Thursday, April 16, 2009

Good unemployment numbers again!

According to the WSJ headline jobless claims "fell" last week. Or did they?

An interesting new mantra has taken over the financial press in the past few weeks: "Things are getting better." For those who choose to see it, the impending improvement in the economy is supported by two undeniable facts, (1) the stock market is up, and (2) the data is "less bad" which must mean it is good (aka the positive second derivative).

Unfortunately, Calculus doesn't seem to be a required course for a career in financial journalism. If it was, maybe a few of our esteemed commentators would realize that the numbers are NOT getting better.

For instance, the Initial Jobless Claims number of 610,000 published today, means that many people filed for unemployment for the first time. Thus, saying that the number is better because in the previous week 660,000 did, or because a group of economists who could not predict the recession once it had already started expected a higher number is missing the point. The fact is that 610,000 additional people lost their jobs which means they will, in all likelihood, consume less and maybe even default on their mortgages and/or credit cards. Aside from the human tragedy, I fail to see how this is good news for the economy.

Which brings me to my second point.

Lets say you used to own a portfolio of investments which was worth $100. Lets say it went down 50% last year, so on 1/1/09 it was worth $50. Lets assume that it went down $1 in January which is either 2% ytd or 1% of your original amount. Are you happier in January than you were in December? How does the slower rate of deterioration help you predict what will happen in February and beyond? After all, your portfolio could rally in February or go down another $2. This is the nonsense that is being disseminated by the financial press. Things are supposed to be getting better because your portfolio is going down a slower pace which must mean it will turn around and go up soon. The part in italics, of course, is not true. There is no way to predict when the deterioration will stop (it could take years) or what will be the minimum for your portfolio (could be $5,$10) based on the change of rate of deterioration or second derivative.

Although I realize that unemployment is a lagging indicator, most pundits omit the obvious fact that unless you know when the economy will turn this knowledge is also useless. Also, I don't think anyone would disagree that fewer Americans losing their jobs, other things being equal, is a good thing. However, 610,000 initial claims is a terrible number because it is large and negative. The economy will not turn around until that number becomes small (even lagged by six months or even a year), and nobody can predict when that will happen based on the second derivative. No matter what they say or how loud they say it.

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