Economic Hits & Misses: Auto Industry In Spotlight As Chrysler Looks To Bankruptcy

The economic data out today provides mixed signals on the economy. On the down side, real personal income dropped 0.3% in March, a tick lower than the 0.2% consensus expectations. This follows a decline of 0.2% in February and a 0.1% increase in January. Income wages and salaries fared worse, falling 0.5%, accelerating from declines of 0.4% in February and 0.3% in January.

Disposable income (i.e. after tax) was unchanged in March. It was also unchanged in February. In January, it jumped 1.6% due to a large cost-of-living adjustment to Social Security checks (calculated yearly, so Social Security recipients got to play catch up for the oil-price-related inflation during 2008). Real Personal Spending fell 0.2% in March, partially reversing increases of 0.1% in February and 0.9% in January. This data suggests that when the first revision of GDP comes out next month, it will indicate that the first quarter was even worse than the -6.1% that was reported yesterday.

However, that is the past, and the other data out today was much better looking forward. The Chicago Purchasing Managers index (PMI) jumped to 40.1 in April from 31.4 in March and an expected reading of 35.0. This does not mean that the economy in Chicagoland is expanding — the index would have to be over 50 for it to show that — but it does indicate a sharp slowing in the rate of deterioration.

Digging deeper, the new orders component rose to 42.1 from 30.9 in March and 30.6 in February. The Production index rose to 38.1 from 32.7 in March and 34.7 in February. The employment index also improved, but remains mired at 31.8, which, while better than the 28.1 in March and the 25.2 in February, is still consistent with shedding lots of jobs. This is just one of the many regional PMI’s, but the Chicago one has a pretty good track record of getting the direction right in predicting the national ISM number that will be reported later this week.

The other “green shoot” out today was the initial claims for unemployment report. New claims fell to 631,000 — a decline of 14,000 from last week. The four-week moving average (which given the noise in the weekly numbers is what really should have been paid attention to) fell 10,750 to 637,250. This is extremely significant, since a decline in the four-week average is historically one of the best indicators of a recession coming to an end.

Unfortunately the graph below (larger version available at http://www.calculatedriskblog.com/) does not have the recession bars in, but peaks in the four-week average (blue line) occur right at the end of recessions. The decline is still too small to declare victory — it is barely perceptible on the chart — but it is there. If the decline continues for the next few weeks, I will be forced to reassess my forecast that the recession will not end until the fourth quarter.

This does not say anything about the shape or nature of the recovery, but it is a very encouraging sign. I would also note that in the last two recessions that the level of initial claims stayed very high well after the peak was reached, unlike earlier recessions where the decline was steep and continuous.

The news on continuing claims was not as good.  It rose to 6.27 million, and increase of 133,000 in just a week. Each week it sets a new record, although to be fair, the total number of people employed is also much higher now than back at the time of the previous peaks in the mid-70s and early-80s.

The continued rise in continuing claims suggests that while the pace of layoffs may have slowed slightly, the pace of hiring has not picked up.  The “mesa” shape of continuing claims in the past two recessions is even more apparent than that for initial claims, and we have not even started to level off. This suggests that unemployment will continue to rise for the foreseeable future.

Since it now looks very likely that Chrysler will go into bankruptcy today, the encouraging news on initial claims could very easily be reversed. This goes triple if General Motors (NYSE:GM) follows suit next month. Those actions will lead not only to layoffs directly at Chrysler and GM, but at suppliers like Lear (NYSE:LEA) and TRW Automotive (NYSE:TRW). It will also cause layoffs at auto dealerships (even if the filing is avoided but the restructuring plan already announced is followed) like AutoNation (NYSE:AN) and CarMax (LMX).

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