Economic News Comment for Thursday 11/19/09

My favorite economic indicator was out this morning and was up again for the seventh straight month of increases. The coincident/lagging ratio is part of a set of three economic indicators, the most famous being the leading economic indicator, which was also up.

The co/lag ratio is one of the best forecasting tools for the arrival and termination of recessions. When the ratio turns down and falls steadily it indicates a recession will start in about six months. The reverse is also true. When the ratio begins rising steadily, it implies the recession will end in about six months.

The current ratio bottomed in March 2009 and began its climb. By June it was clear the trend was higher, and I made the prediction that the recession would end sometime in September, which is six months after the March low. It appears that the recession, in fact, did end around that time.

However, the current economy is struggling to create new jobs and the housing market is still facing lots of uncertainty. The mortgage industry can’t seem to get any traction and seems to be stuck bouncing along its bottom. The difficulties in these two areas appear to be dampening consumer spirits as we head into the holidays.

On the other hand, new orders are rising, and inventories are so low that they are now at a point which should support additional restocking orders. Corporations are lean and mean having cut employees and excess inventories. The result is they are sitting on mountains of cash. Productivity gains have exploded these last two quarters. Historically, they have never been this high without seeing corporations increase employment.

Because of the depth of this recession, the worst economic decline since the depression of the 1930s, it is going to take time for employment to recover. Employment is a lagging indicator and is one of the last areas to recover. The rate of job loss has slowed substantially in recent months but it has yet to turn positive. However, by next spring, I believe we will see new employment growth.