Sunday, November 08, 2009

Lagging Index Improving

Before long, we will get the "official announcement" that the recession ended in June, five months ago. The end of the recession does not mean that we are back to old highs, but that the direction of the economy is once again up.

While the linked report from the Gallup Poll suggests that some of the bounce in consumer attitudes might only be a reflection of the Halloween Holiday Spirit, a number of improving trends have developed. Employment is the forever lagging indicator; when there is a downturn, companies try not to lay off their employees, in hopes that the recession will be short-lived; when a recovery begins, companies are slow to hire, until they are sure that business is going to continue to improve. Stock prices, a leading indicator, falls early and rises early. Stock prices are up 60% since February.

The Gallup Poll notes that there has been a reduction in layoffs. This is good! The Poll also notes that there has not been a significant pick-up in hiring, this is not good, but it is normal during this phase of the business cycle.

As business after business see year-over-year increases in sales, with fewer workers on the payroll, productivity is soaring and profits are following. Productivity growth shows up as increased profits and as lower prices for consumers. The process is directed by the Invisible Hand of Adam Smith; it is automatic. As savings accrue to consumers, they have more money to spend on other goods; causing a momentum gathering chain reaction.

We are well into the process. Indeed, the most lagging of indicators, employment, is improving. Last week, the nations official unemployment rate reached 10.2%, but the number of new claims for unemployment insurance dropped again; we are five months into lower jobless claims!

One factor holding the recovery back has been the attitude of business leaders, as evidenced by positions taken by the Chamber of Commerce. Business leaders have been frightened by the prospects of extremely higher taxes in the form of Cap and Trade and Health Care Legislation. The good news for both American businesses and American consumers is that the odds of passage of both bills has faded. So far, most Americans are not aware of how much the odds have fallen.

The odds posted at Intrade now give Health Care a 1 in 13 chance of passage this year. As it becomes clear that Harry Reid does not have the votes to pass the monster bills that have been cobbled together, the economic recovery will gather momentum. Many a business leader is ready to use funds for hiring employees, if those funds are not consumed in higher taxes.

New claims will continue to drop in the months ahead. Take away the fear of massive health care taxes and new jobs will start pushing the unemployment rate down.

in reference to:

"Job-market conditions remain better than they were earlier this year, but continue to reflect a reduction in layoffs without a significant improvement in hiring."
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