Tuesday, June 30, 2009

New Vanguard Economic Momentum Index: Economic Recovery is Near, Recession May Be Over

The general improvement in global financial conditions since March has fostered a marked improvement in investor sentiment and led many to inquire when (rather than if) the current U.S. recession will end. Increasingly, market commentary has focused on evidence of “green shoots” that would suggest the rate of economic deterioration is at least slowing. But how can we know that the right signals are being captured, and—more important—how accurate have such measures been in identifying the turning points of past business cycles?

In this brief, we unveil a proprietary Vanguard Economic Momentum Index consisting of more than 70 financial and economic indicators that in the past have anticipated (to varying degrees) the beginning and end of economic recessions. This new index is specifically designed to anticipate turning points in the business cycle, and it differs in important ways from several other widely tracked indexes of leading indicators. As of the end of May 2009, the Vanguard Economic Momentum Index indicated that a U.S. economic recovery likely will begin by the end of 2009.

Figure 1 below (click to enlarge) presents a “dashboard” of the individual components that make up the Vanguard Economic Momentum Index. The components are ranked in descending order based on their historical ability to forecast nonfarm payroll growth. For presentation purposes, they have been assigned colors based on these criteria:

Red: Indicator consistent with future employment losses at an increasing rate.

Yellow: Indicator consistent with future employment losses at a decreasing rate.

Green: Indicator consistent with future employment gains.

Components shaded either green or yellow in Figure 1 are considered evidence of so-called green shoots, since their most recent rate of acceleration is consistent with an eventual economic recovery. Yellow shading reflects a recent improvement in the component’s rate of change (i.e., its rate of decline has slowed, or its “second derivative” has turned positive).


Figure 1 shows a notable recent improvement in various economic and financial indicators, especially through May 2009. Some examples of such components are the S&P 500 Index, the shape of the Treasury yield curve, corporate bond spreads, and certain housing and manufacturing statistics. Encouragingly, the components near the top—those that have been the most anticipatory leading indicators of future economic conditions—have changed for the better ahead of those toward the bottom, although the improvement in individual indicators is far from unanimous.


Figure 2 below (click to enlarge) illustrates that after bottoming in November 2008, the index turned positive in February 2009 and continued that trend into March and April. This sharp reversal brings the index to levels that were associated with past economic recoveries. Indeed, by the end of May, the index was near the highs reached following the deep recessions of the mid-1970s and early 1980s. Based on historical patterns, the index’s climb suggests a high statistical probability that a U.S. recovery will begin by the end of 2009.


MP: Based on the pattern of this index over the last eight recessions, and especially in the four severe recessions of the 1970s and early 1980s, it looks very likely that the current recession might already be over, or will be ending shortly.

HT: Heather Brooks


13 Comments:

At 6/30/2009 2:17 PM, Blogger Jeff Herron said...

Just from eyeballing this, most of the data on the most recent report is yellow, i.e. "future employment losses at a decreasing rate".

What concerns me is the simple mathematical observation that of course you cannot have declines of any sort at an increasing rate without hitting zero fairly quickly. And employment will likely never hit zero.

However, you can have declines at a decreasing rate for a very long time -- but the decrease is still very real and very much different than an increase of any kind at any rate.

The first chart then seems to point to a continuation of a slow decline. It does not point to improvement in many sectors, as stated in the original article. Rather, it merely points at many sectors being less bad now than six months ago.

Unfortunately, "less bad" and "better" are not necessarily synonymous.

 
At 6/30/2009 2:25 PM, Blogger 1 said...

"The general improvement in global financial conditions since March has fostered a marked improvement in investor sentiment and led many to inquire when (rather than if) the current U.S. recession will end"...

Ha! ha! ha! ha! ho!...

I'm at least as optimistic as the next informed person generally but unless the Senate kills off this insanely huge tax we as a nation and as a planet won't be seeing an ending to a recession anytime soon...

 
At 6/30/2009 3:43 PM, Anonymous Anonymous said...

I hope you're right. Rush Limbaugh doesn't think so.

 
At 6/30/2009 10:06 PM, Anonymous Anonymous said...

Good Evening Mark,
I enjoy your writings, and I will comment from a long time investor viewpoint. I am not formally trained in money or economics; but I find too many areas in our economy that so many writers (not including you) and tv talking heads comparing past recessions to the current economy. For many months I never heard the comparison of the lack of an industrial base/folks actually employed vs the hugh number of those employed in very well paying industrial based jobs in prior recessions.
This missing industrial base, the baby boomers and the extreme downward movements in the general stock and housing markets are two very large areas of impact that will have a long lasting impact on the prosperty of this country. Aside from the monetary impact on the economy, the financial crash has left deep mental impressions in many that will alter their lifestyle forever.
From an investor viewpoint, I see much of the recent stock market activity being generated from the inside folks and not the public sector. Many in the public sector, who still have some money left for their future are going to buy an annuity (not my recommendation, however)and try to survive. They and their families will have to adjust to a lifestyle not familiar to them; as the old lifestyle is gone, and good ridence to parts of it (credit).

Our economy and market place is in the hands of the government using our money to try a fix. A sad state of affairs; and soon enough the taxes will start on top of an overburdened public.

My 2 cents worth.

A fellow Michigander

 
At 7/01/2009 4:14 PM, Anonymous Junkyard_hawg1985 said...

Mark,

Those are very nice visual charts. Here is where I have my hang-up with the data: First, the charts are based on traditional measures (industrial OP, jobs, etc). The traditional measures are measures of the non-government economy. In 2008, the GDP was $14.264 trillion and total government spending (fed, state, local) was $5.284 trillion. Government made up 37.04% of GDP. In 2009, GDP is forecast at $14.240 trillion and government spending is forecast at $6.435 trillion (45.2% of GDP). If you subtract out government spending, non-gov GDP was $8.891 trillion in 2008 and forecast at $7.805 trillion in 2009 (-13.1%). Our official GDP stats show nothing like this yet because government spending has masked the damage to the real economy up until this point.

Starting today, most state budgets (& local budgets) will get reset lower because of the new fiscal year (i.e. look at CA). This means that there will be sharp spending reductions at the state and local level resulting in a lot of job losses. While the 4 week moving average for first time unemployement claims has dropped from its peak, I expect this to turn back up with state layoffs coming. On top of this, the minimum wage is set to increase again later this month (more job losses). Expect to see new highs in the 4 week moving average for new unemployment claims by mid-August.

Here is the data source for government spending as a percentage of GDP:

http://www.usgovernmentspending.com/downchart_gs.php?year=1900_2014&units=p&chart=F0-total&title=Total%20Spending#copypaste

 
At 7/01/2009 7:10 PM, Anonymous Anonymous said...

Dude, we don't make squat in this country anymore. Don't know if you noticed the decrease in non-farm payroll but this time those "jobs" aren't coming back.

What do we produce that can't be purchased cheaper and easier elsewhere?

 
At 7/02/2009 1:49 PM, Blogger Damian said...

Will Vanguard be making the data available (not the components but the values)? I'd be interested in testing the data.

 
At 7/02/2009 4:38 PM, Anonymous Anonymous said...

A lot of people keep saying that the present financial crisis is most similar to the one during the Great Depression. There hasn't been any other financial crisis like this between now and then.

And if the present recession is different from other recessions in recent times. Then using statistics to compare recent recessions to the present one is like comparing apple and oranges. Such comparison doesn't make sense.

 
At 7/02/2009 11:28 PM, Blogger OBloodyHell said...

> it looks very likely that the current recession might already be over, or will be ending shortly.

At least, that is, until Obama's anti-stimulus package (i.e., "cap and trade", "universal health care" and the debt itself kick in.

After that, it'll be a long slow slide to the bottom again.

 
At 7/02/2009 11:35 PM, Blogger OBloodyHell said...

> This missing industrial base, the baby boomers and the extreme downward movements in the general stock and housing markets are two very large areas of impact that will have a long lasting impact on the prosperty of this country.

We don't need a friggin' industrial base. We are a "post industrial" (i.e., IP and Services based) economy. All new employment, all new wealth, is going to come from development in IP & Services, not from industrial crap. That stuff is going to become as marginal as agriculture has been for decades, with a long slow steady decline until 2% to 5% of the pop is employed in manufacturing, just as it currently is in ag.

 
At 7/02/2009 11:38 PM, Blogger OBloodyHell said...

> What do we produce that can't be purchased cheaper and easier elsewhere?

LOL, American IP and services are among the best in the world. Neither is going to be produced better by anyone else.

With our polyglot culture, if it sells here, it'll sell anywhere. There's a reason why, despite all the "massive" losses due to piracy, the industry as a whole keeps making lots of money year after year.

 
At 7/03/2009 11:08 AM, Blogger sethstorm said...


Dude, we don't make squat in this country anymore. Don't know if you noticed the decrease in non-farm payroll but this time those "jobs" aren't coming back.

That can be fixed (and not in the environmentalism sense).



What do we produce that can't be purchased cheaper and easier elsewhere?

Items that are not outright junk made by thugs of Far Eastern countries (India, China, Vietnam).


We don't need a friggin' industrial base.

Not if our national security depends on an industrial base for which we currently have eviscerated - in a manner dissimilar from agricultural abandonment.

That and if you want to see quality, you build the product and the company from the ground up with US citizens. You do not evade them.

You only make it possible for the economy to be run completely by overzealous lawyers and unelected/unaccountable foreigners.

An industrial base is a check upon the unelected and a way to realize the talents of those best suited to the common trades.

 
At 7/06/2009 4:05 PM, Anonymous Anonymous said...

Re: The US not making anything any more, or not having an industrial base.

Not true. Obviously were making less right now with the recession, but before the recession we where at record levels in terms of industrial production. Each decade since the great depression the US has produced more than the previous decade.

What's changed is that we employ fewer people to produce these manufactured items (a lot fewer as a percentage of the population).

- Tim

 

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