Economics & Research Blog
When Will Things Get Better?
By Dr. Joe Webb
Published: January 14, 2009
It's been a tough few months, and I've been asked when the economy will get better. No one knows when, but there are a few things we can look at. Our current situation did not happen overnight, but I sometimes get the feeling that there are executives who think it did. It actually started two years ago, and it's not going to recover quickly, either. But we will have signs.
The decision to date this recession as starting in December 2007 automatically made this the longest recession since the July 1981 – November 1982 one, which was 16 months. So we are about to be 14 months in this one. There was a good case for them to pick May or June of 2008 instead of December 2007, but they had their reasons for picking it. It should be noted that it took them about 11 months to decide that we had an official recession. The committee that decides are more like economic historians than they are businesspeople in the daily economic battles of the marketplace. What they think matters little in a practical sense.
So how will we know that the economy is rebounding? Personally, I'll be watching four indicators: the ISM manufacturing and non-manufacturing reports, "proprietors income" in the GDP reports, & the NASDAQ stock index. I have my reasons.
The ISM reports are published monthly. Both reports have many pieces that are combined to create their final index value. The key components for me are employment, new orders, and imports. A rise in the employment component in the ISM tells us that businesses are seeking more people. The employment data from the Bureau of Labor Statistics, the fine folks who report the unemployment rate, lag a recovery significantly. That is, unemployment can actually get worse when a recovery is starting because idle workers start entering the workforce again, which is an important part of their calculation. New orders is an obvious one. Imports, however, mean that manufacturers are bringing in raw materials from the various corners of the world to convert into goods.
Proprietors income is part of the GDP and personal income reports. It indicates a change in the activity of small businesses. When this rises, it is a sign that a recovery is starting. Small business incomes contract at a rate greater than economic decline, and they rise in a disproportionate manner as well.
The stock market generally indicates a rise in the economy six months prior to it actually starting. After all stock prices are indicative of anticipated profits. This index is at a very pessimistic level now. During the Internet bubble, it was as high as 5048 on March 10, 2000. It has never recovered. It's currently in the range of 1500. A rise from this current level would be very encouraging. The NASDAQ has many tech companies, but it is less dependent on financial firms for its moves. About one quarter of the S&P 500's value is related to banking, finance, and insurance stock movements. NASDAQ is where many new companies are listed, and they have been noticeably absent from the market. Thank you, Sarbanes-Oxley.
I still expect a very slow recovery, and it is likely that we will get many false signals in the process. But I believe that when these four indicators are all moving in positive concert with each other, they will offer assurance that a recovery is real.
In future editions of this newsletter, we'll update where these indicators stand and how they have changed.