They say crocuses are the early signs of spring. They bloom before daffodils and tulips do and while the weather is still cold. Admittedly, it is premature to write about an early recovery in the United States’ economy, particularly by some one like me who once wrote that the “(t)he economy is facing 1930s-like headwinds,” But I can say now that there are many early signs which signal that stabilization in the US recession is taking shape, and recovery may start in the fourth quarter of 2009. As the crocuses bloom before the daffodils, tulips and certainly roses do, these economic and financial signs of stabilization should light up before the coincident indicators (such as GDP, industrial production and sales)show signs of recovery.
While those signs do not indicate recovery yet, nevertheless they portend that a very modest change is looming on the horizon. I may sound like a lonely bird singing optimistic songs on a deserted tree in the desert now! But there are changes happening. There has been a modest rise in the U.S Treasury bill rates. The three-month rate dropped to 0.10, signaling that the economy is in a liquidity trap which implies that recovery is a long way shot. Recently, this rate has risen to 0.30. Consequently, the spread between the three-month LIBOR and T bill rate is shrinking. This short-term spread is a measure of financial fear and risk in the markets. Therefore, according to this measure, some fear is declining in this fearful recession.
There is also an increase in the junk bond yield. These include distressed bonds of companies in different sectors of the economy that are near restructuring or already are being restructured. Such junk-bond issuers account for 17 per cent of the S&P 500 and nearly half the corporate bond market.[] The direction of change in this junk yield is a signal of change in confidence in the troubled sectors of the economy such as autos and financials. The average yield was about 20 percent last summer, and then it dropped precipitously to 9 percent in December 2008 after heavy selling by hedge funds who were forced to sell in the face of redemptions. It is now above 9.6 percent. While it is modest, it represents some confidence in distressed companies like autos.
In the stock markets, the US and other countries have witnessed some gains since the beginning of the year. By the end of March, the world MSCI index has increased by more than 11%, the emerging market MSCI by more than 9% and MSCI-Arabian Market Index by more than 7%.
The gains in the US stock markets have recently blown optimism into US consumers. Gallup's Consumer Mood Index leaped 6 points for the week ending April 5, the fourth consecutive weekly increase. This index is now as high as it has been in more than a year. Moreover, the number of Americans who think the U.S. is moving in the right direction has more than doubled between October and February, reaching 40 percent. of those surveyed. We have to wait and see if the improved consumer mood will turn into better consumer sentiment and confidence as measured by the Index of Consumer
Sentiment and Index of Consumer Confidence, both gauge consumer plans and future spending in the United States. The consumer is 70 percent of the economy. The Conference Board’s consumer confidence rose 12 points in April, after a small increase in March. The index level gave a reading that surpassed most economists’ expectations and is the highest since 2008 when the financial crisis started to intensify. What’s important about this consumer confidence survey is that it showed substantial improvement in the consumers’ expectations over the next six months, particularly their job outlook. This short run Expectation index suggests that the economy is searching for a bottom.
There is a glimmering sign of an improvement in the U.S. housing sector. While inventory overhang is still rising, amounting to more than 4 million units or more than nine months of supply, as a result of more houses moving from the shadowy inventories that include foreclosures or near foreclosures to regular inventories, the housing affordability index on the other hand has risen on a yearly basis in December 2008 by 10%. In February, the mortgage applications increased by 32%, existing house sales by more than 5% and new housing sales by more than 4%.
Orders of durable goods also increased by more than 3% in February, after a seventh month decline. Next, as stronger signs of recovery we need a three month uptrend in orders of goods such as consumer goods and durable goods, housing permits for residential buildings, average number of initial applications for unemployment insurance, speed of delivery of new merchandise to vendors from suppliers, S&P 500, inflation-adjusted money supply (M2) and consumer sentiment. These estimates future economic activity flash signals of change before the coincident indicators such GDP, industrial production income etc start to move.
For indicators of economic recovery which you’re familiar with, watch pasta, cardboard and gloss sales. Pasta is cheap and people buy more of it in bad times.[ ] In 2008, its sales increased by 22 percent after years of very week growth. While part of the increase is due to the hike in commodity prices, the mere huge increase implies that pasta is taking a larger share of the average family’s grocery basket. When this countercyclical food measure indicates trouble, it signals that better times are ahead. We should watch to see if Americans have started to eat less pasta.
Liner board is the major component of cardboard which is used as packaging to ship almost every thing that can be shipped.[] When liner board prices start to move up, it means demand for many goods is picking up. When this pro-cyclical cardboard indicator flashes green, it also means that better times are around the corner. It is hard to detect the liner board prices but stock prices of cardboard companies can be a proxy.
According to Leonard Lauder of Austee Lauder, gloss sales are a counter indicator. It is an inexpensive indulgence during recessions. Women can use it several times a day in bad times to refresh instead of buying new clothes.
The Baltic Exchanges’ Baltic Dry Index, which measures the cost of shipping dry raw materials (iron, copper, dry grains etc), is also considered a leading economic indicator. In December 2008, it reached its 22 year low. Since then it has bounced about 175%. This rebound indicates that shipping costs have turned the corner after reaching their bottom. However, this index has not been a reliable leading indicator lately as it has given false signals twice in 2007 and 2008 because it is influenced by commodity demand from China. The BDI has risen almost 200% to a current level of 1,900 in February after hitting a peak-level around 12,000 in 2008.
Some Leading indicators which show signs of recovery before the coincident indicators are showing some signs of improvement in down turn. The stock market is up more than 22 % since the beginning of this year, orders for durable goods are the highest since August 2008 and housing start are the best since September 2008. I should mention that the labor market is a drag on the economy now but most of the labor market indicators, particularly the unemployment rate, are lagging indicators.
Let’s see if the next few months will brighten up more of the leading indicators above. To be continued.
 “How to Know when the Economy is Turning up: 7. The Pasta Indicator,” http://www.time.com/time/specials/packages/article/0,28804,1876737_1876735_1876711,00.html
 “How to Know when the Economy is Turning up: 8. The Cardboard Indicator,”
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