Is the economy improving or are we just “muddling through”? Over the last year I’ve tried to note what we should look as reams of economic data are released and then spun by an eager, if naïve press. It’s time to go back and review what’s happening now that data for the end of 2010 is starting to come in.
Headline unemployment appears to have dropped as we enter the new year, but it’s best to ignore that particular stat. This figure does not count “discouraged workers”, which is to say those that have been unemployed so long that they are too busy scratching out what they can to look for a regular, permanent job. As I predicted at the start of this month headline unemployment will continue to drop for this reason, meaning that any real job growth will be hidden.
Six months ago I suggested watching the more visceral 4-week moving average of initial unemployment claims, waiting for it to move below 450k per week. It just managed to do that at the end of 2010, which is to say that the beginnings of job growth are upon us. This chart is from the St Louis Federal Reserve:
Is this the start of something bigger? Note that initial claims are still about where they were at the worst part of the last two recessions, meaning that we can’t expect much yet. On January 28th we will have the first estimate of GDP growth for the 4th quarter of 2010, which remember has to be above 3.3% before we can expect job growth. Third Quarter was an anemic 2.6%. The end of the year should be quite a bit higher than that, possibly as high as 3.6%, which would be very good news.
But is it sustainable through 2011? It’s very hard to tell. GDP growth through the next year could be between 3% and 4%, meaning we could yet see some significant job growth. This is based on the latest stimulus in the form of tax cuts, which are untested. But the 4-week Initial Claims number remains the best quick indicator we have.
Is there any real sign of Deflation, following the guide that I published earlier? So far there is not – and increases in gasoline prices continue to make everyone wary of inflation instead. I’m starting to think that we will avoid any serious deflationary trap because of rising commodity prices, especially for fuel. That will help tame our consumption, but it won’t feel good.
Lastly, I suggested that we all keep an eye on credit markets as some easing of credit has to occur. My hunch is that there will be more political pressure to increase lending, although not in the housing market. Dramatic steps such as “Quantitative Easing” have not helped that situation (and may have even hurt it) with bank reserves essentially unchanged – and still waiting for an opportunity that looks like an investment. This is probably the most important thing to watch for if we are going to see a genuine reversal in the economy for the better.
So what has happened in the last six months to change the situation? Not anywhere near enough, but the same things are worth watching for any signs that the economy is improving or getting worse. Initial claims are best for the optimists among us and falling consumer prices would be a signal that the pessimists are winning. Much of the rest of it will be noise, except for the all-important GDP figures – which are so slow to come out that they only confirm what we already know. This all could change if somehow Washington manages to do something dramatic, but don’t count on it.
As always, fasten your seatbelts.