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Fitzpatrick & Weller
Fitzpatrick & Weller

Fitzpatrick & Weller
12 Mill Street
P.O.Box 490
Ellicottville, New York 14731
Phone 716-699-2393
Fax 716-699-2893
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Aug 20

Written by: Fitzweller Administrator
8/20/2009 9:19 AM 

Baseball great Yogi Berra said it best, "It's tough to make predictions, especially about the future." However, given the depth of this downturn, everyone wants to call the bottom, predict when the light at the end of the tunnel is no longer a train coming our way. And we are hearing some good economic news that might indicate a bottom is near, according to manufacturing consultant Art Raymond in the Wood Machinery Manufacturers of America's August "Cutting Edge" newsletter.

Fewer initial jobless claims: While the unemployment rate is a lagging economic indicator, a related metric - the number of new claims for unemployment benefits - is a sound predictor of the bottoms of recessions. In past recessions, the four-week moving average of new claims has peaked about four weeks prior to the economy forming a bottom. In this downturn, that average peaked at 658,750 the week of April 4. On that basis this metric is calling the week of May 2 the bottom.

Stronger housing starts: Housing is the quintessential leading indicator. Starts rose 3.6 percent in June to an annualized seasonally adjusted rate of 582,000. That's a long way from the 2.292 million starts in January 2006. Single-family starts rose 14.4 percent, much higher than most experts were forecasting.

 

A turn in the ratio of coincident to lagging indicators: This metric turned upward two months ago at the end of May. Since 1960, recessions, as defined by the National Bureau of Economic Research, end within two months of this ratio hitting bottom.

Collapse in business inventories: In the second quarter of 2009, inventories declined at an annual rate of $141 billion. The shelves in warehouses around the country are so low that any upturn will cause manufacturers to run more hours, utilize more capacity, and expand the workweek.

But a bottom is not a recovery and, according to some, may not be a real bottom. Look at these data:

 

Falling non-residential construction: This measure fell in June with the commercial portion of this sector down 30 percent from last year. With rising vacancy rates and tighter credit standards, the pressure will remain on this type of construction.

Declining business investment: Spending on equipment fell nearly 9 percent in the second quarter of 2009, which ended in June.

Weaker consumer spending: Consumers represents nearly 70 percent of all economic activity in the U.S. In the second quarter of 2009, they spent 1.2 percent less on an annual rate after rising 0.6 percent in the prior quarter. Spending, of course, is enabled by income, and it fell by 1.3 percent. Expect languishing wage and salary growth to be a strong headwind to spending in the near term.

Growing unemployment: Experts are forecasting an increase to 10 percent by summer's end. Don't forget that after the last recession in 2001 employment did not turn until seven quarters after GDP stopped falling.

Add some other interesting points about the housing market:

 

Appraisal difficulties: New appraisal standards went into effect May 1. Realtors now report more home sales cancellations because of low appraised valuations.

Inventory overhang: The supply of existing homes is 9.4 months, down from 9.8 in May and a high of 11.3 months in April. Experts say that a balanced market occurs at five to six months. Plus, the condo inventory is 13.4 months.

 

Single family completions: Completions rose by nearly 9 percent in June and are outpacing new-home sales. It is taking builders a record 11.5 months to sell a new home vs. a long-run average of about five months.

 

More foreclosures: The wild card is the overhang of potential foreclosed homes. One expert noted that the actual sale of homes in the U.S. in June equals the number of homes foreclosed in California in one day.

Remember this: Yogi Berra was right. Economic statistics are imperfect. Most are "seasonally adjusted" to remove the effects of weather, annually repeating events like the opening of the school year, etc., in hopes of revealing non-seasonal features. Looking month to month at a particular metric can often be misleading. And at turning points like a recession's bottom, the data can become unreliable as an indicator. Sense can be made of such data only months, perhaps years, after the fact.

At the end of the day, our economy will begin growing again when the battle between the lure of affordable homes and the lack of job security is settled.

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