Can continuing claims predict end of recession?

It’s possible one of the best predictors of the end of the US economic recession could be a moderation in continuing unemployment claims. As discussed in the May weekly update Unemployment Rate, typically continuing unemployment claims peak and then moderate toward the end of recessions. At the time the May update was written continuing claims were showing no signs of moderation and were actually setting weekly records.

Well, last week that changed as continuing unemployment claims declined by roughly 150,000, halting a streak of 21 straight weekly increases in continuing claims, including 19 that were new records.

After companies made deep job cuts earlier this year, the drop in continuing claims is a welcome change. Companies have slashed more than 6 million jobs since the recession officially began in December 2007. Of course, the statistics don’t reveal whether workers on government rolls are successfully finding new jobs or just dropping off because their benefits have simply run out after the normal allotment of 26 weeks. It could be a combination of both circumstances, but more likely unemployed workers have simply run out of benefits and have dropped off the rolls.

To obtain a better perspective on unemployment during past recessions, below is a chart of initial claims (those filing for unemployment benefits for the first time) along with continuing claims (those who continue to receive weekly benefits) dating back to 1971. (Click on chart for larger image)

Looking at the chart, the red line represents continuing claims while the blue line represents initial weekly claims. Let's take a look back at the last three recessions to gain a better understanding of past recessionary cycles.

The early 1980's recession officially lasted from January 1980 until November 1982. As you can see on the chart the peak in continuing claims as well as initial weekly claims came in November 1982. Both the initial weekly claims and continuing claims dropped significantly over the next two years as the economy experienced a robust recovery. Economic growth was spurred by the Fed lowering interest rates and Congress reducing tax rates.

The early 1990's recession officially lasted from July 1990 until March 1991. Reviewing the chart we can see that the peak in continuing claims (red line) occurred in the first quarter of 1991. Although the recession ended in the beginning of 1991, it wasn't until the second half of 1992 (when continuing claims dropped) that the economy began a robust recovery.

The early 2000's recession lasted from March 2001 until November 2001; again the recession ended as the continuing claims figured reached a peak. Unfortunately, the ensuing recovery was rather anemic and job creation was below past recovery levels. The economy didn't really gain meaningful traction until the end of first quarter of 2003, many months after the recession officially ended. Interestingly, the US stock market reached a low in March of 2003, before beginning a multi-year bull market that ended in 2007, driven by expanding liquidity and excess credit. Again, the economy actually gained momentum after the continuing claims figure began to decline, which also corresponded to a turnaround in the US stock markets.

It's possible our current recession could be close to ending, especially if continuing claims continue to decrease or begin to level off in the coming weeks. Officially the end of the recession won't be recorded and announced for several months after it ends, as it takes time for statistics to be finalized. It will be wonderful to finally declare this recession over and we hope things begin to improve. However, it is likely we could experience a recovery that will be very similar to the most recent recessions in the early 90's and earlier this decade; where continuing claims remain elevated or clustered and economic growth experiences rather anemic trends until continuing claims begin to decline.

It is also possible the US stock markets may take their cue from both initial jobless claims and continuing claims in attempting to forecast future economic growth and the pace of corporate earnings. If the past holds any key to the future these numbers bear watching.

Cash for Clunkers Program

Today, Congress officially House approved a "cash for clunkers" program that aims to boost new auto sales by allowing consumers to turn in their gas-guzzling cars and trucks for vouchers worth up to $4,500 toward more fuel-efficient vehicles.

Under the program, car owners could get a voucher worth $3,500 if they traded in a vehicle getting 18 miles per gallon or less for one getting at least 22 miles per gallon. The value of the voucher would grow to $4,500 if the mileage of the new car is 10 mpg higher than the old vehicle. The miles per gallon figures are listed on the window sticker.

Owners of sport utility vehicles, pickup trucks or minivans that get 18 mpg or less could receive a voucher for $3,500 if their new truck or SUV is at least 2 mpg higher than their old vehicle. The voucher would increase to $4,500 if the mileage of the new truck or SUV is at least 5 mpg higher than the older vehicle. It is also possible consumers could also receive vouchers for leased vehicles. It is important to remember that this voucher is taken into account after you receive and discounts or dealer incentives, so the total savings could be significant.

There are two key points to remember:

1. Trade in a car that — this is important — has been registered and in use for at least a year (under the same registration), and has a federal combined city/highway fuel-economy rating of 18 or fewer miles per gallon.

2. Buy a new car, priced at $45,000 or less and rated at least 4 mpg better than the old one to get the $3,500 voucher. If the new one gets at least 10 mpg better, you get the full $4,500.

Representative Betty Sutton, D-Ohio, the bill's chief sponsor, said the bill showed that "the multiple goals of helping consumers purchase more fuel efficient vehicles, improving our environment and boosting auto sales can be achieved."

The program would direct dealers to ensure that the older vehicles are crushed or shredded to get the clunkers off the road. It was intended to help replace older vehicles built in model year 1984 or later.

To determine the combined gas mileage on your current vehicle, you can visit http://www.fueleconomy.gov/. Go to the lower right hand corner of the main page on click on the “1985-2010 MPG estimates.” It is right below the “2009 Fuel Economy Guide” box.

Details of the program can be found at http://www.cashforclunkersheadquarters.com/

Federal Reserve Insolvent?

One of the issues that bears close watching in the coming weeks is a little know bill in the House of Representatives called HR 1207 – Federal Reserve Transparency Act. It is probably going to become more known because Rep. Ed Perlmutter (D-CO) and Rep. Chris Lee (R-NY), both House Financial Services Committee members, as well as Rep. John Boehner (R-OH), Minority Leader of the House just became co-sponsors of the bill. Currently, just 11 more cosponsors are needed for a majority to be reached in the House.

If enacted, HR 1207 will amend title 31 of the United States Code and reform the manner in which the Board of Governors of the Federal Reserve System is audited by the Comptroller General of the United States. In other words, for the first time since 1950, the independent financial powerhouse that creates and regulates all money in the US will be forced by law to open its books.

This news also dovetails with reports detailing how the House Oversight and Government Reform Committee, the panel responsible for investigating the use of bailout money, has issued a subpoena to the Federal Reserve, asking them to hand over all documents relating to the takeover of Merrill Lynch by the Bank of America.

Claims by New York Attorney-General Andrew Cuomo that former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke strong-armed Bank of America into buying Merrill, are giving politics and power a new definition in Washington.

If this bill passes the House, expect the debate to be significantly loud and fierce in the US Senate. This bill and corresponding debate could have a definite impact on stocks, bonds, and the dollar as many believe the Federal Reserve is not well capitalized. Even Jim Grant made a comment this week on CNBC stating the Federal Reserve probably couldn’t survive a conventional audit and would have be shut down. His discussion on the Federal Reserve can be seen below.

Market Update 6/1/09

Global stock markets continue to display strong underlying strength as the “end of the world” scenario has seemingly been taken off the table, investors return to more normal trading patterns, and institutions begin to adjust price based on perceived risk. The US markets, both bond and stock, have become more stable and more rational since last fall. Investors are becoming more confident as volatility decreases. As reported by AMG data services, both bond and stock mutual funds are receiving more cash on a weekly basis.

Our risk assessment is that the US market averages (S&P 500) are in the range of fair valuation as mentioned in the Earnings Matter article on May 8th. Our fair valuation assumes earnings for the S&P 500 will increase to roughly $62 by year end; the estimate at the end of the first quarter. Current estimates for S&P 500 earnings for 2009 are $54.00, a slight decrease from one month ago. Earnings are not yet being adjusted upward, but are not being lowered at a rapid pace. If conditions continue to improve, we could expect upward adjustments to earnings estimates after second quarter earnings are released by companies in July. If earnings estimates increase, this will help support higher stock valuations. If earnings estimates don't increase and markets continue higher, stocks will likely become significantly overvalued.

Investors seem to be pricing in a full recovery and significant earnings growth by the end of 2009. While this is definitely possible and recent economic indicators are less bad, any deviation from this implied recovery scenario could result in more volatile markets as risk and valuations are adjusted. In other words, markets are preparing for best case scenario and if it doesn't happen, volatility will likely increase. Since markets are extremely dynamic, outlooks and assumptions change constantly. There is no predetermined direction or course of action. In March, market participants were pricing in a very dire economic environment. As conditions have become less bad, market participants are quickly pricing in a full recovery.

So where do we go from here? Do we have a full recovery or do economic conditions begin to deteriorate again? It is difficult to know for sure, but it is likely something between these two extremes is the probable direction for the economy. The market currently has a great deal of positive momentum and this can continue for an extended period of time. We believe in this type of environment the best course of action is to contemplate various scenarios (positive and negative) and prepare for possible outcomes. It is difficult to intellectually and emotionally make decisions going against the market trend – such as, buying if the Dow drops 2,000 points or selling if it increases 2,000 points. This is why preparation is important. Too many people make decisions either based on emotion at the moment or without proper thought.

So, with financial Armageddon not likely given the massive liquidity intervention by the government (this liquidity push will have other unintended consequences, but we’ll save that for another day) and stocks more or less near fair valuation given an increase in earnings, investors want to remain patient and focus on an opportunistic approach of adding selective stock, bond, country, and commodity exposure as opportunities arise; especially if corporate earnings estimates begin to increase. Of course, the actual level of exposure should be dictated by one's own risk profile and tolerance for volatility. In addition, one wants to be prepared for any adverse conditions which may arise (another crisis for example) or a negative change to the perceived strength of the economic recovery.