Unemployment Will Peak Sooner than Expected

Includes: DIA, SPY
by: Lok Sang Ho

The discussions about green shoots had invited a lot of skepticism. By now, however, the recovery appears to be well under way. There is little doubt that third quarter will bring in positive growth, which should carry over to the last quarter and beyond.

One area of key statistics that tells about the future that I watch closely is the ISM indices. Overseas, the Canadian index shot up to 58.2 in June from May's reading of 48.4. In UK the ISM index hit 50.8 in July, up from 47.4 in June. In Asia, The official Chinese PMI improved slightly in July to 53.3% from 53.2% in June, having been in the expansionary zone of higher than 50% for five consecutive months, indicating continued expansion of the manufacturing sector and recovery of economic activities in China. The purchasing managers' index in Hong Kong rose to 49.9 in July from 47.1 in June. China is confident its growth this year should be north of 8%. India, Asia’s third-largest economy, will probably expand 6.5% in the year ending March 31, the Reserve Bank of India said. This forecast compares to an earlier estimate of 5.7 percent gain. The Singapore economy actually grew at an astonishing 20% plus in the second quarter!

The US Institute of Supply Managers Index for manufacturing was higher than expected in July, reaching 48.9. According to a commentary on the official website:

The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (40.6 percent) corresponds to a 0.2 percent decrease in real gross domestic product (GDP). However, if the PMI for July (48.9 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually.

Skeptics point to the mounting debt, the still rising unemployment numbers, and the apparently unstoppable surge in home foreclosures. Yet do not underestimate the effects of psychology. Just as the loss of confidence directly triggered the credit crisis, so the return of confidence will bring about real, positive effects throughout the economy. Already the housing market has shown clear signs of stabilizing: rising prices and transaction volumes in many cities. Toxic assets are becoming less toxic. And with the return of confidence the US dollar is depreciating, lending further support to American exports.

As the economy is recovering faster than expected, the fiscal deficit will narrow. I am optimistic that the unemployment rate will peak much sooner than expected.