Kamis, 02 Agustus 2012

Slow growth, but no signs of recession

Today's economic releases shed no new light on the state of the economy, which remains one of disappointingly slow growth. Although it's very clear the economy has slowed down, there are as yet no indications that it is going to slow further or enter a recession. 

After a month of very volatile numbers, the picture of the weekly unemployment claims has clarified: the volatility was almost entirely due to seasonal adjustment factors—which attempt to predict the timing and magnitude of scheduled layoffs in the auto industry—that did not match up with the reality. By now, however, these problems are water under the bridge, and today's release is probably an accurate reflection of the underlying realities: new claims for unemployment continue to decline. On an unadjusted basis, claims are down 9% from a year ago. This is important, since if the economic fundamentals were deteriorating, we should be seeing an increase in claims, not ongoing declines. The economy is growing slowly, but it is not deteriorating.

Thanks to the scheduled expiration of emergency claims beneifts, and to the ongoing decline in new layoff activity, the number of people receiving unemployment insurance continues to decline on a seasonally-adjusted basis: down over 1 million in the past year, or -15.4%. This creates important new incentives in the workforce, since more people have an incentive to find and accept job offers, even though they may not be ideal jobs. This—relocating workers to the areas of the economy where they are needed and adjusting the cost of labor to new realities—is part of the natural healing process of any recession, and it has been retarded for way too long by Congress' decision to keep extending eligibility for unemployment insurance.

Announced corporate layoffs continue to run at very low levels. Once again, here is a key indicator of underlying economic fundamentals that shows no sign of deterioration.

Nondefense factory orders declined in June, and they have fallen at a 9% annualized rate so far this year. The deterioration in factory orders and related subcomponents (e.g., capital goods orders) is mirrored in the recent decline of the ISM manufacturing index, and it reflects conditions that existed 1-2 months ago, so it is arguably not new news.

Key indicators of financial health and systemic risk, captured in Bloomberg's Financial Conditions Index (first chart above), are behaving in relatively normal fashion. The Vix index of implied equity volatility remains somewhat elevated, at 18.7, but swap spreads (second chart above) are trading at relatively low levels in the U.S. and are even down significantly from recent highs in the Eurozone. The market is still in the grips of fear, and risk aversion is still high (viz. 10-yr Treasury yields at 1.46%), but markets are liquid and functioning normally. Arguably, the illiquidity that struck markets in the wake of the Lehman collapse in late 2008 was a very important factor aggravating the recessionary conditions that had been building up to that time. With banks almost frozen, for example, letters of credit were almost impossible to get, and global trade virtually collapsed. Today's liquid and relatively tranquil market conditions show no signs of deteriorating fundamentals that might threaten the U.S. economy going forward.

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