Sweet Orange

NEW YORK, August 20, 2009…The Conference Board Leading Economic Index^TM (LEI) for the U.S. increased 0.6 percent in July, following a 0.8 percent gain in June, and a 1.2 percent rise in May.

Says Ken Goldstein, Economist at The Conference Board: “The indicators suggest that the recession is bottoming out, and that economic activity will likely begin recovering soon. The Coincident Economic Index was flat in July - the first time it did not register a decline since October 2008. The Leading Economic Index, which has increased for four consecutive months, suggests that the CEI will turn positive soon.”

In a recent post, I wrote that Chris Thornberg, principal with Beacon Economics, see improvement in construction, finance, and retail not occurring until sometime after the recovery is underway. In other words, they are lagging indicators. The employment numbers are another indicator that Thornberg see  as a lagging indicator in this recovery. Lagging and leading indicators are not the same in every recession. However, improvement in the employment numbers is seen by most economist as a indicator that lags in most recessions.

As I wrote previously, Peter Orszag, Director of the Office of Management and Budget, agrees that improvement in the employment numbers is a lagging indicator in recessions, including this one. However, he sees the current unemployment numbers as 1.5% higher than is normal for this stage of recession. He sees two reasons for this.

First, the losses in stocks and, therefore, the reduced amount in retirement accounts is making it necessary for many to delay retirement. Previously, pensions, not stock numbers, determined the amount in a retirement account. So the ups and downs of the stock market have a bigger role in this recession. Second, he says the fall in home prices to below the amount owed makes it difficult for many unemployed to relocate to other areas to accept a job offer. This has not been true in other recent downturns.

After a slight downturn in July, the U.S. unemployment number rose in August to 9.7%.  In a few weeks, the California and Orange County numbers will come out. For now, here is a look at the July and June unemployment numbers:

• U.S–July: 9.4% (June: 9.5%)
• California–July: 11.9% (June: 11.6%)
• Orange County–July: 9.5% (Jun: 9.3%)

For more information on why unemployment remains high, see “Why is U.S. Unemployment so High?“. Also see, “The Conference Board’s August 2009 Global Business Cycle Indicators” and Unemployment in O.C., state buck U.S. trend.”

Note: For Beacon’s economic forecast, see Beaconomics.

GRAPH COURTESY WIKIPEDIA

Chris Thornberg, a principal with Beacon Economics, had some comments on what the leading and lagging indicators of market recovery will be for this recession (AirTalk, Larry Mantle, August 7, 2009). (By the way, Tim Quinlan, a Wells Fargo analyst, says that the recession ended in June. Michael Murphy of New World Investor also says the recession is over. Maybe I’ll write more about that later.)

According to Thornberg, the following sectors of the economy are leading us to recovery:

• professional services
• export services

In addition, Thornberg states that, although the manufacturing sector is not growing, this sector  is “firming up.”

Before I go on to state what Thornberg sees as the sectors that will be the lagging indicators in this recovery, here is what Joel Kotkin, a fellow with the New America Foundation, says about the professional services sector:

Media coverage of America’s best jobs usually focuses on blue-collar sectors, like manufacturing, or elite ones, such as finance or technology. But if you’re seeking high-wage employment, your best bet lies in the massive “business and professional services” sector.

This unsung division of the economy is basically a mirror of any and all productive industry. It includes everything from human resources and administration to technical and scientific positions, as well as accounting, legal and architectural posts.–Joel Kotkin, “Best and Worst Cities for High Paying Jobs,” Forbes

Unfortunately for those of us who live in southern California, Forbes ranks Los Angeles-Long Beach-Glendale as the fourth worst area to find these jobs and the Irvine-Santa Ana-Anaheim area as the seventh worst.

Now for the lagging economic indicators: According to Thornberg, improvement in the following sectors of the economy will not show considerable improvement until sometime after the recovery has begun:

• construction
• finance
• retail

Thornberg, as well as most other economists, sees employment (which is a factor of all of the above mentioned economic sectors) as another lagging indicator. He also states that recovery in each sector will vary from region to region.

Note: For Beacon’s economic forecast, see Beaconomics.

GRAPH COURTESY BEACON ECONOMICS

Well, we had stimulus spending and some say that we are starting to see an economic recovery. However, others are questioning this since unemployment is still so high. Peter Orszag, Director of the Office of Management and Budget, explained it this way during a Charlie Rose interview.

Orszag stated that he sees the economy as improving but the unemployment rate will remain high for some time to come. This is in accord with most economists’ belief  that employment is a lagging indicator in a recovering economy–the stock market might go up, businesses may see improvement, but hiring is put off until the recovery has long been underway.

However, Orszag said that the current unemployment rate is 1.5% higher than would be expected in a more traditional recession. He listed two factors for this: First, pensions are largely a thing of the past; more U.S. citizens now depend on a 401K for their retirement. However, with the fall of the stock market, the amount in 401Ks has decreased drastically, and many, by necessity, are postponing retirement and staying in the workforce.

Second, in past recessions, many moved to other locations to accept a job offer. However, this time around, plunging house prices make it difficult for homeowners to sell their homes and seek employment elsewhere. The result is that fewer of the unemployed see moving as an option in this recession than in past recessions.

Orszag also said that without the stimulus spending the economy and the job situation would be worst than it is now and that the affect of stimulus spending was designed to reach a peak at the end of this year and early 2010.