David Rosenberg: Odds of Double-Dip Greater Than 50/50

Real time economics highlights an interview with David Rosenberg, Chief Economist at Canadian firm, Gluskin, Sheff & Associates:

Weekly Claims For Unemployment Insurance: Keep Your Eye Out For Criminals

Weekly Claims for Unemployment Insurance tracks new filings for unemployment insurance benefits.
Figures on new filings for unemployment benefits are released every week and are based on reports from state agencies.  Because of this it is considered a good coincident indicator, or an indicator that actively reflects what is going on in the economy.  Its also considered forward-looking because first-time claims can influence future economic activity.  If a large number of workers are losing their jobs every week and applying for unemployment insurance, this will eventually doom consumer sentiment, slash spending, and cause business to cut back investments.  If the number of people filing for unemployment benefits increases every week or remains at a high level, it indicates that the economy is struggling. 

The report can be found here.  First look at the Unemployment Insurance Data for Regular State Programs.  The general rule of thumb has been that if first-time claims stand above 400,000 for several weeks, it is a symptom of an economy that losing traction and in danger of slipping into recession.  Also this pace usually drives the unemployment rate higher.  For their to be any meaningful jump in payroll employment, first-time claims must remain below 350,000.  For July 3rd initial claims stood at 454,000 down -21,000 from 475,000 on June 26 from last week.

We want to look at the four-week moving average to smooth out the volatility of the weekly numbers. This was 466,000 for July 3rd which is down 1,250 from 467,250 June 26.  The numbers have continued to remain at a very high level which is a bad sign for consumer confidence and spending.

 Insured unemployment vs. total unemployment:

Looking at this graph we can see the growing disparity between those unemployed and those receiving unemployment insurance benefits.  Jobless workers collecting unemployment insurance at least have some money to spend, which can dampen the harmful effects of an economic downturn.  If total unemployment rises at a faster rate than those collecting unemployment insurance, it means a growing proportion of people out of work may have to get by without any state financial support.  This can lead to more people turning to the underground economy or crime for money.  Furthermore, the stress facing many state budgets has led to a massive reduction in police forces.  I'll be keeping my eye out for the hamburglar.

GDP Numbers Revised Downward

From the Bureau of Economic Analysis:

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.7 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2009, real GDP increased 5.6 percent."

The 2.7% is a .3% revision downward from the "second" estimate and a .5% downward revision from the "advance" estimate.   

Double-Dip: Financial Conditions Index Shows Pre-Lehman Reading

Check this out.

Is the Double-Dip Inevitable?

After I posted about the unemployment situation and the possibility of the Great Recession slipping back into contraction, I saw similar sentiment from around the blogosphere. Robert Reich of the RGE Monitor also believes we're heading back into recession. He looked at the job numbers as well, but made the claim that at least 100,000 jobs are needed each month just to keep up with population growth. Reich gives three reasons as to why the U.S. has avoided the double-dip until now:

"the federal stimulus (of which 75 percent has been spent), near-zero interest rates (which can’t continue much longer without igniting speculative bubbles), and replacements (consumers have had to replace worn-out cars and appliances, and businesses had to replace worn-down inventories)."

Another bad sign is that some of the insiders like the super-rich believe that a double-dip will indeed occur. Robert Frank of WSJ's Wealth Report, wrote that the super rich were buying gold again and how troubling that is. For additional support he points to a survey of the rich and super rich which found that 25% of those with a net worth of $15 million or more believed the global economy will deteriorate in the next five years, compared with an average of 17% of respondents with $1.5 million or more. His theory (and i tend to agree with him on all three points) is that:

"First, the wealthy have better information than most Americans, and that information suggests more bad news to come.

Second, the wealthy have more to lose (in pure dollar terms) than the nonwealthy. The risks of losing a fortune right now appear greater than the potential for building a fortune.

Third (and related to the second theory) the wealthy are making conservative bets with their money, avoiding bold trades and preferring to sit on cash. People who hang on their cash to preserve their fortunes are by nature going to be more cautious about the broader economy."

It will be interesting to see if all these rumors will become a self-fulfilling process as the economy's state is all of a sudden highly questionable. Macro Man is skeptical of the markets and economies ability to recover because the negatives seem to be overwhelmingly outweighing any positives, for example pointing to the recovery in manufacturing and how it's unlikely to be the miracle we're looking for. Macro Man is worried about all the problems in Europe becoming even worse as they brace themselves for epic disaster:

"In spite of the authorities the world over seemingly having thrown everything, including the kitchen sink at the problem, the market seems to have gone back to square one in the past couple of days. The panic in the EUR periphery not only continues unabated, but is now spreading to “soft-core” countries (Austria, Belgium, Finland) and France (welcome to the Club Med, Mr. Sarkozy)."

The Employment Situation and the Double Dip

Markets reacted wildly to the disappointing employment numbers released by the BLS yesterday. The Dow dropped 323 points to a new year low and mass panic about the stability of the recovery has ensued. Economist reactions included disappointment and fear as the jobs report indicated an extremely weak recovery. The number looked at most was the monthly change in non-farm employment from the establishment data. This data usually does generate excitement in the bond and stock markets because it provides the strongest evidence as to whether the economy is creating jobs. It is important to look at total private job creation as that is the best indicator of the economies true direction. If you looked at just the total non-farm you would have seen that 431,000 jobs were created in May. This is misleading however because 390,000 of those were jobs created by the government (temporary Census workers) and only 41,000 created by the private sector. This number was terribly disappointing because it was down from 218,000 private sector jobs created in April which indicates that the economy is slowing down. The markets should have also looked at the slowly increasing average weekly hours which signals that business may accelerate hiring in the distant future. Delving deeper we see that overtime hours are in fact rising and have broken the 4 hour mark in May. Rising overtime hours is a precursor to new permanent hires because overtime can be quite costly for a company. Traditionally less than 4 hrs a week for a few months has indicated that layoffs may increase while above 4.5 hours usually indicates that increased hiring we be coming around the corner. Another thing to look at is weekly claims for unemployment insurance which has shown an ability to predict when the economy approaches a turning point. Initial unemployment insurance claims have been steadily falling since its peak in early 2009, but has seemed to level off around 460,000 which indicates that the economy is still weak and in danger of slipping back into contraction (possibly a double dip). A general rule of thumb is that when first-time claims stand above 400,000 for several weeks the economy may be in danger of slipping into a recession. A number below 400,000 suggests a recovery in underway and companies are laying off fewer workers.The above graph shows the two recessions of the early 1980's where initial unemployment claims originally leveled off slightly above 400,000 before the economy slipped into another contraction. I have a feeling that maybe the same thing will happen in the most recent scenario given that the economy is still in a very fragile state.