25 May 2009

The hunt for real recovery

The following is extracted from the 23 May 2009 edition of “globeandmail.com”.

Cast back to early March. It felt like the world was on the edge of a cliff, ready at any moment to tumble into an economic abyss.

Then, unexpectedly, came a hopeful sign: The mighty U.S. consumer wasn't quite dead after all. The Commerce Department reported that the tally of everything Americans consume – from groceries to computers – perked up in January for the first time in seven months. Same thing in February. Maybe the end wasn't near.

The hitch: The factors that really drive people to spend – wages, wealth and jobs – are still shrinking.

Consumption promptly tumbled in March. Turns out that what economists thought was a green shoot, a phrase that quickly became a recession cliché, was more of a weed.

And it wasn't the only such disappointment. After a nearly three-month global market rally buoyed by statistics showing that at the very least the pace of contraction was slowing on several key fronts, the news has once again turned a little more downbeat.

The abrupt shift in mood away from the optimism fuelled by tentative signs that the recession was ending points to a thorny dilemma for investors – and a long-standing challenge for economists. ….

Even with billions at stake, Wall and Bay Street's consensus forecasts have never managed to determine precisely when the economy was coming off the rails, and can only affirm months after the fact that a recession is in progress at all. And although armed with the most sophisticated of data-mining skills, the pros aren't much better at picking up the signals that an economy is poised to get up off the floor and start the long climb back toward stable growth. …

The signals are hard to read in part because government data on everything from retail sales and durable goods to industrial production and non-farm payrolls are constantly being revised, as more information becomes available.

In what has been described as a once-in-a-century event with few, if any, precedents, the economists' tools are particularly suspect. …

To assess the best and least useful, the most overrated, and underrated of the hundreds of indicators on which economists keep regular tabs, Report on Business has talked to experts on both sides of the border.

JOBS

What not to look for: The jobless rate. Among the most closely watched of indicators, the monthly job reports have been known to move markets. But they are filled with what Richard Kelly, a senior economist with Toronto-Dominion Bank, calls “false dawns.” …

Instead, look for: Weekly U.S. jobless claims, a reliable leading indicator of previous recoveries – typically about six to eight weeks after claims for unemployment benefits peak. Average hours worked are another favourite.

What it looks like now: New U.S. claims for UI benefits fell to 631,000 in the week ended May 16 from 643,000 the previous week. This is near the mid-point of their recent peak of 674,000 and low-point of 605,000, a sign that job losses may be stabilizing.

HOUSING

… Instead, look for: Housing starts. “In every single housing recovery in the past, the icebreaker that went in front of the navy was housing starts,” says Prof. Case, who estimates that each dollar invested in a new home produces about $1.40 in economic activity. Nearly every recovery since the Second World War has been led by a resurgence in home building.

What it looks like now: Not so good. “ [U.S.] housing starts haven't budged off their bottom yet.”

INCOME

… Instead, look for: Economist David Rosenberg