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russiangambit (29.49)

Unemployment – a lagging indicator, but from where do you start counting?

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April 09, 2009 – Comments (1)

I keep hearing people saying that never mind unemployment is a lagging indicator, so never mind huge unemployment number, the economy is getting better. I guess, may be some parts of economy are getting better, but not the parts related to consumers. We’ve seen rally the last few days in retail stocks on the premise that consumer is going to start shopping again any minute now. And when somebody brings up the unemployment number, the answer is – never mind unemployment, it is lagging indicator.

 

But you know it is quite possible for economy to be falling and unemployment to be falling at the same time.  When recovery starts, the businesses will still be laying off because they have no money to pay the salaries, but still they will be laying off at a slower pace. And I haven’t noticed any slow down yet. The US businesses are very quick to lay off people, so I don’t think increase in unemployment is too much lagging. Increase in employment is lagging, that is true, because businesses are very cautious in adding people.

 

El-Elarian said something very interesting the other day in response to that same point. When unemployment is at high levels like it is now, it becomes forward looking indicator because people see unemployed people around them, they get worried about loosing their jobs too, they don’t spend, and they hunker down. So, it affects forward consumer spending.

 

So, my point is, unemployment only becomes a lagging indicator when the rate of unemployment increase slows dramatically, until then it is still a forward looking indicator.

1 Comments – Post Your Own

#1) On April 09, 2009 at 3:10 PM, angusthermopylae (40.04) wrote:

I agree; simply dismissing indiciations that the economy is poor is a bad way to do business.

I know I have a bearish bias, but I think that, instead of a V-, U-, or L-shaped  recession, we're going to have an NN-shaped one (a little skewed to the right, but NN-shaped (or should that be a backwards-N?  ИИ?)

Think of it like this:  Last September/October, all the bad news came out, and both the markets and the economy basically tanked.  (I'm still a believer that all the signs were there...just not in the public/political consciousness.) Things progressed downward until about mid-February.

As things headed downhill, cutbacks in spending, jobs, lending, and manufacturing occurred...everyone was hunkering down, waiting for the next "bad thing."  Even the big economists, the Fed, and the Treasury were declaring that "things won't get better until 2010..or later."

...that's the first downward leg of our ИИ.

Then, starting about March, a few things happened.  First, everyone was expecting the worst...riots, hyperinflation/deflation, collapse of the dollar, cats and dogs living together, soup lines...pick your doomsday scenario.  When that didn't happen, people thought, "Well, maybe it's not so bad..."

Secondly, the same previous folks who were declaring that things were going to be bad suddenly started saying "It's almost over...recovery this year."

Thirdly,some of the recent economic data that has been coming in has been interpreted as "not so bad," reinforcing the first thing.

Also, everyone is looking for The Deal--get something cheap now, compared to August-September 08.  You can put off a car purchase for so long, then you need one.  Same with TVs, houses, furniture, etc.  With some prices dropping double-digit percentages, people are starting to come out of their hidey-holes.

With stocks, the popular wisdom "look how cheap everything is!" has pulled money back into the market.

...that's the upward tick on our ИИ...

But, (and here I show my bearish colors), poor indicators are still coming in:  Jobs numbers are bad (unemployment percentages, no matter how you calculate them.)  Trading volume on the markets seems to be low, still (meaining that the few and brave ones are making the moves happen.)  Those 8.5%+ people are still living off their unemployment compensation...which should start to run out in the next few months (not to mention the people laid off before September...)

Then there's what some (including me) believe are other major indicators of weakness:  Commercial real estate is getting shakier.  Pension funds (state, federal, and business) are still calculating the hit.  Tax revenues are still falling.  And the effects of the TARP, bailout, Treasury, and Fed plans still haven't made their full effects felt.

...in other words, the whole structure is still shaky, and all it would take (imho) is a headline source of bad news to drop us on the last leg of that double-И...

So, yeah, in this scenario, unemployment numbers are a forward indicator...especially of weakness.

(Sorry for the long comment...you brought up one of my pet peeves...)

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