Monday, July 19, 2010

Is The Economy Rolling Over?

The economic data seems to be signaling a slowing of the economy; however, this slowing does not mean a double dip recession yet. Lackshman Achuthan of the Economic Cycle Research Institute noted in a recent Yahoo interview that we are experiencing a "sharp drop" in the weekly leading indicators. On the other hand the coincident indicator continues to show a sharp rise in economic activity.
Source: Briefing.com
One variable not included in the coincident measure and a part of the leading indicators is the direction of stock prices and stock prices have trended lower over the last three months; thus one component that is pulling down the leading indicator. Mark Thoma, a professor of economics at the University of Oregon, notes the relationship between capacity utilization and unemployment. In his article on his Economist's View website, he notes,
"In the past, there was a fairly close contemporaneous relationship between capacity utilization and unemployment. However, much like the relationship between output and unemployment, a lag in the relationship has developed in the last two recessions (see graph). That is, in past recessions an upturn in capacity utilization was matched by an upturn in employment, there was no delay in the relationship, but in recent recessions there has been about a half year delay before unemployment reacts to changes in capacity utilization (or perhaps even a bit longer)."
Thoma goes on to point out two favorable aspects of the above graph.
"First, the "V" in capacity utilization seems steeper than it was in the last two recessions. If the steep recovery of capacity utilization continues and employment follows, the recovery could be a bit faster than I've been anticipating (though the recovery of capacity utilization could certainly flatten out, and that possibility has to be factored into any policy response -- in the past two recessions the initial change in capacity utilization was also steep for the first few months, but it didn't last). Second, the lag between changes in capacity utilization and the change in employment appears to be shorter than the last two recessions. If so, then employment will recover faster. But the word "appears" here is important. Looking at the response of unemployment in the last (2001) recession, there were initial encouraging signs for unemployment just like this time, but then the recovery of unemployment stalled and actually increased a bit more before finally beginning to decline consistently. It's certainly possible that will happen again. Thus, while there are some encouraging signs here -- the steepness of the recovery for capacity utilization and the apparently shorter lag between improvements in capacity usage and improvements in employment -- but neither of these are unqualified, the steepness could change and the shorter lag isn't yet certain..."
The economic recovery we are experiencing is certainly fragile. Much of the support has been provided by the public sector and we need to see the private sector be more of a stimulus. Social, economic and tax policies coming out of Washington are creating potential headwinds. We continue to expect positive economic growth, although the growth is slowing at this time.


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