Glimmer of Recovery

By Chief Economist Walter Kemmsies of Moffatt & Nichol

As this column is being written in late March, there are a number of hints that the contraction in economic activity is coming to an end. The most significant of these is a slowdown in the growth rate of unemployment insurance claims.

However, there are other signs:

• This week, the American Association of Railroads reported that while volumes are down about 15% compared with the same period in 2008, there have been sequential improvements in volumes over the last few weeks. Retail inventories, excluding autos, have been falling since late 2007. With consumer spending showing more resiliency than analysts expected and the inventory-to-sales ratio appearing to have peaked, re-stocking may begin soon. That would be confirmation of a recovery.

•  Recent stock market activity indicates rising optimism that the fiscal stimulus and efforts to salvage the banking system will succeed. The financial sector has led the market over the last several weeks, which is a common event after a sell-off in that, usually, the sector that has been most significantly impacted in the downturn leads the market in the beginning. Eventually, other cyclical sectors would sustain a continued rise in stock market indexes.

While government stimulus and financial stabilization policies are having a significant impact on the outlook, in the final analysis it all boils down to consumer trends. Consumer spending accounts for 65% to 70% of GDP. Unless consumer spending picks up, economic growth is not sustainable.

The outlook for consumer spending remains weak because of lower wealth and weak labor market conditions. Household wealth has declined to 2004 levels according to the Federal Reserve’s recent Z1 survey, reflecting declines in the value of houses and falling share prices. Along with the banking sector’s struggle to remain solvent, this implies that consumers are neither willing, nor able, to borrow in order to buy goods and services.

Spending is more likely to be based on current income. However, rising unemployment indicates that consumers are more likely to be too worried to want to spend. Therefore, the timing of a recovery now depends on employment trend. And that’s where the glimmer of a recovery has just emerged.

Historical Perspective

It is well known that the unemployment rate is a poor measure of trends in the labor market and usually peaks well after the economy begins to recover. Furthermore, unemployment is a broad measure consisting of people who have just lost their jobs and those who have been unemployed a long time.

To get a better sense of the labor market, trends analysts often look at data on unemployment insurance claims. When economic conditions are weakening, companies lay off staff, which gives rise to new claims. Over the following months, workers must continue to file in order to collect their unemployment insurance benefits. Monitoring both the level of new and continuing unemployment insurance claims provides more insight since the economy, even during recessions, is always creating new jobs. The key point is that it is necessary that new claims decline before continuing claims can decline and therefore allow consumer spending to pick up.
This is shown in the chart above. When the blue bars (growth in new claims) exceed the black line depicting growth in continuing claims (red arrows), continuing claims follow the trend up.

Sudden significant increases in new unemployment claims usually indicate economic contraction. At the end of the recession, the blue bars are below the black line, indicating that the sectors that had been over-extended prior to the beginning of the recession have mostly completed the downsizing necessary for companies to survive. Eventually, the declines in new claims lead the continuing claims lower.

Unemployment claim data released on March 20 indicated that the growth in initial claims slowed from 88% year on year to 84.7%, indicating that layoffs may have peaked. The growth rate in continuing claims (which lags a week behind the initial claims data) rose to 88% year on year.

Given the outlook for empl oyment growth (including continued announcements of layoffs, coupled with the fact that employment growth usually begins after a return of growth in the general economy) it wouldn’t be surprising to see further growth in continuing claims; however, what we expect to see is the peak in the growth rate of initial claims followed by a peak in the growth rate in continuing claims within the next few months. For now, evidence of a peak in the continuing claims growth would be a strong signal that the recession is coming to an end.

Retailers also monitor these trends and are likely to see an improvement in sales. Given the low level of non-automobile inventories, re-stocking should begin by the third quarter. That would end the contraction in the ocean carrier, trucking, and railroad industries. n

In This Issue

News, Trends & Analysis
New Items

Glimmer of Recovery

Supply Chain
A Quick Primer on Site Selection

Managing with the Supply Chain in Mind

Compliance Corner: Trade Compliance Requires a Focus on Information Gathering

How to Green Up Your Logistics Operation

Supply Chain product review
Trucking Software

Special Section
Creating the Extraordinary — the Prince Rupert Story

Features
Building a Future from Drayage Wreckage

Gateway at a Glance Pacific Northwest

Ports & infrastructure
Stimulus Bill Has Cash for Ports . . . for the Right Projects

What Shippers Need from Inland Ports

Port Product Review
Lift Trucks

Commentary
New Trends Driving Transpacific Trade

Who, What, Where, When

Final Say