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.

May New Residential Sales Drop 32.7% From April

This is not a positive sign as it will probably lead to a further drop in construction of new homes.  300,000 new homes were sold in May which is a 32.7% drop from April's numbers.  For the Current Press Release.  It is now estimated that it will take 8.5 months for all new homes to sell given current inventory and sales, this is a significant jump from last months 5.8 months.  We have also seen a drop in the amount of homes for sale.  One possible explanation: depressed housing values and demand has led to home builders waiting for current inventory to clear and demand to pick up.  This is not good news for durable goods producers as it means depressed demand for all the things that usually go along with a new house.

Reactions to the data from WSJ can be found here.

Housing Starts Data: Not A Surprise

For X.U. Economics blog readers the drop in housing starts does not come as a surprise but is still discouraging.  Yesterday we looked at the Housing Market Index which warned us that this would happen.  Housing Starts and Building Permits data essentially just records the number of new homes being built and permits being issued for future construction.

When browsing over the data it is important to note the performance of "single-family housing start" as opposed to "multi-family starts." This is because single-family home building is based on consumer confidence and demand, while construction for multi-unit apartments can be subject to speculation and changes in the tax code.  The most recent release indicates only 468,000 single-family housing starts in May as compared to the slight pick-up of 565,000 found in April's release ( Current New Residential Construction Press Release).

 One possible explanation is the disappearance of the home-buyers tax credit and with it a vanishing act by demand.  Another reasonable explanation is that growing families are looking to rent as opposed to purchasing a new home- especially with job stability being a hard thing to count on.  Whatever the reason may be the drop in single family housing starts is not a good sign for those betting on a V-shaped recovery.

A look at Building Permits:
We have to keep close tabs on building permits because they are the precursor to housing starts.  Although the issuance of a housing permit does not necessarily result in new construction, as you can see the two series do move together over time. 
For other reactions to the housing start data.

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)."