Home » Money » DJIA: Yes and/or No

DJIA: Yes and/or No

The Dow Jones Industrial Average (DJIA) keeps setting new record highs.  Does this mean the Managed Depression is over?  The short answer is “yes”, but the long answer is “no”.

The case for a “yes” is that this is based on the solid progress that we have been waiting for, and it’s backed by some strong numbers.  The “no” is that we’re still judging ourselves against either the depths of the worst part of the depression, or in the case of the DJIA a 6-year old record – it should be about 30% higher or more in that time.  But what counts is that this is based on strong corporate profits at least as much as a lack of any other place to put money and the trends should continue – unless the Federal government does something stupid.  Where do you want to put your money on that one?

wall-street-bullSince it’s been two months since Barataria set out the criteria for judging this year, we should check in to see where we stand.  The most important signal that we’ve been following since the low point three years ago remains the ADP Employment Report, which showed a healthy 198k jobs added in January.  A full 40% of them came from businesses of less than 50 employees, 25% from businesses of less than 20.  Small businesses continue to lead job growth by far, suggesting that the restructuring we can expect in a depression is continuing apace.  More to the point, the absolute figure is ahead of the 160k per month average we’ve seen since the bottom, a very hopeful sign.

We won’t know how youth unemployment is faring until we get a few more months of data in from the noisier but official BLS jobs survey.  But that’s still the best sign to watch.

The jobs figure is important against the DJIA record because of solid corporate profits.  While large companies have been slow to hire, profits suggest that in the future they will come around and enjoy the party being thrown by small businesses.  The main reason that employment lags recovery in a normal recession (as it has not so far!) is that corporations typically wait to see profits return before they hire.  That may finally be turning on.

One of the important other measures to keep an eye on in 2013 is the Consumer Confidence Index, which jumped to 69.6 in February (from 58.4 in January).  This number, where 100 is defined as the positive response net in 1985, is still at typical recession levels – but about as high as it has been since 2007.  People are becoming more positive, if cautiously so.  It’s hard to expect this to climb out of the ditch in 2013, but it should normalize in the 70-80 range this year if we are to believe consumers are less pessimistic.  February saw us hit that.

The Case-Schiller index of home prices, which should also start hitting more normal ranges in 2013, takes more than 2 months to compile.  So like youth unemployment, we can’t say yet.

Given these stronger numbers and solid profits, the rise in the DJIA should be taken as a real thing.  If nothing else, the zero overnight Fed rate means that money has nowhere else to go – so we can expect the ride on Wall Street to continue just because it is the only big show going.

The only dark clouds on the horizon come out of Washington, which has slouched its way into austerity even though everyone knows it is a bad idea.  At least congress is predictable even if they aren’t all that helpful.  This one problem could easily overshadow everything good into next month as the population is spooked by sequestration.  Hiring at small businesses can be as emotional as it is practical, and small business owners are notoriously cautious about bringing more people on if they believe they will have to look them in the eyes and lay them off in a few months – if not for the emotions involved, at least for the sunk costs of training new hires.  Horrible news of a broken government can have a terrible effect in the kind of economy we have now, also wreaking havoc on consumer confidence.

In the short term, we have everything set up for a good party.  Over the longer haul there are a few idiots who stand a good chance of blowing it bad.  Is the DJIA record for real?  You can look at it either way.  What we can say is that, unless it gets screwed up, the solid foundation set a year ago is starting to have a shiny new economy built on top of it.  We’re still on track for a 2017 full recovery.

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13 thoughts on “DJIA: Yes and/or No

  1. I hope you are right but the point is well taken that it should be much higher by now. 30% is only inflation over 6 years, it should be 50% higher or more. So that is some good context to understand how low our standards have become. Just don’t you lower them much more. 🙂

    • How about 42%? 2% inflation and 4% real return over 6 years. 🙂
      Yes, it’s a big number. I think we might be back near there in 4 years unless rates go up quickly – which I doubt. So there may be a lot of potential here, and the continuing rise of corporate profits will be something to watch in 2013.
      Incidentally, this will probably tempt Democrats to tax corporations more as the year wears on. I’m not totally against that, but the current structure has to change before I’ll back anything.

  2. I don’t doubt that it is turning around but there is still a lot of debt out there and nothing will be all roses until that is taken care of.

    • YES! Debt is the main issue, and I have been thinking about what needs to be done here. Obviously, we’re not going to have a “Jubilee” as I proposed before given that the establishment will never make this cost them $$$ so directly. But there has to be a way out of the debt, and that is what it will take to have a real turn-around.
      One answer, of course, is inflation. I think we should be ready for that.

  3. Record setting stock markets are definately a good sign but you are right that simply returning to 2007 is not the same as a recovery! There are good signs but to be honest a consumer confidence of 70 is not all that high and we really should not be happy with that. You are right that employment is improving especially with small businesses and I see that everywhere. But so many are start-ups that do not seem secure and I think that is what you see in the consumer confidence number. People might have work but they also have been struggling for a long time now. And Jim is right that there is a lot of debt and underwater mortgages to be sure.

    • Excellent point on the CCI – just because someone has a job does not mean they are ready to spend every dollar from their last paycheck and max out the credit card again. I hadn’t thought this through enough, but these start-ups are all rather tenuous and at 40% of new jobs we have to regard all those employees as “wary”.
      Excellent call, thank you!

  4. Just a few notes. I may be totally wrong but I tend to view small companies as often serving for large companies. I’ll try to do my best to explain that by saying Ford is a large company but it employs a lot of small companies. In some cases I think the small companies are more flexible/risky in that they are in a sense “jobbers”. I think Chomsky said something once along this line. There is the primary economy of Empire (Boeing etc. and raw material), the secondary economy, the third economy and then the underground economy.
    Onto public employment/public infrastructure. Is there any way for economists to predict longer cycles (I am referring to those of more than one year)? I often think our news and political driven time frame is too short. Ever since the Great Recession started in approximately July of 2007 I have been reading some longer term views that often focused on 2012, 2013, 2017. With that in mind could we as a government or as a free market economy preemptively redeploy some of our energies/workforce? I glanced across an article today where it often takes more than shovel ready projects to best use up our excess labor. And again we have a horribly divided government due to conservative states redistricting
    As an old guy i know belatedly that sometimes you just have to politically dump money into the economy to refill the channels. It is very hard to pick and choose. I know it can seem wasteful. Inflation can be one aspect of that.
    The same sometimes goes into diplomatic or war/peace strategic thinking. Targeted vs. general sanctions and what has more force.
    On a more personal note I can tell you and the readers that the Unemployment Insurance program failed me in the past 3 months. I was terminated in early December for a minor accident (less than $500 damages). Also I was soon due for a large wage increase of $4.50 an hour as per the labor agreement. My case was aggrieved for 30 days until the company made it clear that it was going to start costing me and the union money and time to keep appealing my case. I decided not to continue the appeal process as it would no longer have been a good place to work with all the negativity of the past 30 days.
    I did not receive wages or unemployment insurance for the month of December. When I did apply the computer locked up on me so I ended up talking on the phone to a call center and one person was helpful, the other not so much. Same goes for the in person staff at the workforce centers.
    Once I quit the appeal process I had to legally argue with a hearing judge for an hour over that my termination meant no work insurance or yes work insurance. I won the case that although from a business standpoint the company had the right to fire me due to the fact that I tended to have a very minor accident every 50,000 miles and may present a risk, that was not sufficient to deny me unemployment insurance. By that time I was working part time at a horrible job (rampant wage theft and low low wages) . I did end up getting $700 in the month of January.
    In February when I got a job with some future in it I had to reapply as I was now in a low part time training period for 2-3 weeks and that affected my eligibility. The only good thing that occurred during that time was that I still had company paid health insurance for December and January. Now I will probably be with a terrible but expensive health plan for a year. And yes I did watch the Minnesota Senate debate the insurance exchange on Thursday. There were over 150 amendments to consider almost all from pro private insurance republicans although there were a few friendly amendments from both sides of the aisle.

    • Yes, there are primary companies and a lot of small ones that feed into them – the auto industry is the best example. I wrote about this a while ago, but more about Ohio as a whole state. I’ve been worried about the place. But yes, that’s how it goes.
      As for longer term planning, it’s entirely possible and there are many approaches to making it work. The business cycles, for example, are something I’ve been talking about here for at least a couple of years – and we know something about what the next one will look like. We could do a MUCH better job with long range planning, especially with infrastructure.
      Sorry about the hassles with work, that’s terrible. And I do hope we get something good together in health care, finally. I’m not watching it all that closely, because this stuff really gets detailed, but I will keep something of an eye on it.

  5. 2 other Minnesota political notes. Was happy to see Norm Coleman is not running for political office. Thought he could serve equally well as a republican or a democrat, I really don’t have much vitriol for him but was so disappointed to see him win over Mondale when Wellstone died.
    Felt sad that Dayton is having to give up a large part of his sales tax reform. There was a lot of state and special interest resistance to it. It would be interesting if something could be done like that on a regional scale like with Wisconsin and Illinois. Change will probably have to come from a large state like California.
    And man I gotta say you are fast and sharp. It seems to me and I could be wrong they used to write and talk about business cycles all the time. Then sometime post .com bubble breakage they didn’t talk about the cycle(s) so much except for real estate. But I still think the cycle(s) still exist esp. in cars where you can defer purchases but eventually new buying occurs which can dampen growth in that particular industry although they make money in financing, parts and service and fees.

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