Wednesday, October 29, 2008
Economists Search for End of Woes - WSJ
--House: vacancy rate --Consumer: consumer expectaction --Employment: weekly job loss --Company profit: S&P or South Korean Composite Stock Price Index Economists struggling to gauge the depth of the U.S. downturn are turning to more forward-looking clues, such as home-vacancy rates and foreign stock markets. The standard measures of gross domestic product and monthly payroll figures give snapshots of what has happened, but say less about what will happen next. The current downturn is shaping up to be worse than the recessions of 1990-91 and 2001 and the prolonged downturn that ended in 1982. Banks are cutting back on lending, consumers are spending less, companies are shedding jobs amid sinking profits, and the housing bust that triggered the slide persists. Here are five areas economists are watching, and the indicators they are tracking. Banks The government's plan to inject $250 billion into financial institutions as well as its guarantees on loans between banks eased some of the stress ripping through credit markets. View Full Image Getty Images Bernard Prinstein and other job seekers at an IRS open house in New York on Tuesday. Weekly jobless claims are an indicator of economic health. In a sign that banks have become less wary of lending to one another, the London interbank offered rate, a benchmark interest rate for many dollar loans, has fallen sharply over the past two weeks. It still is historically high relative to the Federal Reserve's target rate, however. Continued declines in Libor will be an important sign that the credit crunch is easing. While lower interbank rates are an important precondition for a recovery in lending markets, they won't automatically lead to a lending revival. "It doesn't matter whether a bank will lend to a bank," said Northern Trust economist Paul Kasriel. "It's whether a bank will lend to Joe the plumber." Banks are cautious about lending, in part because they have been hurt badly in the housing downturn and financial-market turmoil, but also because lending is riskier during a downturn. In the Fed's July quarterly survey of senior loan officers, a large percentage of banks reported that they had tightened lending standards. One early sign the economy is on the road to recovery, according to Mr. Kasriel, will be when more banks are easing lending standards than tightening them. Homes The housing market will play a major role in any easing of lending standards. As long as home prices continue to fall, more homeowners will find themselves owing more on their mortgages than their homes are worth. That sets the stage for more mortgages going sour and continued caution among lenders. Through this year's second quarter, the S&P Case-Shiller national index of home prices was 18% below its 2006 peak; Goldman Sachs economists forecast another 15% fall. The key to how much further home prices fall, Goldman Sachs economist Jan Hatzius said, is how fast the glut of empty homes is absorbed. At the beginning of 2005, 1.8% of nonrental homes were empty and waiting to be sold. The Census Bureau reported Tuesday a 2008 third-quarter vacancy rate of 2.8% -- even with the second quarter and just shy of the first quarter's 2.9%. With many homes on the market, sellers are lowering prices to attract buyers. "If you see excess supply coming down, Economics 101 says that house prices will eventually stabilize," Mr. Hatzius said. Consumers Worries about the economy have skittish consumers tightening their purse strings. Consumer spending represents more than two-thirds of U.S. GDP and hasn't declined on a quarterly basis since late 1991. That nearly two-decade spurt of spending growth likely ended during the July-through-September period, economists predict, dragging economic growth down with it. A widely followed index of consumer expectations, part of the monthly consumer-sentiment report from Reuters and the University of Michigan, could offer clues to where spending is headed. After hitting its lowest level in nearly 30 years in June, the gauge had begun to improve as oil and gas prices fell from their record highs. But that improvement was wiped out this month as financial and economic conditions worsened. One sign of improving attitudes among consumers will be their willingness to buy big-ticket items such as cars, furniture, appliances and electronics -- categories that have been hit hard in recent months as loan standards tighten and consumers shy away from making major purchases. "It's a natural thing to postpone spending when you're uncertain about the world," said Barclays Capital economist Ethan Harris. "What we want to see are signs that those sales are starting to stabilize and improve. That would tell you people are starting to come out of their bunker and buy things that are longer-term commitments again." Jobs Americans probably won't be inclined to make such commitments until they see improvement in the labor market. The payroll figures and unemployment rate from the monthly employment report are lagging indicators, showing changes in the jobs environment long after the fact. Many economists more closely monitor the Labor Department's weekly report on initial unemployment insurance claims, which measures the number of people filing for new unemployment benefits. A rule of thumb says that when claims stay above 400,000, the economy is slipping into recession. That started happening in July. The latest weekly claims figure is 478,000. Stocks Companies play the major role in the jobs outlook: If they are worried about losses, they are more likely to pare the work force than hire. The stock market, for all its imperfections, is one of the best indicators of corporate health. Millions of investors are devoted to figuring out where profits are headed, and their opinions get reflected in prices. But at a time when companies' health is highly dependent on the global economic environment, watching the Dow Jones Industrial Average may not give the best reading. Instead, Merrill Lynch strategist Richard Bernstein tracks the Korea Composite Stock Price index, known as the Kospi. South Korean companies are export-oriented, which makes them highly sensitive to global profit growth. The Kospi topped out a year ago. Tuesday, it was 52% below that level.