Looking for Signs of Recovery

by Inya Ivkovic, MA

As I wrote recently, there is little reason to be optimistic about the U.S. economy in the short term. But that does not mean I shouldn’t look for signs of recovery, however feeble and undefined they might be this early into the game. Construed as one such sign, for example, could be the statement issued by Fed Chairman Ben Bernanke on Tuesday this week that, while economic data are still rather depressing, at least they aren’t getting progressively worse. If negative performance appears to be leveling out, this certainly could be the first step toward recovery.

No one owns a crystal ball or, at the very least, evidence of anyone successfully timing the market has been misleading. However, the consensus among economists appears to be forming, estimating that the first signs of recovery could be seen late this year, or early next year. Most are even ready to point to a few signposts along the way.

These “signposts” range anywhere from traditional economic data, such as the residential building permits, home sales and stock market trends, to new age ways to gauge investor sentiment — such as Google’s search engine. Not surprisingly, two of the most frequently searched terms on Google are “global economy” and “Great Depression.”

Investors should be cautioned that talking about a recovery does not a recovery make and that the U.S. economy is still very far from turning the corner. To illustrate, after almost all of its leading economic indicators increased in January, albeit slightly, there were disappointing declines again in February, weighed down by unrelenting unemployment numbers and consistently deteriorating industrial production. Overall, however, six out of 10 indicators improved in February.

Positive contributors were the interest rate spread, index tracking supplier deliveries, number of new building permits, real money supply, new manufacturers’ orders for consumer goods and for non-defense related goods. In contrast stood the negative contributors, such as unemployment insurance, stock prices, consumer confidence and average weekly manufacturing hours.

Out of these 10 indicators, economists rely the most on the following: jobless claims, employment numbers, stock market performance, new building permits, and home sales. Starting with jobless claims, economists agree that this number tends to hit the peak approximately two to four months after a recession has technically ended. At this point, the U.S. jobless claims are still growing and there is no evidence of a true peak just yet.

As far as employment numbers are concerned, don’t be misled by popular opinion that employment is a lagging indicator. Quite the contrary; the U.S. National Bureau of Economic Research uses the first month of significant job losses to mark the start of a recession and the first month of significant new hiring to mark the start of recovery. Some economists go so far as treating employment as the best leading indicator all around. In March, the U.S. economy lost 663,000 jobs. Clearly, no one will be using that month as a sign of a turning point.

Stock markets’ performances are perhaps the flashiest of the key indicators, as well as being the most forward among forward-looking indicators. With a reasonable amount of consistence during the past six recessions, North American benchmarks have bottomed out from three to six months before any of the six recessions has officially ended. Today, analysts’ opinions on how close to bottoming out we are at the moment are conflicting at best. I belong to the camp that believes what we are currently seeing are bear market rallies and that there is still ground left to be covered before a true bottom is reached.

Finally, building permits, housing starts and home sales are complementary indicators and have become very important as of late, since the current recession is more or less rooted in the crash of the U.S. housing market. In his speech on Tuesday before the FOMC, Fed Chairman Bernanke referred to signs of improvement in the U.S. housing market as the first signs of recovery. However, this might be a premature statement, since the timing of the eventual recovery of that market segment will rely largely on the recovery of the financial and credit markets, which are far from healed at this point.