Evaluating the Recession Clock

Wow, what a week. I wish I could tell you that the information we've gotten amounted to something, but I can't. We aren't any closer to moving in a positive direction, but in a glass-half-full kind of way, we aren't any closer to things getting worse. The positive releases continue to be offset by negative releases, so I'm keeping the recession clock at 2 minutes to midnight.

For details on why the data we received doesn't really tell us anything, see my previous post. Suffice to say there is a lot of noise in the economy. Many numbers are moving in the right direction, but may not be doing so for the right reasons. We should see less tainted information soon.

I'm still watching the housing market. At the beginning of next week, we'll get numbers for existing home sales. In my opinion, this is the money number: it represents demand for housing. It's been improving over the last few months, although that could be in large part due to first-time home buyers taking advantage of a fairly significant tax incentive. The incentive should expire Nov. 30, so expect a drop off, but I think the December numbers will exceed expectations.

I see no reason to describe the employment situation anyway other than bleak; again, see my previous post for more information. More and more, employers are finding ways to produce without as many employees. GDP is growing (and we'll get preliminary numbers next week on how fast) but lots of workers who lost jobs still haven't gotten them back.

Analysts talks about the "fundamentals" of the economy quite a bit, although I doubt many of them know what these are. The "fundamentals" is an abstract group of numbers comprised of Consumer Spending (via permanent income hypothesis-see note at bottom), Inflation, and Stability (and borrowing ability) of businesses.

The fundamentals are not strong right now. Consumer Spending is down, except for the spending artificially induced by the Federal Government. Businesses are facing poor sales numbers and tightening lending standards. Inflation is where we want it, but this isn't good news, it's just not bad news.

I'm hoping for better information for Christmas.

Note: The permanent income hypothesis argues that consumer spending is dependent not just on their current income but on the income of their foreseeable lifetime. It clashes with Keynesian philosophy which says that current income is all that matters. Consider the example: a person is given a sizable bonus at work. The permanent income hypothesis argues that this would increase spending but not by as much as an equivalent increase in salary. Keynesian philosophy argues that a bonus would change spending by the same amount as an equivalent change in salary.

Under the permanent income hypothesis, you also look at the existing value of assets. So if an asset like a house decreases in value, the person behaves as though there was an equivalent decrease in his permanent income.

Think of the permanent income hypothesis like linking current spending to your foreseeable lifetime's monetary net worth. It takes into account everything you make and everything you own.