As Unemployment Growth Slows, a Recovery Could Stir
On Friday morning, we will get the clearest sign yet of whether these glimmers are real. That’s when the Labor Department will release its monthly jobs report, the single most important economic indicator out there. As bad as the job market is, it no longer seems to be getting worse at an accelerating pace. In both February and March, the economy lost fewer than 670,000 jobs; in January, it had lost 741,000.
In past recessions, a slowdown in the rate of job loss has been a telling sign. A few months after that, the economy typically began growing again. The vicious cycle turned virtuous.
After a stretch of unrelenting bad news, dating to last year, the economic signals have been more mixed lately. In just the last week, data on home sales, manufacturing and the service sector have all been better than expected. This welcome news has caused many of us who are pessimistic about the economy’s near-term fortunes to reassess.
“At the moment,” says Joshua Shapiro, chief United States economist with MFR, a New York research firm, “those forecasting nearer-term recovery have the recent data on their side.”
There is still a strong case to be made that the economy won’t feel truly healthy anytime soon, not this year or perhaps even next.
The overhang from the 20-year bubble in stocks and then real estate won’t simply go away. As Mr. Shapiro says, “Wage and salary growth has evaporated, credit is very tight, home prices continue to decline, financial asset values have been decimated and household balance sheets are extremely stressed.”
But the difference between a bad economy and a depression is real. We’ve taken a few steps away from depression lately. If Friday’s jobs report shows more progress, it will suggest that Mr. Bernanke’s optimism is legitimate.
Wall Street has a notoriously bad forecasting record. It almost always predicts that the economy will grow by something like 3 percent a year, which happens to be correct most of the time. But when a forecast would most be useful — when the economy is turning — Wall Street doesn’t offer much guidance. Amazingly enough, Wall Street’s consensus forecast has failed to predict a single recession in the last 30 years.
A small firm in New York called the Economic Cycle Research Institute has a much better record. It was founded by Geoffrey Moore, an economist who helped invent the idea of leading indicators. He used historical patterns to predict the economy’s direction, and unlike most Wall Street forecasters, he wasn’t afraid to stand apart from the crowd. In 2006, while most forecasters were still talking about 3 percent growth, Mr. Moore’s protégés were issuing warnings (though they were still too optimistic).
Today, they think the economy is on the verge of turning. “We’re in the worst recession since World War II,” says Lakshman Achuthan, the managing director of the Economic Cycle Research Institute. “However, the days of this recession are limited.”
The main reason, he says, is the economy’s normal self-correcting mechanism. That mechanism, I realize, is somewhat counterintuitive. You often hear — and we in the news media often write — about the vicious cycle of job cuts, spending cuts and yet more job cuts. Eventually, though, the cycle always ends, and momentum reverses.
How? Prices fall by enough to tempt households to spend. Businesses cut their costs, become profitable again, and begin to expand. Spending begets more spending. This is what’s happening now, Mr. Achuthan argues. The stimulus plan is also making a difference, he says, and so are the government’s efforts to reduce the cost of borrowing.
Obama administration officials have been a bit more circumspect. They have said, as you would expect them to, that more disappointments are likely. But Lawrence Summers, the top economic adviser, has also been talking lately about the economy’s tendency to self-correct.
To replace worn-out vehicles and accommodate a growing population, Americans need to buy roughly 14 million vehicles a year, Mr. Summers says. Recently, they have been selling at an annual pace of only nine million. At some point, more people will have to start buying.
The Economic Cycle Research Institute’s data show that, in every previous downturn in the last 75 years, the economy has started to grow no more than four months after its pace of deterioration has unquestionably slowed. So that’s what the institute is forecasting: the Great Recession will most likely be over by Labor Day.
Friday’s jobs report, covering April, will support this case if, at the very least, it shows job losses of no more than 650,000 a month. The average forecast among economists is roughly 610,000. The Labor Department’s revisions to its February and March numbers will also be worth watching.
Still, even most optimists, including Mr. Achuthan, are not predicting a fabulous recovery. The forces weighing on the economy are too strong.
Stock prices, despite their dizzying fall, are only slightly below their historical average, relative to long-term earnings, which suggests that a true bull market is unlikely. Home prices still have some way to fall. Eventually, the government will need to bring down the budget deficit, and doing so will hold back economic growth.
Morgan Stanley’s economists put out a thoughtful report this week, pointing out that the aggressive steps taken by the government have so far muted the impact of “deleveraging” — the paying down of debt by households and Wall Street. But this debt repayment is still happening, and it will be a drag on growth for a long time. The debt and the severity of this recession also raise the risk that the recent signs will turn out to be a false dawn, much as the economy slipped back into a deep downturn in the mid-1930s.
And whenever the economy begins growing again, it won’t feel good for a while. Slowing job losses aren’t the same as job gains. The unemployment rate may continue to rise into 2010 — and not come down to a healthy level until even later.
As a point of reference, the recession of the early 1990s ended in March 1991, but Americans were still so dissatisfied that they removed George H. W. Bush from office a year and a half later.
So the situation is not as dark as it was a few months ago. Maybe Friday’s jobs report will bring more reason for hope. But the Great Recession, or at least its impact, still has a way to go.