Are We There Yet?

Historically, almost all economic recessions and depressions have ended in periods of recovery and prosperity. This is expected to be the case for the current recession.

Since the U.S. financial system stabilized in mid-2009, several economic indicators, notably the growth rate of U.S. gross domestic product (GDP) and several stock market price indexes, have apparently recovered from their troughs in 2008. It seems that the worst is over. Now the difficult question is whether the recovery will be L-shaped (a long period of stagnant growth), U-shaped (a gradual increase in economic activities), or V-shaped (a strong recover).

Looking at Economic Indicators

The Real Estate Center’s business cycle research program monitors a number of economic indicators to analyze the Texas economy and its relationship to the U.S. economy.

The most widely monitored and analyzed economic indicators are employment levels and employment growth rates, unemployment rate, GDP, aggregate personal income, per capita personal income, housing starts, stock market indexes, consumer price indexes and industrial production indexes. Macroeconomists look at these indicators to offer more informed opinions about the direction of the aggregate economy.

The indicators are classified into three groups: leading, coincident and lagging. A leading indicator is an economic time series that changes before the aggregate GDP changes. Examples of leading indicators include stock market indexes, building permits, inventory changes, overtime production hours, unemployment insurance claims and money supply.

Leading indicators are useful for short-term economic forecasting but their macroeconomic forecasting records, especially stock market indexes, have not been any better than weather forecasts. The late Paul Samuelson, the first American Nobel Laureate in economics, once quipped, “The stock market has forecast nine of the last five recessions.”

A coincident indicator is an economic variable that changes approximately at the same time as the aggregate GDP. Examples include personal income, retail sales and industrial production indexes. Coincident indicators provide useful information about the current state of the economy and help identify the dates of peaks and troughs.

Lagging indicators are time series variables that change typically a few quarters after a change in the aggregate economy. Examples of major lagging indicators include employment growth rates, outstanding consumer and business loans, and unemployment rates.

Past patterns of economic recovery show that in a recession, private sector firms first attempt to increase productivity and profitability by producing the same amount of goods and services using the same or lower amounts of labor, leading to lower unit labor costs and product prices. The decrease in product prices leads to increases in demand for goods and services, which in turn lead to recovery of sales and output.

In the Center’s Monthly Review of the Texas Economy, the monthly time series of employment growth rates in Texas industries is studied to analyze Texas labor market cycles. Recovery in the labor market normally occurs after sales and output recover, when firms employ more people to produce more goods and services.

The Texas and U.S. labor markets seem to have bottomed out in fourth quarter 2009 (see figure). This suggests that the state’s GDP and aggregate personal income may have already recovered or at least have bottomed out. Because employment growth rate is a lagging variable, looking at Texas total personal income gives a clearer picture of the current state of Texas’ economy.

Texas Personal Income

Texas’ total personal income fell from $924,319 million in second quarter 2008 to $902,892 million in second quarter 2009, an annual decline rate of 2.3 percent. It increased to $904,713 million in third quarter 2009, for a quarterly growth rate of 0.2 percent compared with 0.3 percent for the United States (Table 1).

Net earnings accounted for most of third quarter 2009 income growth rates for both Texas and the United States (Table 2). Net earnings growth rate in the third quarter was 0.4 percent for both Texas and the United States (Table 2, Panel A). Income received on assets (dividends, interest and rent) fell by 0.5 percent in Texas compared with a 0.1 percent increase for the United States.

Transfer receipts, which are income payments to persons for which no current services are performed and of net insurance settlements or the sum of government social benefits and current transfer receipts from business, remained unchanged for Texas and rose 0.4 percent for the United States in third quarter 2009 (Table 2, Panel A).

The net earnings growth rate in Texas contributed 0.26 percent to the state’s personal income growth rate in third quarter 2009 (Table 2, Panel B). The combined contributions of net earnings (0.26 percent) and transfer receipts (0.01 percent) reduced by the negative contribution of receipts for dividends, interest and rent ( 0.06) resulted in an income growth rate of 0.2 percent in third quarter 2009 (Table 2, Panel B).

Industries Generating Income

Twelve Texas industries generated more income in third quarter 2009 than in the second quarter of the year. Six Texas industries experienced negative income growth rates (Table 3).

Texas’ finance and insurance industry ranked first in income growth rate, contributing 0.14 percent to Texas income growth compared with 0.09 percent for the United States.

The health care and social assistance industry ranked second in contribution to income growth rate in Texas, accounting for 0.13 percent compared with 0.12 percent for the nation.

The professional and technical services industry and other services industry (repair and maintenance, personal and laundry services, religious, civic and professional organizations) contributed 0.07 percent to the Texas income growth rate compared with 0.03 percent for the United States.

The contributions of the state’s real estate and rental and leasing industry, transportation and warehousing industry, and administrative and waste services industry were twice the national averages for these industries (Table 3).

Contributions of Texas’ educational services industry and management of companies and enterprises industry were 0.01 percent, equal to the national figure. The accommodation and food services industry and retail trade industry contributed 0.01 percent to the growth rate of net earnings, less than the 0.02 percent for the United States. The state’s utilities industry contributed 0.01 percent to net earnings growth rate compared with zero percent for the United States.

Total incomes in three Texas industries (farm, retail trade, and arts, entertainment and recreation) remained unchanged from second to third quarter 2009. Four Texas goods-producing industries (construction, mining, and durable and nondurable manufacturing) and two service-providing industries (information and wholesale trade) had negative contributions in third quarter 2009. The construction industry suffered most in terms of reduced income growth and had a negative contribution of 0.12 percentage points.

Suffering heavily from falling crude oil prices, which went from more than $140 per barrel in 2008 to less than $70 in 2009, the state’s mining sector, mainly oil and natural gas extraction, reduced the growth rate of net earnings by Texas industries by 0.1 percent.

As reported in the Center’s Monthly Review of the Texas Economy, heavy job losses in the state’s manufacturing industry caused the state’s durable and nondurable manufacturing industries to contribute negative 0.06 percent and negative 0.03 percent to the growth rate of net earnings by industry in Texas. In the service providing sector, the information industry and wholesale trade industry reduced the sum of the contributions by 0.02 and 0.04 percentage points, respectively.

Texas personal income trends point to an early stage of a weak recovery in output and income. These trends, together with decreasing job loss rates (see figure) suggest that the worst of the economic downturn may be over.

Dr. Anari ([email protected]) is a research economist with the Real Estate Center at Texas A&M University.