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Making Sen$e of 2010: Indicators to Watch

What is the economic indicator to watch in 2010 and why?

Tyler Cowen

Professor of economics at George Mason University

If you’re going to watch one economic indicator this year, it isn’t the jobless rate or stock prices. It should be the economy of China.

So far most of the global economy has gone through “the Great Recession,” as it is being called. Except China. Is the Middle Kingdom doing something right or is the downturn simply coming to China a bit later? You might know that in the 1930s, the Great Depression also came to China a few years later than everywhere else.

So far, we’ve been counting on China as a kind of global locomotive, to grow, and to shore up Asia, while other economies are shrinking. The question is whether things will continue to run so well for the next few years.

The tricky thing is, there’s not any single statistic from China which you can count on. They measure their GDP differently than we do and they count it as economic growth if something is produced, whether or not it ends up being sold at the retail level. That means Chinese GDP can look fine while the economy is failing.

I do not expect our current mess to turn into a true depression. But if it does, it will be China leading the way and that’s where you should keep your eye.

Robert Shiller

Professor of economics at Yale University and co-author of Animal Spirits

The most interesting economic indicator at this point is, to me, the Reuters/University of Michigan Consumer Sentiment Question x4, which is one of the five inputs to the Michigan Consumer Sentiment Index.

I prefer to look at Question x4 rather than the index constructed from all five Michigan questions since question x4 relates to long-term expectations — five years. Those expectations are relevant to the kind of essential business decisions that will affect permanent hiring decisions and willingness of businesses to seriously commit to new activities, key factors in lifting us out of the recent economic collapse.

The question also focuses on the risk of economic depression. Fear of depression seems to have been a major factor in the severity of our recent crisis, and the fear is still often expressed.

Question x4 has had exactly this wording consistently since 1951:

x4: “Looking ahead, which would you say is more likely — that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?”

The Reuters/Michigan Surveys of Consumers people construct an x4 confidence index from the answers to this question. The confidence index shows that that there have been exactly four depression scares (when the index collapsed to very low levels): 1974, 1979, 1990 and 2008. In all cases the scare lasted no more than a couple years.

Now, the x4 confidence index seems to have recovered nicely, and, at the level 84, is comparable to values before the subprime crisis began in late 2006.

However, bad news is still arising, and x4 confidence has been showing a downward trend ever since the peak of irrational exuberance around 2000. We have seen two prior waves of increase in x4 confidence since the bottom of the market in 2002 and from 2005, but each wave to be followed by collapse of x4 confidence to new lows.

I hope to see a steadying of x4 confidence, but worry that it may yet collapse to newer lows yet.

Mark Zandi

Chief economist of Moody’s Economy.com

The economy is measurably better than it was a year ago and it will be measurably better a year from now. Unemployment will still be near a very uncomfortably high 10 percent, but job growth will have resumed and unemployment will be headed lower.

Key to this optimism is the belief that the federal reserve and fiscal policymakers will continue to aggressively support the economy. This means the fed will not raise interest rates until year’s end 2010 at the earliest and the Obama administration and congress will provide more help to unemployed workers and hard pressed state and local governments.

A stronger global economy and softer u.s. dollar will also fuel a revival in export growth. Selling what we produce to the rest of the world will be the principal source of long term growth, and this growth driver will kick in next year.

While the economy will come back next year, it won’t come roaring back. Businesses are no longer panicked, but they remain cautious and will be slow to hire and invest. A lack of credit is also impeding small businesses who are vital to the job machine. The ongoing foreclosure crisis threatens to push house prices even lower. Nothing works well in our economy if house prices are falling.

To gauge whether the economy is sticking to this script, watch initial claims for unemployment insurance. Weekly claims are down from over 600k per week at the start of the year to 450k currently. 350k would be consistent would a stable unemployment rate and unemployment will fall with claims near or below 300k.

Lending by banks to businesses also must stop declining. Only when commercial and industrial loans outstanding turn up will it be safe to conclude that the coast is clear.

Confidence must also revive. The return of those animal spirits is necessary for the economy to be in full swing.

The wrongs that led to the financial crisis and great recession are being slowly righted. With a bit more help from policymakers, the current recovery will evolve into a self sustaining expansion next year.


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