Tortoise or Hare Recovery

DKW, February, 2010


The debate is now on about whether this economic recovery will be slow or robust. Economists differed on the early shape of the recession. The estimates of economic prediction winners were close to actuals on some factors, not so close on others. (Shout out: Kurt Karl, chief economist at Swiss Re and former colleague at WEFA, was runner-up.) The same discussions are being carried out now for the shape of the recovery: a "U", a "V", a "W" (double dip). I have shifted a bit to numeric symbols and gone with a square root sign, v------------- .

Most indicators we look at are moving upwards in a definitive manner from very low levels. Manufacturing is now showing encouraging progress. Production in the manufacturing and non-manufacturing sectors is climbing. The ISM purchasing managers' manufacturing index is up to 58.4 (over 50 signals gains) on the strength of new orders, with backlogs increasing. Even the employment component of the index is showing improvement. The ISM non-manufacturing index has breached the 50 level on output. Its employment component still shows contraction, although less so. The Chicago PMI (taken as more indicative of what is going on in the heavy manufacturing area of the upper-Midwest) is also up to an appealing 61.5. Factory orders are up. Durable and nondurable goods orders are up. Shipments are up. Consumption is up. Exports are up. Imports are up. Inventory shaving is down. Chain stores have raised their outlook goals. Consumer confidence is inching up on future prospects, but is dampened by current prospects. All components of the Leading Economic Indicators index are at least mildly higher, continuing a nine-month streak in the overall index. Risk spreads have narrowed to something recognizable and we have the first report of a hint of easing in credit extension.

Housing starts and auto sales have ebbed and flowed around the incentive packages' of tax credits on home purchases and the "cash for clunkers" subsidies for autos. Domestic auto sales are up to 7.9 million units at a seasonally adjusted annual rate (SAAR).

All this affirmative activity boosted preliminary Q4 2009 GDP to a positive 5.7%, following the final Q3 figure of 2.2%. About 3.4 percentage points of the Q4 growth figure was attributed to the slowing of inventory cuts. This GDP pop was expected as a result of the inventory change and the fact that many components were positive, if only slightly, instead of negative. Our expectations for Q1 and Q2 2010 GDP growth are more subdued, in the 2.5 – 3.0% range. Auto sales, housing starts, and consumption still have a long way to go to foster any robust economic growth.

Remember, these are quarter-to-quarter growth rates, and while encouraging, need to be compared to pre-recession levels. For example, business spending was up in Q4 2009, but still 18% below levels reached in late 2007. Auto sales are about half of peaks and new home sales are a million units below what we consider sustainable levels of about 1.6 million units per year.

There are mixed emotions around the world as the major European countries struggle to show sustained growth, smaller continental countries struggle with debt, and China struggles to keep its economy from over heating. The U.S. dollar remains relatively weak against major currencies, yielding an exporting advantage.

No employment commitment yet

Even with all this good news, we can't seem to infuse a hiring commitment yet. The length and severity of this recession (along with the wealth destruction in homes and investments) has gone beyond fatigue to outright angst. Wisconsin lost 184,000 jobs since the recession began in December of 2007. Year-over-year job losses were running about 120,000 per month in 2009. Our last reading on the unemployment rate was 8.3% seasonally unadjusted (SU), up from 7.9% in November 2009. The number of our unemployed increased and our employed decreased, to 250,900 and 2,762,800, respectively for December. The size of our workforce has been falling since February 2009 as those unable to find work, simply drop out of the workforce – the discouraged worker. In fact, we see a second wave of discouraged workers as some significant others, who entered the workforce to replace lost household earnings of the early unemployed, have since dropped out as well. Wisconsin's labor force actually decreased by 0.1% in 2009. The U.S. labor force declined by 0.1%, the first net drop since 1950.

Unemployment insurance (UI) claims continue at high levels. Wisconsin continued UI claims are running at about 70,000 more than 2007 levels, at 171,000 for week five of 2010. But this is only part of the story. Over 100,000 claimants have exhausted state benefits and shifted over to federal extended benefits. The UI division cut some 570,000 federal 1099 tax forms for 2009. That means that about one in five of the state's workers received some amount of unemployment insurance payment at sometime in 2009. If Congress doesn't extend UI benefits past March, long idled workers will begin to fall off the supports system in ever larger numbers, further impacting consumer spending.

We know that employment recovery always lags economic recovery as businesses are reluctant to hire before they see sustained new orders. Moreover, firms usually bring current workers back to full-time and a little overtime before they add more permanent staff. We expect SU unemployment rates to be higher in January and February. We expect jobs numbers to start increasing in Q2 2010. The December 2009 jobs numbers were disappointing and we pushed our jobs trough out from early Q2 to later Q2.

Job gains will be the next welcomed aspect of this recovery. The average work week for the employed has edged up to 33.9 hours, with the manufacturing work week at 40.8 hours. These numbers are getting near pre-recession levels. So it is just a matter of time before businesses begin hiring. However, not all the jobless will be better off when this occurs. It will be some time before we reach the employment levels we saw in 2007. It was a two-year jobs cycle in the 1981 recession. It was four years for the 2001 recession.

Without an uptick in consumption and business investment, employment gains are likely to be lethargic at best. In turn, without employment gains and corresponding increases in earnings, consumption and, hence, production will be held back. Economic cycles are spirals not circles, driven by positive feedback loops (whether positive or negative in direction).

Slow but sturdy

This looks to me to be a "tortoise" recovery – slow but sturdy. I believe the economic recovery is solid, but it will be slow, perhaps painfully slow in the employment segment. Production indicators continue to show strength and anecdotal conversations suggest a subdued yet noticeable uptick in orders and hiring considerations. Capital investment and exports are likely to be the growth drivers, with consumption unlikely to be anything but an incidental in the near term. I think the wealth destruction that occurred during this recession, particularly among middle-class baby boomers who are not so far from retirement to depend on an equity rally to recoup assets, will cause the consumption/savings ratio to shift toward the denominator. I don't think there will be a double-dip recession because: 1) the inertia of the tortoise recovery will sustain a growth path, albeit sluggish, and 2) the sluggish recovery will have little to dip from.

Written by Dennis Winters, Chief Economist and OEA Administrator. February, 2010.