I am skeptical of a lot of the "good news", and note that a recent mini-bounce in the Conference Board Leading Indicator was only due to the expansion in the money supply; all other variables were negative. I also think Rosenberg is on the right track in terms of higher than expected savings rates, and the over-extrapolation of recent housing and production data.
But as for employment, we need to acknowledge the historical reality that prior market bottoms have coincided with terrible (and worsening) employment conditions. This is true even in the very bad recessions of 1957-58, and 1973-75. In the charts below, the orange line shows unemployment, and the blue line the S&P 500; the blue line often troughs while the orange line keeps getting worse. This is the basis for the whole "employment as a lagging indicator" argument. Maybe it's different this time and employment is a now coincident indicator, but that's the case, adherents to such a view should explain why.
Sphere: Related Content
Bookmark this post with:
4 comments:
An observation from the data presented:
When comparing trough (market) to peak (unemployment) you are only looking at two static data points. If you look at it instead as the market trough occuring within a range of unemployment's peak a clearer picture emerges. In almost every case the market turns when unemployment is within 1.5-2% of its high. Under that metric, if unemployment is going higher than 10% then the market can decline further and maintain the past trend.
Hmm this is interesting, I thought that most of the economists have expressed the rise from 2003-2008 was a large credit fueled boom. I think the last graph clearly illustrates the difference between a credit cycle bust and your regular recessionary bust. Equities didn't recover until significantly after the regular economy had and even then they lagged traditional measures of economic health. The whole 'equities performing months into the future' is a rule that's always right until it's wrong and when it's wrong you've got to find out why, 2001 it was wrong, why?
Granted I'm looking a little past the gray recession box on the charts, but you can see the continued decline in equities even though the recession was 'over'.
The CB's indicators (leading, coincident, and lagging) are all measured relative to GDP.
The stock market is generally considered to be a leading indicator to GDP. Relative to the stock market, GDP and employment are lagging indicators.
Unemployment is a lagging indicator to both due to the behavior of marginal workers, who tend to enter/leave the labor force as employment opportunities become better/worse.
That an indicator is leading or lagging is just its mathematical correlation with GDP. It's not an exact indicator, which is why the CB relies on an index to forecast GDP. There's an old quote (among economists at least): "The stock market has predicted 9 out of the last 5 recessions."
The market has its own cycles independent of the economy. You can see them by dividing a stock index by nominal GDP (I think there was a reference to an analyst about a week ago that used that as an indicator of sentiment).
I fail to see how employment can be classed as a lagging indicator in a consumer dominated economy like that of the US. In the recessions in 57-58 and in 73-75 the US still made and exported a lot of things. Now the US buys lots of things, around 70% of the economy being dependent on the consumer. The ability to consume something is dependent on ones income and if one losses ones job then surely that ability to consume, whether items or services, will become severely restricted. This will in turn affect earnings and GDP growth. What is more, consumers have used huge amounts of credit to maintain their spending, so that house prices have become a leading indicator in this depression. As we are entering a massive structural re-allignment, which is effectively, what a depression is, I think it is perhaps time that everyone started challenging the common measures and the way we have used them previously, unemployment being classed as a leading rather then a lagging indicator, being such a change.
Post a Comment