Wednesday, August 10, 2011

When will confidence finally fail?

It is the hypothesis of this web site that the entrance into recession is most distinctly characterized by the crossing of the unemployment rate above its recent exponential moving average.


Now if the unemployment rate trends downward as forecast by the blue line, there will be a secular exhilaration, even as survey measures like the Michigan series are still very low; this was the case in the early ‘Seventies.  We could have a few quarters of slow but positive economic growth.

Recall that our confidence measure is given by A = – (U – UMEAN)/Sigma(U).


Here’s a close-up of what would drive a (weak) secular exhilaration:


However, given the wave of fear sweeping the globe, how likely is it that businesses will add enough to employment—even with labor force participation rate trending down—to lower the unemployment rate?  At this point, there might be a yin-and-yang, goal-gradient-climbing desire for a return of confidence (as Baby Boomers hope desperately for growth in their retirement portfolios), but methinks it will be dashed by several months of increasing unemployment rate reports, in which case we will fall into a “double dip” as we did in the early ‘Eighties.  Why should this one number hold such power over popular psychology?  Because since the Great Depression, it has been the focus of most macroeconomic policy.

However, any such turning “positive” of our “animal spirits” measure between now and election time is likely to be as short-lived as was the early ‘Seventies upturn, which ceased almost immediately with the reelection of President Nixon—whose pathetic economic policies, including wage and price controls and taking the U.S. off the gold standard and throwing the world into the chaos of Bretton Woods II, are yet another indication that our political parties stand for absolutely nothing other than pork.

Any increases of the unemployment rate in the current environment will be truly “high-powered” in determining when confidence will “finally” collapse in this cycle.

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