Thursday, April 16, 2009

The End of the Recession May Be Only Weeks Away - Member of the Recession Dating Committee

While unemployment is a lagging indicator, jobless claims are a leading indicator.

As of last week, the four-week average of new claims fell by 8,500 to 651,000, the series' first decline in three months. This week the Labor Department reports the number of U.S. workers filing new claims for jobless benefits fell by 53,000 last week to 610,000. There is a lot of Labor Department mystical seasonal adjustment in the number. The advance number of actual initial claims under state programs, unadjusted, totaled 607,971 in the week ending April 11, a decrease of 18,892 from the previous week. But, the trend appears clear.

According to WSJ, Robert J. Gordon, an economics professor at Northwestern University who sits on the committee tasked with dating recessions, is one who finds enormous value in the jobless claims data. Going back to the late 1960s, he has found that the four-week average of new claims peaks about a month before the declared end of recessions with remarkable accuracy.

WSJ continues:

If that number holds, based on the series' past performance it would mean the recession ended somewhere between late March and early May - a far more
optimistic read on the economy than any consensus forecast (the latest WSJ survey of economists shows on average they expect the recession to end in September). "The end of the tunnel may only be weeks away," says Mr. Gordon.
There is no one more suspicious of econometric type forecasting models than me me. However, if the logic behind a number makes sense and their are no countervailing data points, and other data (In this case, strong money growth) support the trend, I will take a number into consideration.

Further, since I have been shouting from the mountain tops that this recession is over or near over, I am not surprised that we are beginning to see a downtrend in new jobless claims.

So here's how the race looks like it will end: I was first in suggesting the recession may be over, the data hounds such as Paul Krugman came in second. The pack followers will be third.


  1. Bob, how do you see this affecting the housing market? Here is what I've been able to observe and surmise in the Southern California market where I frequent. Please let me know if you see any flaws in my reasoning:

    First Observation: People will buy homes based on three, primary factors:

    1. Future Price Expectations: People buy when they think prices are going up and that a "greater fool" down the road will buy from them at a higher price. I believe the future expectations are still negative. Future Price Expecations pushed prices to the extreme on the upside when the market was hot. Now we are seeing the other side of this.

    2. Rent vs. Buy: People will be motivated to buy when it is cheaper than renting (assuming they can get credit). When it is cheaper to rent they will stay out of the ownership market (especially when they have negative future price expectations as described above). This takes into account all the costs of home ownership including taxes, insurance and maintenance.

    3. Return on Investment: Investors will buy houses when they can rent them out and get a decent return on their investment.

    With those three primary factors in mind, here is what I see in the Southern California market (San Diego specifically):

    Low end homes:

    Low-end, entry level homes are being snapped up by investors because the properties will now cash flow at current prices. They are also being bought by homebuyers because it is now cheaper to buy vs. renting in these price ranges. This seems to be putting somewhat of a floor on prices here. This is where homes that sold for $400k at the peak are now selling for $125k. One big determining factor is the ease and availability of credit. Rates are low, and many people want to buy, but can they qualify for a loan? Investors seem to be taking up the slack here and can get a 8% to 9% cash on cash return when they pay all cash.

    Mid to high-end homes ($400k to $800k): These home prices seem to still have a long ways to fall because, at these prices, they fail the three primary factors that I've listed above. Future Price Expectations are still low, it is still cheaper to Rent vs. Buying, and the Return on Investment for landlords is still too low (rents don't rise proportionately to home prices).


    The low end homes are excellent opportunities if you have the cash or the credit to get financing. If you can lock in a 30 year fixed mortgage at the current rates of 5% +/- then you can pay the debts off with much cheaper dollars later when hyperinflation hits.

    I think the mid to higher end homes will continue to drop in price until inflation/hyperinflation meets somewhere in the middle (cushioning the price drop).

    Now here are the million-dollar questions:

    As you know, interest rates determine home prices (people buy based on the monthly payment and not the total price). How long will inflation/hyperinflation have to rage before mortgage rates get pushed up? When mortgage rates finally do get pushed up, how fast will that kill price appreciation on home prices? If we have a sudden devaluation/currency collapse will it really matter to the homebuyer who can now pay down their debt with toilet-paper money?

    It appears to me that one can't go wrong buying the entry-level homes (which cash-flow) with long-term, fixed-rate financing.

    Any comments or observations on how you think this may unfold?


  2. So just to be clear, you are now very confident that the unemployment rate in, say, December will be lower than it was in January?

  3. @ Bob Murphy

    I think the economy will be really humming by December. Unemployment is a lagging indicator but if the recession is ending now, unemployment should be lower than Jan. 09 by then.

  4. @ BulionInsider

    Steve, I am pretty much in sync with your analysis.

    Anything that cash flows is an obvious buy. However, there may be other buys given that many people just don't figure the rent versus buy numbers on housing. This may be what is holding up the middle and higher markets.

    As for rates, they will steadily climb higher. However, unless Bernanke raises rates high enough to pretty much end money inflation, price inflation will always be ahead of interest rates. The really trick is to lock in rates now, before the inflation hits.

    Not everyone will invest based on points 2 and 3, but if you do, it will be hard to go wrong.

  5. So is that it then? The sequel to the depression of the 1930's is now over (that was quick) and we are now in the recovery phase?

    So Keynesian eocnomics wins the day presumably ...

  6. The decline in jobless claims may need a little "Seasonal" adjusting.

  7. Bob,

    Doesn't the unemployment rate often lag the official end of recessions by a year or more? That was my impression of what happened in 1990-1 period. If so, it seems likely that, even if the NBER declares the end of the recession say in Q2 of 2009, that the unemployment might well peak well into 2010.

  8. @ Annonymous

    Keynesian economics wins the day?

    Try unprecedented Fed money printing.

    Is that it?

    It hasn't even started yet. Wait for the inflation to hit.

  9. @SteveInOho

    That's why you never look at one week but rather a trend over a minimum of at least four weeks. Further, if the BLS seasonal adjustment is, off that can explain fewer jobless Easter week, but mention that nonseasonal is also down.

    Bottom line, though, this is more than a one week phenomena and appears that a trend is developing.

  10. @ Nick Kaster,

    It is possible that unemployment could drag on. However, this "recovery" looks very strong to me.People pay a lot more attention to the news about the economy than they did in 1990. Employers will start hiring a lot quicker this time around. There is a lag, but it will probably shorten compared to the old days.

  11. Ratio of coincident to lagging indicators was still down for Feb 09 (released Apr 20 09). Accordingly, I don't think NBER will ultimately mark April as the end unless there is a surprise positive GDP on Apr 27 09, which is possible with the beating imports have taken and the amount of government spending.