New Economic Signs: Rays of Hope?

Economic Indicators Are Rising . . . and Confusing

Production is on the rise

a-ray-of-hopeIf you need easy loans just to make it from paycheck to paycheck, and even then you could still use some extra cash, take heart. Recently there have been hopeful signs that the current recession is coming to an end.

At the end of July, the government reported that the real gross domestic product (GDP) fell at an annual rate of only 1% in the second quarter. Manufacturing activity rose to its highest level in the last year. Car sales jumped 15% and manufacturers are ramping up production. Based on the data now available for July, experts are predicting that the GDP will increase by as much as 3% in the second quarter.

Home sales are on the rise

Another encouraging trend is that existing home sales are on the rise. Between April and May, the S&P/Case-Shiller 20-city index of house prices fell just 0.2%, the smallest decline in the past two years. Stabilizing house prices are expected to reduce mortgage-loan defaults, shore up bank balance-sheets and improve the flow of credit.

Oddly, unemployment is also on the rise

unemployment-officeEmployment, however, is the single most important economic benchmark, and the outlook on that front remains grim. Unemployment rates are still on the rise, which is surprising given that economists generally predict that an increase in the GDP will be accompanied by a decrease in the unemployment rate.

The accuracy of this rule of economics, called Okun’s law, has been disputed, however; and according to Michael Feroli, an economist at JPMorgan Chase, Okun’s law would have predicted a national unemployment rate of only 8.6% during the second quarter of this year, whereas the actual rate averaged 9.3%.

Many factors influence the rising unemployment rate

Several factors may be at work in the discrepancy between the improving GDP and the worsening unemployment rate. Last week, the government revised earlier data to show that the GDP has declined a cumulative 3.7% (rather than 2.5%) since the end of 2007, tying with 1957-58 as the deepest recession since the Great Depression.

Also, expanded unemployment-insurance benefits are encouraging some workers to keep looking for jobs rather than drop out of the workforce altogether, which according to the government, could add as much as a half percentage point to the unemployment rate. Similarly, dissipation of wealth is driving people to look for employment rather than retire or stay at home with the children.

Another factor may be that employers have been quick to slash payrolls. Businesses are budgeting more conservatively because of the credit crunch, and many are pessimistic about an eventual economic recovery.

Whatever the explanation, productivity is rising and so is unemployment. According to a recent article in The Economist, Robert Hall of Stanford University, head of the academic committee that identifies and assigns time frames to recessions, says Okun devised his law in an era when productivity usually fell during recessions: “When productivity rises, the law fails.” Okun’s law, he says, is “obsolete.”

The rise in production may be a false reading

Employers are not likely to do much hiring until it seems reasonably certain that the new growth in production will continue. And some economists are doubtful that what we are seeing is real growth. These experts attribute the recent increase in production to the replenishment of inventory after an extended period of filling new orders from existing inventory in idle factories. They point out that inventory replenishment gives production a temporary boost without a corresponding increase in consumer demand.

The federal cash-for-clunkers program may also have given production an artificial boost. Recent car sales have been strong, in large part because of the program, which offers subsidies of as much as $4,500 to people trading in older, higher-emissions vehicles for newer, more fuel-efficient cars. But the $1 billion set aside for the program, which was supposed to run for several months, was depleted within the first week. The House of Representatives has now voted to spend an additional $2 billion and the Senate is expected to do likewise. But cars bought now will mean fewer cars bought later.

Numbers have a way of changing

And one more qualification: Government figures are notoriously subject to revision. Even the Great Depression is getting worse. According to the latest revisions, the GDP fell 26.7% (rather than 26.6%) between 1929 and 1933. In another 50 or 60 years, or as soon as next week – who can say? — today’s fresh new growth in production may never have happened.

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