Economic Downturn: How Long, How Deep?

|
 |  Includes: DIA, QQQ, SPY
by: James Picerno

Thursday's update on durable goods orders reinforces the notion that the economy is slowing if not contracting. But then there's the initial jobless claims news, which reports somewhat better numbers of late. So, what's the deal?

In search of an answer, let's start with the raw numbers. Durable goods orders slipped last month by 0.3% - the third month in a row of declines. Looking at the annual pace of durable goods orders shows weakness as well, as our chart below illustrates. Clearly, the trend is down, as it has been for some time on a rolling 12-month basis. Notably, red ink has been showing up with increasing frequency in the annual trend.

click to enlarge

What, then, should we make of new filings for unemployment claims? The Bureau of Labor Statistics reports that since new claims hit a recent peak of 406,000 for the week through March 29, 2008, filings have dropped to 342,000 through last week, as our second chart shows.

click to enlarge

It's tempting to see the drop in new filings as a sign that the economic ills are now behind us. Nonetheless, we're skeptical. One reason is that corporate America has been running its payrolls rather lean in recent years compared to previous expansions. Between outsourcing, technology and heavy pressure to run a tight ship, businesses don't go overboard in swelling its ranks, at least not relative to what passed for average in decades past. As a result, this data series may not surge as much on an absolute basis this time around compared with past cycles.

Meanwhile, weekly jobless claims are a "noisy" bunch, suffering lots of volatility in the short run. Ultimately, the broader trend is the only reliable signal and by that standard it's clear that jobless filings have been turning up on a relative basis since last fall. Until and if there's fundamental reasons to think otherwise we continue to expect more of the same.

Based on other economic variables we track, it still looks like the economy's suffering. Thursday's update on new home sales, for instance, reveals the lowest level in 16 years. But recession isn't our biggest worry, at least not yet. Rather, it's the outlook for the rebound that makes us anxious.

Everyone knows that recessions are painful. Fortunately, salvation comes, eventually. But for a number of reasons that we'll detail in future posts, the upcycle may not be quite so strong this time. But let's not get ahead of ourselves. By our reckoning, we're still grappling with a downturn and on that score there's still plenty of mystery left, starting with: how long, how deep?