The Economy, In Charts

[Porsche-O-Phile]

I hope this isn't just a "false bottom", like I think it may very well be.

People are sick of being down and in a recession, but the underlying factors remain - we don't manufacture anything here anymore, our consumption is way out of whack with what we actually produce, we have staggering levels of debt, real estate (in particular) is still obscenely overpriced and there are few real prospects for job creation (i.e. no new "growth areas").

Things will flatten out (they're starting to) but to truly recover, we need to CREATE things - things that have value. This will create jobs. Only then will we truly see a "recovery".

A slowing in the rate of losses is hardly a "recovery". It just means things are marginally less sucky today than they were a few months ago. They're still getting suckier overall. That's not a recovery.

[turbo6bar]

Things are not so good when total jobs is at the same level as 10 years ago. Population is up ~30million during that time frame. So much for bubble economy theory. I wish I had the answer, but it's not easy when you've effectively spent the 'rainy' day fund on trinkets and fun.

[jyl]

Kind of a busy chart, so here is a quickie explanation.

This chart shows the 12-month return in percent if invested in broad US stock market index (measured by Russell 3000) at various points before and after the "official" end of the past four recessions. "-12" means 12 months before recession end, "0" means right at recession end, "+12" means 12 months after recession end. The different color bars correspond to the different recessions (1980, 1982, 1991, 2001), there is also an average of the four.

You can see market behaved similarly in first three of those recessions - optimum time to invest was 3 to 6 months before recession end, waiting until after recession end was less optimal, waiting until recession end was officially declared was less optimal yet. The fourth recession was quite different.

I have not found similar charts for the prior recessions. Obviously one has to make a judgment as to which prior pattern the market will follow in this recession, or if it will follow any prior pattern at all. Ideally, one would have made that call several months ago, but it is still relevant.

[Android356]

I kind of felt like this. I'm sticking with what I know and polish up my crystal ball and go to Vegas baby!

[jyl]

U of Michigan consumer sentiment data. What % of consumers say they are postponing purchases due to uncertainty over jobs/income.

[Porsche-O-Phile]

So people are four times more likely to postpone purchases today than they were four years ago due to concerns about jobs/incomes. This is a "recovery" somehow?

[jyl]

Depends on whether you're focused on past, present, or future. Consumer spending now is very weak, that is obvious. The chart suggests to me there is a large amount of pent-up spending. When consumers feel more confident in their job security, some of that spending should be released. When net jobs go from loss to gain, we should see that confidence build. Even if, as consensus believes, we are in for a long-term trend of weak consumer spending (rebuild savings, new frugality ethic, etc) there is the potential for a surprisingly strong period. In my view.

[jyl]

Strictly speaking not a chart, but whatever - here is US as % of global manufacturing output.



Contrary to popular impression, America's share of global manufacturing output has held steady, not shrunk. 2009 US figures won't be as good as 2007, but if you smooth out the cyclical up-down, basically the USA has about the same share of global manufacturing output that it's always had. China's share has doubled, and that's been at the expense of Japan and the rest of the world.

And here is US manufacturing output vs US manufacturing jobs.



Confirming popular impression, America's manufacturing workforce has steadily shrunk. The blue-collar factory worker is, indeed, a scarcer breed now than in prior decades.

How can popular impression be both wrong and right?

Maybe the answer is automation and the value chain. As manufacturing is increasingly automated, the number of people required falls faster than their output. And if one country has high technology and the other has low labor costs, they will focus on different parts of the manufacturing value chain.

[nostatic]

[jyl]

Not a chart, but a table

Initial claims at start of recession and at end of recession
(average weekly figure, in thousands, during the quarter)

Recession At Start At End Pct Increase

1948-50 208,000 293,000 41%
1953-54 200 319 59
1957-58 228 374 64
1960-61 289 373 29
1970-71 287 309 8
1974-75 307 478 56
1980 424 478 13
1981-83 439 501 14
1990-92 360 431 20
2001-03 355 391 10
2008- 337 524 55

The lesson is that employment, including initial unemployment claims, is worse when a recession ends than when the recession starts. Sometimes a heck of a lot worse.

That seems pretty obvious – that’s why they call them recessions - and it is normal. Unpleasant, but normal.

[turbo6bar]

[jyl]

(blue line) ISM Employment Index (Avg of Mfg & Srvcs, Adv 6m (means the line is pushed to the right by 6 months).
(pink line) Nonfarm Payroll Growth (YOY % Chg)

[Jim Richards]

At this point in the economic cycle, what sector(s) are likely to be improving?

[jyl]

(blue line) Weekly Initial Unemployment Clains (4wk ma, Adv 3m)
(pink line) Civilian Unemployment Rate (%)

[jyl]

Originally Posted by Jim Richards

At this point in the economic cycle, what sector(s) are likely to be improving?

You mean, improving fundamentals or improving stock prices?

[Jim Richards]

Fundamentals. I imagine stock prices will lag a bit. Is my assumption about this typically correct?

[jyl]

No, stock prices lead fundamentals. Market is anticipatory - investors anticipate which companies/sectors will have improving fundtls, and then try to get into those stocks before they go up. The lead is variable but 6 months to over a year lead is pretty common.

Hence, investing based on how good/bad things are today is not a good idea. Have to decide whether things will get better/worse over the next year or so. (Plus valuation, sentiment, liquidity, etc factors.)

Some sectors are usually thought of as "early cycle" meaning that, historically, their stock prices have tended to do better than the market while the the recession is fading and in the early part of the expansion. Consumer discretionary is one. Others are usually thought of as "late cycle", meaning their prices have tended to do better when the expansion is well under way. Industrials are an example. And others are thought of as "defensive", meaning they have tended to do better when the economy tips over into recession. Healthcare is an example. There is some logic to this - some industries are more economically-sensitive than others - but mostly this is "conventional wisdom" thinking based on what has most often worked in the past. I know that in 2009 I made most of my performance in the consumer discretionary and technology sectors, and in 2010 I am a little worried about where I'm going to find performance.

[Jim Richards]

Thanks for setting me straight, John! This past fall, I invested in materials and industrials, reduced my exposure to financials, and now I'm wondering where I should be next. I don't know if that was the right strategy, but it's all water under the bridge now.

I'm also concerned where to find performance next.

[kach22i]

Originally Posted by Jim Richards

I'm going to pay off my mortgage.

Why?

What's the advantage?

The government will still take your house if you get behind on the taxes.

[Jim Richards]

That's fine. I won't fall behind on my taxes. We paid it off a year ago, and have saved like mad since then.