While the unemployment rate continues to rise, it is important to remember two things. First, it is a lagging indicator of the economy. More on that in a minute. The second is that there are lots of signs of good news around:
- Consumer confidence rose for the fourth straight month, jumping to its highest level in nine months at 69.
- The latest unemployment report showed fewer Americans filing new claims for unemployment benefits. New claims fell by 24,000 to 601,000 for the week ended June 6. This is important, because the peaking of new claims for unemployment is one of the more reliable indicators of the end of a recession.
- May retail sales rose for the first time in three months, including a rise in sales at auto dealerships and parts stores.
- For the second straight month, the index of leading economic indicators rose. The gains over this two-month period were the best since November-December 2001.
- The TED spread has fallen under 0.5 percent from more than 4.5 percent after Lehman Brothers declared bankruptcy and is now back in what is considered ”normal” range. The spread is an indicator of banks’ willingness to lend to each other, and this decrease is a strong signal that confidence has been restored to the banking system.
The changes in the capital markets are all signs that the Fed’s program of driving up the opportunity cost of holding cash (by driving short term rates basically to zero) is working and investor willingness to take risk is being restored.
They also serve as an indication of why you should not panic when you see the unemployment rate continue to rise. As I mentioned, it is a lagging indicator, meaning the economy tends to recover before the unemployment rate begins to decline.
On the other hand, the stock market is a leading indicator. As proof of that, consider the following: Since 1970 stocks have returned 15 percent per year when unemployment has been higher than 6 percent. That is more than 50 percent above the long-term average. However, when unemployment was less than 4.3 percent, stocks returned just 2.1 percent a year, or about 80 percent less than the long term average.
