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Summertime Blues

July means many things.  The kids are off, the weather is hot, and somewhere between those two facts you can hope the lawn is being mowed regularly.  But for those of us who are into economic stats, July is the start of a new quarter – the sleepiest quarter of the year, despite a tremendous number of summer jobs.  Summertime, and the livin’ is easy.

It’s a good time to check in and see how we’ve done in 2011 so far and where we think it’ll go from here.  The short answer is “Meh?” but the long answer is a much more definitive, “Meh, don’t expect much”.  I’ll explain …

Since the start of this phase of the Managed Depression in 2008 the key to watch has always been the 4-week average of initial unemployment claims.  This is real-time data that comes in regularly, smoothed out a bit by averaging – and much more current than the stuff that takes time to compile such as Gross Domestic Product (GDP).  That’s the real economic “bottom line”, fudgy as it is at times.  However, we won’t see GDP figures for the second quarter (April-June) until later this month.

We can guess how it’ll go and how the rest of the year is going to look.  Below is a chart from our old friends at the St Louis Federal Reserve, a data junkie’s paradise.  I chose to update this data that I present every quarter with the latest thing the stock market is fretting over, namely the ISM Manufacturing Index.  The latter is a survey of activity among manufacturers, normalized so that anything above 50 signals growth.  The two figures have an interesting relationship, shown here since 2009:

You can see that there is a very strong inverse relationship between the health of the manufacturing sector and unemployment claims.  Previously, I’ve established the strong relation between unemployment claims and everything else, including consumer spending and home prices.  That’s a big “Duh!” since people need jobs to have money which they can spend.  But remember that in the boomiest times of the 1990s and 2000s people were far more likely to talk about investments and housing prices as a driver of the economy, not work.  What changed is that our economy is now much more closely tied to reality – and our leadership has been incapable of mastering that reality.

The ISM Manufacturing index is one of the latest worries on Wall Street.  As we can see, it is not exactly optimistic lately.  The strong correlation above shows that the Initial Claims data is still the best real-time way to monitor how things are going to go as more data is released.  It’s been stuck at about 430k per week for most of 2011, a number that signals neither strong growth nor a worsening Depression.  Staying even like this is what our “Waiting for Godot” economy is all about.

Note how strongly it all goes back to manufacturing, however.  That’s the one sector of the economy that stands out among all the others at this point.  When things are going well in manufacturing there are jobs being created and the whole economy is lifted.  You will continue to hear more and more about manufacturing and the jobs it creates through the rest of this year.  That chatter will probably be met with even more inaction as no one in power has yet to talk about fundamental restructuring of the economy in a way that will create the needed manufacturing jobs.

What can we expect through the rest of the year?  The second quarter GDP number will probably come in right around the number for the first quarter, which as a net grown of 1.9%.  If it’s lower than that we will see panic because it will signal a weakening economy, and that is a very real possibility.  More likely it will be very close to that number, as predicted by the very flat Initial Claims data.  That means that the doldrums of summer will be reflected in the economy, at least as long as there is no sovereign (national) debt crisis either here or in Europe.

That is what we can expect.  If it changes you’ll see it in the Initial Claims numbers before anything else.  Keep your fingers crossed, but temper any optimism with the realization that our leadership is far more concerned with pointless posturing and games than it is with taking simple steps to get us out of the doldrums.

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17 thoughts on “Summertime Blues

  1. I am starting to understand just why you always concentrate on manufacturing when you look at the economic situation and your proposed policies to deal with it. I think that this is very slow to sink in because people got used to the idea that the stock market was the most important thing and all the money made from that made the economy. I can see now that this was a temporary thing.

    You should put all of this together in some way, either a book or an e-book or one website. I think I get it now but it is a hard thing to understand when your used to something else.

  2. Anna: Yes, that is what I’ve been saying all along – the one thing that has really changed in the last 30 years has been the gradual decay of the manufacturing sector since about 1968- which took a real dive at the start of this Depression in 2001. It was masked, briefly, by an increase in finance related jobs but those were purely ephemeral. Without those, the underlying problem was laid bare – and it shows us how we have to restructure to fix it.

    It’s really very simple, but the policy makers and the news media are very slow to understand it because they are operating on the new “conventional wisdom” that wealth somehow comes passively from investment. That very wrong belief, born of the bubble economy of 1991-2008, has to be purged from our thinking before we can honestly get real.

    That is what I am trying to do, 3X a week. It’s tough, but someone has to do it. 🙂

  3. The blue line is the initial claims, yes? It really did flatten out since you last showed this graph. That kind of works with what I have been hearing which is that jobs are a bit stronger than they were but not much. I think you have hit the nail on the head with this and it sure does seem to be the best figure for understanding what’s up.

    Is there some other place I can get the same information? When does it come out? Thanks.

  4. Jim: Yes, I didn’t label the graph very well, did I! Sorry ’bout that.

    The “horse’s mouth” on this stuff is the Department of Labor (DOL) and it comes out every Thursday at 8:30 Eastern Time, on a clock. Find it here:
    http://www.dol.gov/opa/media/press/eta/ui/current.htm

    It’s very handy to have this so meaningful and current. What’s funny is that the stock market is only starting to react to this data as it’s realeased – but it reacts quickly to other data like the ISM and GDP figures. Not very bright of them, IMHO. 🙂

  5. Excellent update, thank you. The 1.9% GDP growth you cite is annualized, isn’t it? It’s a pretty small number for the quarter alone, almost inside the noise. I think it’s probably not real and we are already slipping back. Would it be a double-dip if we’re already in a depression?

  6. Dale: Yes, it’s annualized, and you’re right that it’s awfully close to the noise. Considering we’re running a deficit of something like 5% of GDP and the rest of the economy is continuing to shrink.

    I think the term “Double Dip” is out once we call this one big Depression, yes. So if we slip back I’ll just be more obnoxious about promoting the term “Managed Depression”. 🙂

  7. Thanks, Sheryl! I just want to emphasize that since I wrote this the connection between unemployment and the decline of manufacturing is starting to feel more and more profound to me. If that is indeed what we have to do, a number of policy choices that are normally a careful balance become very easy. For example, letting the dollar drop may be the one thing we absolutely have to do – and screw the inflation because it just means we’ll pay off our debt with cheap money later.

    I’d love to know what people think about this.

  8. I do not pretend to understand all of this but I like the way you break it down to something simple. It only makes sense that jobs are the most important thing right now but I still do not know about manufacturing. Perhaps if we gave more support to green factories we would not have to choose between pollution and jobs but I fear that is what we to do have now.

  9. I do think you have a better grasp of the economy than I do, but I definitely FEEL the effects of it and have for awhile. My opinion is that we got into this mess because of the greed of a few at the top. Capitalism. There are some people in this world who have more money than God. Some of them are that filthy rich because they come from a rich family like Paris Hilton. Other people are filthy rich because they are smart and came up with a great idea like Mark Zuckerberg or Bill Gates or Steve Jobs. Other people are filthy rich because they lucked out and got “discovered” as an artist or that interesting person to listen to like Lady Gaga or Oprah. And then there are people who are filthy rich because they are just plain greedy and stepped on a bunch of other people to get that wealth. As in shipping jobs (like manufacturing as you mentioned) overseas, laying off people and expecting more productivity out of workers who are paid less and receive fewer benefits, and in some instances committing fraud and basically acting as big time con artists. (Such as the mortgage and banking industries who we all bailed out for no good reason.)

    Meanwhile the so-called middle class is disappearing. Poverty is getting worse. Those in abject poverty are at risk for going deeper into poverty with possible cuts to food support, Medicaid (MN Care on a local level), Social Security and disability, Medicare, and so on. Food shelves have shortages. Apparently the Republicans just want the poor to be dead and the middle class to be poor. I suppose the poor make good soldiers for all those wars we keep getting into. That is, the poor who are in okay health. The rest of them apparently don’t deserve any quality of life. Yet extremely rich people always want to brag about how “hard” they work as if nobody else in the world worked.

    It’s quite simple. Nobody really NEEDS the amount of money that the extremely wealthy have. Nor does anyone DESERVE to be in such poverty. A redistribution of wealth is what is necessary. The rich ought to pay their taxes just like the rest of us. And yes, even unemployed people pay taxes. That is assuming they ever purchase anything that has sales tax. Aside from that, putting an end to various wars would be another good move. As for the debt ceiling, although I am not fond of such an idea, I would prefer that if it meant taking care of the poor and vulnerable. Things have gotten so bad in the last decade that I no longer have the patience to have a discussion with a Republican. I would rather rise up and march in the streets with my own kind and have my voice heard. I do not believe in bipartisanship. It is a waste of time and a sign of weakness. When I elect a Democrat, I expect a Democrat.

  10. Kris, I agree with you completely here. This is a national crisis and we are just not taking it seriously. If there is one theme that I hope people take away from this humble li’l blog it is that we have to be much more serious and stop playing games with our civic responsibility.

    A big part of the game is not political, however, it’s all about keeping score by amassing far more money than anyone could ever need to live. It’s gotten way far out of hand – and people actually believe that it is all about them, not society. I don’t know if you ever saw this piece from long ago:
    https://erikhare.wordpress.com/2009/03/25/money/

    There is no definition of “money” that isn’t social in some way. It’s just not all about individuals and it can never be. A society defined so heavily by selfishness has not future, IMHO.

  11. I just want to add that I am very dismayed that the headline unemployment rate rising on Friday was taken as a big surprise. It’s like no one is paying attention at all. Here’s a graph from the St Louis Fed showing the strong correlation between initial claims and headline unemployement:
    http://tinyurl.com/5umpuwy

    I’d go back further in time to show how strong the correlation is, but there was a “jump” discontinuity between 2008 and 2010 as a lot of “discouraged workers” fell off the headline unemployment rate – which only shows how fudgy the damned thing is. I’m trying to figure out just what to say about it, but the reality is that it tracks very well.

    Meanwhile, I hope everyone on twitter can follow the tag #ManagedDepression where I’ll post articles and data as I get them. There have been some really good items lately that show how this is, in fact, a kind of Depression that we are in.

  12. More and more signs that we are in a double-dip but if we push it all together into one Depression I don’t know what they will call it. Your call of a Depression is looking more accurate all the time. I don’t hear too many people willing to call it but it is gaining.

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