very unlikely,
> in my opinion, that any combination of specific-but-partial factors
> can be used as accurate predictors of the eventual outcome.

May 31 04:20 AM