The First Signs Of An Economic Thaw?

On November 5, 2008 I posted “When Will the Recession End?”. Using the Chicago Fed National Activity Index (CFNAI) I suggested that the recession may have started around December 2007. I then added the longest recession period (14 months) and concluded that Q1 2009 was prime time for a recovery. Subsequently, the NBER confirmed that the recession did indeed begin in December 2007 -so far so good for my ability to look backwards! However, if the recession is to end in the next three months we should begin to see an uptick in economic activity.

Last week the Chicago Fed released the CFNAI for November, the results are presented graphically below (recessions in red).

The bad news is that the CFNAI-3 (3 month average) for November printed at -2.47 the lowest since the 1980’s and well below the -0.70 level that indicates a recession has begun. The good news? This indicator tends to trough 1-3 months before a recession ends. The December CFNAI-3 (to be released January 26, 2009) must be higher than -2.47 for any hope of a first quarter end to the economic malaise.

Optimistically, there are two signs of spring on the economic landscape: an uptick in the Transportation Services Index and a decrease in initial jobless claims.

The Bureau of Transportation Statistics publishes the Transportation Services Index (TSI), the combined index measures both freight traffic and passenger traffic. While it may make sense to separate the two indexes, the combined index provides a better clue to the state of the economy. In fact, using simple regression we find more than 90% of the variation in GDP can be explained by the variation in the TSI. The combined TSI is presented below with R-squared.

The high correlation and regression statistics suggest that the TSI is a very good indicator of future GDP. In fact the TSI has tended to trend up at least one month before GDP. On December 10, 2008, the combined TSI came in higher than the previous month. The freight index rose 1%,the passenger index fell -0.6% and the combined index increased 0.60%.

Of course it would be nice to see both the freight and the passenger indexes increase, but we must take what we can get in this environment. The next TSI report is scheduled for January 14, 2009 and another increase is needed before we can infer the beginning of an upward trend.

The second sign of spring for the economy is initial jobless claims, released today (December 31, 2008). The consensus estimate was 575,000 initial jobless claims, however, the actual number came in well below that at 492,000. For the first time since the beginning of December jobless claims are below the 4 week moving average.

Once again, one point does not make a line and there is the strong possibility that holiday season hiring contributed to the drop in claims, but, it is a glimmer of hope.

The first data of 2009 is the ISM index to be released on January 2, 2009. Positive movement in this index is one more pillar on which to build the economic recovery. The key indicators in the first month of 2009 will be transportation data (especially airlines), unemployment and jobless data, and finally anecdotal data such as the ISM.

Disclosures: None

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