Friday, July 17, 2009

How to tell if an economic recovery has arrived...

So our export figures has surged. But economists warn that it is largely due to the volatile biomedical sector. Take that sector away, and we see a small decline in export. So is our economy recovering? In the US there was optimism in May and June that the economy was on the rebound...but when the unemployment rate hit 9.4% exceeding the Obama Administration's expectation of a peak of 8%, many became pessimistic about a 2009 recovery. You get mixed signals if you look at other indicators consumer confidence, ISM, housing starts, etc etc. So is the recovery here? Is there something that has been reliable in past recessions that can be used?

In the US, the best leading indicator of an economic recovery has been the initial jobless claims. Instead of looking at 101 indicators and trying to track every piece of news, you can just track this single number.

The latest US initial jobless claims have fallen by over 150,000 since peaking at 674,000 for the week ending March 27, 2009. While new jobless claims of over 500,000 hardly reflects a robust economy, a peaking of jobless claims has generally preceded the official end of a recession by 2-6 months. (click on the chart to see how this works). While the US economy is weak, it is probably recovering.

In Singapore, the quarterly PPI (Property Price Index) is an excellent indicator. In all the past few recessions, the private property market had only one turning point for going into recession and one turning point for recovery.

Recent US jobless claims and Singapore Private Residential PPI both seem to indicate the economy is on the (rocky?) road to recovery. However, we are recovering slowly from a very sharp and long global recession and it will be some time before we get back to the economy of 2007. There is also enhanced risk of inflation due to the quatitative easing (printing money) by major economies[Link]. Inflation can be even more painful than recession for many people.

That is all I have for forecasting the economy. The rest of this posting talks about what is really wrong with the global economy and the real root cause of the problems we are seeing today. The root cause is not the subprime crisis or banking crisis - those precipitated a downturn in a global economy that was not sustainable anyway in the long run.

For the economy to grow long term in a sustainable fashion, something known as the productivity-wage gap has to be closed. Since Reaganomics of 80s which resulted in the decline of workers unions and globalisation, this gap has gone up. Workers became more productive making more products but their wages did not catch up. Wages are the main source of demand for these products. In order to make up for the gap, consumers in Western countries borrowed money - first using credit cards, later remortgaging their homes to consume. Debt ballooned..... Globalisation which allowed companies to move their production to where wages were the lowest resulted in a race to the bottom (remember Singapore workers were told to keep wage increases below productivity). Corporate profits rose to the highest levels as a % of GDP as income inequality rose to record levels along with household debt levels. The relationship between wages and productivity which was stable for previous 200 years, according to Ravi Batra, started to deviate and widen in the 80s . Rising debt in Western societies compensated for stagnant wages and we were on a path of unsustainable growth. The problem is with many countries like China have poor labor laws and hundreds of millions of peasants willing to work in sweatshop conditions for low wages...this gap cannot be closed until the Chinese, Vietnamese etc allow their workers better wages & benefits.


We have been told independent unions are a bad thing. They cause trouble by pushing up wages in certain industries and make our country uncompetitive. We are also told that higher wages will cause inflation (lower wages better?). Unions have caused trouble in the past by going beyond reasonable demands weakening the competitiveness of certain industries (e.g. US auto-makers?). However, the other side of the story, less frequently told is the problems caused by the disappearance of labor unions around the world. We need to get rid of ours to compete with China which under communist leaders don't even respect basic human rights let alone worker's rights. In Paul Krugman's book "Conscience of a Liberal", he looked at the how the disappearance of labor union resulted in the decimation of the middleclass in America[Link].

14 comments:

Anonymous said...

i am a fan of ravi batra but ....with a twist.

"first using credit cards, later remortgaging their homes to consume. Debt ballooned."

i hv said this a long time ago, our middle incomers and low wage workers( low wages are being supplemented by property gains) have benefited much from our housing boom over the decades.
but when it stops, and it will, what happen next? where is the fuel to boost consumption?

Anonymous said...

maybe when the head of GIC or Temasek gets invited to Allen & Co retreat at sun valley..

keep up the good work Lucky.


http://www.huffingtonpost.com/2008/07/09/sun-valley-photos-media-b_n_111700.html

Anonymous said...

Globalization and the collapse of the soviet bloc have "liberated" more than 1 billion labors into the free market. The oversupply of labors will cause the salary to go down.

And be reminded, there are another 2 Billions labors in India and Africa, who could not benefit from the global market now because of the infrastructure. In 10 to 20 years, they will be connected.

Climb up, as high as possible, is the only way to save ur job.

Anonymous said...

We must learn to sacrifice for the greater good, the greater good, the greater good!

Anonymous said...

$$$Climb up, as high as possible, is the only way to save ur job.$$$

u must be kidding. tell it to the millions of grduates without a decent job that reflects their education!

Anonymous said...

i rember a story of an indian odd job laborer who managed to own an exe flat. his wife was a full time housewife with 3 kids. by all count, they were far from well off but seems to get by. 5 years later, their flat triple the original price.. he was shrewd enough to sell off his flat and downgraded to a nearby 5 rm away from amenities. with his gain, he bought himself a landed home in JB and leased it out.

how many "not so well off" flipped their properties and boosted our economy?

countless billions of dollars lubricated our economy!


apparently, low wage was not an...issue.

Anonymous said...

Lucky

My personal view,stagflation is well on its way.

Anonymous said...

@Lucky

You may want to read this.
http://www.nytimes.com/2009/07/17/opinion/17krugman.html?_r=1&partner=rssnyt&emc=rss

Anonymous said...

@Lucky

And more about CIT and what it means to SMEs in USA (and by extension rest of the world).

LuckySingaporean said...

anon 2:43,

I read that article. I have a post on Goldman Sachs also. It is time for regulators to check on their activities. Are the worsening the boom-bust cycles by what they do?

Anonymous said...

Actually politics come before economics. That's why China or Vietnam has no worker rights.

Or why in Malaysia it is bumiputra first although it is bad economics.

Or why Robert Mugabe of Zimbabwe in Africa can still survive although inflation runs into 1000%!

The PAP know this very well. That's why they take care of politics first and also very well.

Once politics is taken care, economics is up to them to decide, based on each country's unique situation. And they will survive if they control politics first.

Anonymous said...

The war of the classes is yet another attempt at mass wealth transfer. The middle class is destined to revert to the servitude of serfs (feudalism) through various schemes akin to the asset enhancement schemes all around the world.

Monopolistic control over a person's basic needs (shelter, education, transport, medical, education) results in a system that continually adjusts itself to ensure that the average person spends the greater part of their working life paying for these things.

C'est la vie.
J

Parka said...

I don't even need those charts to tell people that recovery is still far away, probably in 2010.

From a purely business point of view, one has to note that businesses/departments takes time to develop and start up. When the recession removes these business, it will take that same period of time (at least a year) to get the economy back and people jobs. Let's not forget how many jobs are lost this time round.

Parka said...

Oh. Want a better way to predict recovery?

Follow the numbers of business startups, talk to CEOs to see what expansion plans they have for their companies. When people have jobs, they have money to spend.