Thursday, July 2, 2009

U of O index: jobless recovery may follow end of recession

Professor Duy released the U of O Index of Economic Indicators for May this week.

The University of Oregon Index of Economic Indicators™ fell 0.1 percentage points in May to 85.0 (1997=100). The relative stability in the UO Index over the past three months is consistent with a pattern of economic stabilization, but falls short of a turn that would conclusively mark the end of the recession.

As a general rule of thumb, a decline of 2.5 percent (annualized) over six months, coupled with a decline in more than half of its components, signals that a recession is likely imminent.

On the job market:
Oregon labor market data continue to be mixed. Initial jobless claims edged downward slightly, but remain at a level that suggests further declines in nonfarm payrolls.
Still, initial claims remain well below the peak of December as the pace of economic deterioration has slowed markedly. Employment services payroll—largely temporary help agencies—fell in May, but, importantly, the rate of decline is slowing. Nonfarm payrolls (not included in the index) fell by just 100 jobs during May, an abrupt slowing compared to the recent declines. It is difficult to see a substantial improvement in the jobs picture, however, with initial claims remaining at high levels. The unemployment rate, a lagging indicator, rose to 12.4 percent.

On housing starts:
Residential housing permits (smoothed) continued to decline, falling to just 627. The typical seasonal boost in building activity is largely absent, a testament to persistent weakness in the housing market; builders are finding it difficult to compete in an environment of rising oreclosures and tighter underwriting conditions for home mortgages.

A few comments on the eventual recovery:
The Oregon economy likely remained in recession in May. That said, the pace of deterioration has slowed; the six-month annualized change in the index improved significantly over the past two months, from -11.8 percent in March to -8.0 percent in May. Similar improvement signaled an impending end to the 2001 recession, and would be consistent with the prediction that economic growth would firm in the second half of 2009. Still, caution is warranted. The UO Index has not yet turned upward, and six-month change remains well below rates normally consistent with economic expansions, and more than half of the index components remain below six-monthago levels. Finally, there is a strong possibility of a “jobless recovery” as the economy continues to face structural adjustment issues that limit the pace of growth.