I was recently at a Goldman Sachs investment conference regarding investment in the commodities markets. Like most of those types of events 90% of what you hear is not worthy of residing in one of our remaining uninhabited brain cells. In the case of a Goldman conference that may be true for 80% as you are in the presence of the masters of the economy. At this particular conference it was interesting to note that after all of the noise it was clear that one of the firm’s leading strategists is laser-focused, like many others but notable for being one of Goldman’s leading strategists, on employment as the all-important indicator for the direction and rate of recovery of the economy. The strategist went on to say that the unemployment rate itself was viewed as a lagging indicator and new claims for unemployment insurance considered a leading, or predictive indicator. Leading indicators are considered much more valuable in telling where the economy is going opposed to where it has been.
We get multiple employment indicators. The unemployment rate, currently at a recent high of 9.8% has often been considered a lagging indicator of the economy. A lagging indicator is a measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend and is therefore viewed as confirming a trend but not predicting one. Mohamed El-Erian, the highly respected CEO of PIMCO, the world’s largest bond investor, takes a different view. On Oct. 2nd he stated the following in an email to investors regarding unemployment, “Today’s unemployment rate is much more than a lagging indicator, it is also a signal of future pressures on consumption, housing and the country’s social safety net.” El-Erian went on to say that given the large and protracted rise in joblessness and the likelihood that it will stay high, the unemployment rate, historically considered a lagging indicator, was, in this case, capable of predictive powers. What it is predicting is not pretty.
The bullish view on the economy would say that nothing is different this time and that there is no reason to view the unemployment rate as anything more than a lagging indicator and that new unemployment claims are the leading indicator, the canary in the coal mine, so to speak. Indeed, yesterday we got encouraging news from the canary as new claims for unemployment insurance dropped yet again from a revised 524,000 for the week ended Oct.3 to 514,000 for the week ended Oct. 10. This indicator peaked in February at approximately 670,000 and has been on a downward trend since with a definitive spike downward in June. Such downward spikes and downward trends typically mark the end of a recession and we expect that when the National Bureau of Economic Research marks the end of the recession it will be some time in the June through September, 2009 timeframe.
Indeed thats good, but how good? The answer is something along the line of “better than a sharp stick in the eye”. This is because, once out of a recession, the rate of recovery becomes the focus and in this case all indications are the rate of recovery and the starting point for recovery are much worse than our average recession. I sense that is what El-Erian is getting at and he is likely looking at other indicators of unemployment when bestowing predictive powers on the Johnny-come-lately unemployment rate. Consider for example the U.S. Bureau of Labor Statistics’ August JOLTS (Job Openings and Labor Turnover Survey) which indicated that there were only 2.4 million job openings in the U.S. or, viewed another way, only 1.8% of all jobs were currently unfilled at August’s end, a new record low. The resulting ratio of unemployed to job openings was a very high 6 to 1. As per the Atlanta Fed’s very good Macroblog this is graphically depicted as follows:
As you can see, this figure appears to be rising as of August and the stubbornly high level indicates a longer, slower road to recovery than we are used to. Given that small business is generally considered to create somewhere between 2/3rds and 90% of all net new jobs and that, currently, credit is most constrained for small business, we get further assurance of the rough road ahead. For those thinking of what a bearish grouch I am becoming please give me credit for not raising the specter of a double dip recession just yet (oops, I guess I just did).
In summary, we did get good news yesterday regarding new claims for unemployment insurance and any positive indicator is welcome. However, given the magnitude of the problems facing the economy and the likely slow rate of recovery we are likely to slog through for quite some time. The canary in the coal mine is still alive and even chirping a bit but it will be some time until it fattens up a bit and can actually fly. Good thing we don’t eat canaries at Thanksgiving.
