Lagging Indicator

Thursday, 2 July 2009 by bbbeard.

On the heels of today’s dismal unemployment report, the Wall Street Journal has an article out today:

Republicans Blame Obama Policies for Job Losses

Republicans are using today’s report on further U.S. job losses and the highest unemployment rate, 9.5%, in 25 years to criticize President Barack Obama’s administration on its fiscal policies.

While I certainly concur that Mr. Obama’s economic policies are worthy of severe criticism, I think this particular grandstanding is  unwarranted. The reason is that unemployment is a lagging indicator of the economy’s performance. In layman’s terms, that means that unemployment peaks sometime after the trough of an economic downturn, not at the trough, or before. A rule of thumb is that unemployment lags about six months, although sometimes the lag can be longer. So June’s unemployment is largely due to factors in place before Mr. Obama’s inauguration.

Now, arguably, Mr. Obama’s party gets the lion’s share of the blame in setting up the mortgage crisis that triggered the current downturn. But I understand that reasonable people can differ on the causal factors that brought us to our current juncture.

And there are those who point to Mr. Obama’s election as being a turning point in economic expectations. After the election of the most leftist President in our history,  this argument goes, money started to flow out of investments and into various safehavens (like mattresses and gold). The main datum supporting this theory is the continued lackluster performance of the stock markets. The DJIA, for instance, is still down 13% from election day, including a 200-ish point drop today (the NASDAQ Composite, though, is up 1.2% since election day). By this theory, we should set the line of scrimmage not on inauguration day, but on election day plus one, when Mr. Obama set up his Office of the President-Elect. And again by this theory, the six-month lag was struck in early May 2009.

But I’m not arguing that right now. Maybe I believe it, maybe I don’t — I’m still on the fence. In the long run I don’t think it will matter much, because in the long run I think we are in for a Japanese-style “Lost Decade“, due fully to the incompetence of the Obama administration. But only time will tell.

However, one thing is clear at this early juncture — Mr. Obama’s economic team thought they were immune from the normal operations of the national economy, including the lagging indicators. The blog Innocent Bystanders has been standing by, holding their feet to the fire, as it were. Back before the memory of most Obama voters, when the administration was arguing for its trillionish “stimulus” bill, they put out a claim that without the stimulus bill, unemployment would peak at around 9% in the third quarter of 2010. With the stimulus bill, they claimed, unemployment would peak at 7.5% in the third quarter of 2009. Here’s is IB’s graphical summary of their prognosticatory skills:

One might be tempted to judge the Obama team’s economic competence by this yardstick. I am.

Now, it is a hopeful sign that the rate of increase of unemployment slowed. I hope this is a harbinger of moderation in our economic situation. I think the next couple of months will tell us a great deal about the future.  If unemployment continues to climb — and in particular, if it resumes its previous rate of increase, watch out. On the other hand, if June really was the peak month, if unemployment drops back to 9% by the fall, the markets may stabilize, money may begin to flow back into investments, and no one will remember how badly the Obama team blew their economic predictions.

But I am not hopeful. The Democrat-controlled House  of Representatives just passed H.R. 2454, the ACES Act, which will raise the cost of energy — which is to say, the cost of just about everything — by a hefty amount (the discussion over at Transterrestrial Musings suggests about 25%). Recent reports also suggest an unwillingness of international lenders to fund the Obama deficit. Democrats are determined to take action on the health insurance situation, and many bystanders fear the worst. None of these leading indicators bode well.

Now the official LEI put out by the Conference Board shows three consecutive months of increases in the leading index. But it doesn’t take into account the political environment. We shall have to see if economics can trump politics. If the recklessness of Congress can be restrained — if ACESA is held up or stripped in the Senate, if “health care reform” can be stopped — then maybe we’ll get through this, even with the massive deficits that Mr. Obama has created. By the way, here’s a reminder:

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