At this time, it is simply a matter of speculation as to when the recession might end. Most bets seem to be on mid-2009 as the trough point for the U.S. economy. However, what statistics should we be watching for signs that things are starting to turn around?

The following is a list of some indicators that are likely to show the earliest improvement.

(1) Watch for better conditions in the U.S. housing market. These will come in several areas: a leveling off of existing-home sales prices; a gradual pickup in new housing starts; an improvement in new home sales; and a decline in the inventory of unsold units.

(2) Watch for oil to be among the first commodities to show improvement. Oil prices respond very quickly to the world economic environment. Modest increases in world trade require more energy inputs. Until “greener” days arrive, black oil is the lubricant and feedstock that fuels almost all growth.

Be careful, however, about the “risk premium.” For example, oil prices at this moment have moved above $50 USD (U.S. dollars) per barrel due to the fighting in the Gaza strip and the threat of supply interruptions from the Middle East. In other words, the current increase in the global price of oil has little to do with underlying supply and demand.

(3) Stock markets usually begin to record an upward trajectory about six months before the start of general economic activity. But one has to be careful about “false starts.” The nature of stock markets is that they are volatile. There can be periods of improvement that have little to do with the underlying economy but are rather the result of technical factors. Tax loss provisions, repositioning portfolios and asset diversification can also play roles.

North American indices have been on an upswing lately. This is primarily due to a more realistic assessment of where stock prices should be relative to profitability ratios and long-term performances. Earlier declines were too exaggerated. In Canada, the commodity sector is receiving a boost from higher oil prices, but this carries its own risk.

(4) Watch for indications that the financial sector has settled down and that banks are willing to lend to each other again. The clearest indication of this can be found in the Libor rate, but this is not widely published. Another indication is the spread between Triple-A corporate paper and government bonds, which has been much higher of late than historically. Other fixed income indicators are important to watch as well.

At the height of insecurity about financial markets, the yield on 10- and 30-year U.S. treasury bills dropped to very low levels. Purchasers were willing to forego interest in exchange for security. Gradually, reduced demand − mixed with an abundance of supply − is lowering the price and raising the yield. Investors are switching funds into areas (e.g., equities) that are thought to have higher capital gains potential. The need for security is on the wane, especially given the amount of fiscal stimulus that is coming.

(5) Other indicators to watch are consumer confidence, the purchasing managers index (for manufacturing activity, combined with overall economic activity) and the Baltic Dry Index (which is a record of seagoing cargo shipments and, hence, world trade). Some may not be as easily accessible as others, but they all do receive media coverage.

Something to be aware of is that labour market numbers are usually lagging when it comes to recessions. Employers tend to meet the first increases in demand with the workers that they have on hand. It usually takes about a year for employment to start to show gains. Of course, this encompasses an inherent flaw that slows down overall recovery. It is employment and income growth that fuels so much of consumer spending, which accounts for 70% of Gross Domestic Product in the U.S. and 55% in Canada.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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