In Eight Signs The Recession Is Over, Peter Cohan writes: “I recently delivered a Webinar, Economic Outlook: U.S. and Key Industries, and got asked a very interesting question — How will we know the recession is over? With Thursday’s report that productivity grew 9.5 percent while the number of people added to the unemployment rolls hit 512,000 in the last week, the signals are not exactly clear. But my answer to the question is that people can follow eight indicators to know whether we’re out of a recession. My best guess is that these indicators will not all flash a green light suddenly or at the same time. But if you follow these indicators over the next few months and monitor changes in them closely, you may get some meaningful signs of whether the recession is over.
Before jumping into these indicators, there is one more thing. As I’ve posted, the National Bureau of Economic Research (NBER) officially decides when recessions begin and end and they dated the current one from December 2007 — the month that jobs started shrinking. So that is one of the indicators that I am tracking. But without further ado, here are the eight:
Interest rates. Wednesday the Fed announced that it would keep rates low for the foreseeable future. This means that the Fed believes that the risk of a deflationary spiral — which leads to economic contraction — is greater than the odds of inflation. Once the Fed raises rates, we’ll know that balance has tipped.
Hiring. We lost over half a million jobs in the last week. In a healthy recovery, business hires as many as hundreds of thousands a month. If things start improving in the economy, you’ll start to see the hiring numbers rise rapidly.
Revenue growth. As I have written, 81 percent of public companies reporting this quarter beat expectations by guiding down forecasts and by slashing jobs. If businesses start reporting double digit revenue growth, you’ll know things are really improving.
Underwater homeowners. We’re likely to peak at 17.4 million underwater home owners by 2010, according to USA Today. It reports that some analysts think the peak figure could run as high as 25 million. And we’ll know if housing is out of the woods if that number tumbles.
Housing prices. Similarly, housing prices — which have fallen nationally by 25 percent from their 2005 peak, according to USA Today — will need to rebound both nationally and regionally. It’s likely that such a rebound would come after jobs have returned.
Stock prices. While the S&P 500 has risen nearly 60 percent from the March low, it is 22 percent below where it was 10 years ago. If stocks rise substantially from there, people might go from ignoring their 401 (k) statements to watching them with interest. If they start thinking of themselves as wealthier, then that wealth effect might get them to start spending.
Capacity utilization. Factories are not working to their full capacity. Recently capacity utilization was running at about 70 percent — well below the 82 percent long-term average. If factories get closer to working at full capacity, they’ll start hiring to meet the growing demand. With productivity so high right now, some hiring might be in the near future.
Fed balance sheet. Since the financial collapse started, the Fed loaded up its balance sheet from $800 billion to $2.2 trillion. In so doing, it is storing all the financial toxic waste that Wall Street generated during the previous five or six years. Once the Fed starts selling off those “assets”, we’ll know the economy is getting stronger.
All this data is public, so if you care about keeping track of how we’re doing economically, you might consider keeping a spreadsheet of these indicators and updating it as new information becomes available. Peter Cohan is a management consultant, Babson professor and author of 9 books, including Capital Rising.
I think it’s important to note where Cohan says “… these indicators will not all flash a green light suddenly or at the same time. But if you follow these indicators over the next few months and monitor changes in them closely, you may get some meaningful signs…”
So once again, it all goes back to being alert for the signs around you. Stay awake and aware and take note of what is going on right in front of you. When I do that, I see that – right in front of me, with very few exceptions – everyone has a job and everyone has a roof over their heads. Despite the complaining and the whining, most of them are in about the same financial position they were in prior to 2007. So business has not decreased for them. 2008 was my best financial year to date and I paid enough taxes to prove it.
So if I look right in front of me, at the people I know, my friends, clients and advertisers, despite all the complaining about it, all admit their numbers have not dramatically changed. The ones whose numbers have changed, not surprisingly they tend to be the ones who complain the most, who criticize and blame the most in other areas of their life as well. The downward spiral is their default position.
Even when I look at my own neighbors on my block, the only difference is that now, after all the re-construction and re-modelling after the 2004 hurricanes, and the repaving of the roads as they widened Emerson Drive and installed the Bayside community, has really upgraded the look of the neighborhood. So our lives here on my block have actually been upgraded to a greater degree than most. Before, we were just an old school ‘hood near Liberty Park. Now we’re Bayside.
I do tend to think, though, that anywhere I live will be a bright and shiny place, no matter what it is dropped in the midst of. Is that because I stay alert for the signs at all times?
Am I just lucky, or is it me that makes it so?
Come on, we all know the answer to that one.
🙂
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