Data Shows Reasons To Be Optimistic on Economy

Are the subtle signs of an improving economy, such as decreasing jobless claims, enough to warrant optimism? Or should investors be cautious until we see employers actually increase hiring and the unemployment rate decrease? According to The Capital Spectator, we should be both cautious AND optimistic.

In early March we asked: When Will It End? At the time, we argued that watching the weekly squiggles of new filings for jobless benefits was a productive effort for estimating when the cycle would turn.

The reasoning is that a careful study of history shows that initial jobless claims have a habit of peaking concurrently or just ahead of the technical end of the recession, as defined by the National Bureau of Economic Research. Waiting for NBER to proclaim the downturn's denouement isn't practical, since the organization takes its sweet time on such matters. Watching initial jobless claims, then, may be a more timely reading of what comes next for the business cycle. It shouldn't be analyzed in a vacuum, but as part of a broader review of leading economic indicators it's a valuable tool for discounting the future.

Today's jobs report, along with yesterday's update on jobless claims, offer another round of data releases for thinking that our counsel in March is still valid. Although the economy shed lots of jobs again last month, the decline was relatively mild compared to the magnitude of losses in the recent past. Nonfarm payroll employment fell by 345,000 in May, or roughly half the average monthly decline for the prior 6 months, the Labor Department reports.

Meanwhile, yesterday's update on initial jobless claims shows that new filings fell again last week, dropping to 621,000. That's still high and on its face the one number implies the recession rolls on. On the other hand, the trend of late offers some encouraging clues. As our chart below illustrates, last week's claims are still well below the peak of 674,000 that was set back in the final week of March. By virtue of its general decline over the past two months, modest though it is, the jobless claims indicator continues to predict that the recession has ended. We can't be sure, of course, at least not yet. But for the moment, there's mounting reason for hope, which is bolstered by today's jobs report.



Of course, the technical end of recession, especially one as painful as the current one, isn't easily forgotten. Indeed, while the leading indicators point to recovery, the lagging indicators, as expected, continue to get worse. Unemployment, for instance, rose last month to 9.4% from 8.9% in April. More of the same is probably coming.

In terms of people's lives, the official end of the recession is likely to have little meaning for many months or even quarters. The signal that Joe Sixpack is looking for—the creation of new jobs—is still probably a ways off. Nonetheless, a thousand-mile journey must begin with the first step, and so an economic recovery necessarily begins quietly, starting with the end of the recession.

We're not completely confident that the contraction has ended. Indeed, the fall in jobless claims, although obvious so far, isn't fully convincing. A dip below the 600,000 mark, however, would help tip the scale in favor of optimism. Nonetheless, the trend so far can't be denied, at least not today. Anything's possible when it comes to the slippery business of projecting economic trends in the short term, but the odds that it's over are rising, or so the numbers suggest.

Keep in mind that jobless claims are but one of several forward-looking indicators predicting revival. In the June issue of The Beta Investment Report, we report that our proprietary index of leading indicators continues flashing a strong signal that recovery is near, or at least that the downturn's momentum is lessening.

Even if the recession is over, and one day it will be, there remains the bigger question: What magnitude of rebound awaits? On that point we remain quite wary. One reason is that if a rebound is underway, the shift implies a new set of challenges lurking in the future, starting with the issue of debt, interest rates and inflation, all of which threaten in the medium- to long-term outlook.

But for now, let's savor the moment. There are a few extra data points that offer reason for mild optimism. Monday, of course, is another day.

This post can also be viewed on capitalspectator.com.