What does the latest Dow Jones Industrial Average tell us about the managed depression?


The Dow Jones Industrial Average (DJIA) keeps setting new record highs. Does this mean the Managed Depression is over? The short answer is “yes”, but the long answer is “no”.

The case for a “yes” is that this is based on the solid progress that we have been waiting for, and it’s backed by some strong numbers. The “no” is that we’re still judging ourselves against either the depths of the worst part of the depression, or in the case of the DJIA a 6-year old record – it should be about 30% higher or more in that time. But what counts is that this is based on strong corporate profits at least as much as a lack of any other place to put money and the trends should continue – unless the Federal government does something stupid. Where do you want to put your money on that one?

Since it’s been two months since Barataria set out the criteria for judging this year, we should check in to see where we stand. The most important signal that we’ve been following since the low point three years ago remains the ADP Employment Report, which showed a healthy 198k jobs added in January. A full 40% of them came from businesses of less than 50 employees, 25% from businesses of less than 20. Small businesses continue to lead job growth by far, suggesting that the restructuring we can expect in a depression is continuing apace. More to the point, the absolute figure is ahead of the 160k per month average we’ve seen since the bottom, a very hopeful sign.

We won’t know how youth unemployment is faring until we get a few more months of data in from the noisier but official BLS jobs survey. But that’s still the best sign to watch.

The jobs figure is important against the DJIA record because of solid corporate profits. While large companies have been slow to hire, profits suggest that in the future they will come around and enjoy the party being thrown by small businesses. The main reason that employment lags recovery in a normal recession (as it has not so far!) is that corporations typically wait to see profits return before they hire. That may finally be turning on.

One of the important other measures to keep an eye on in 2013 is the Consumer Confidence Index, which jumped to 69.6 in February (from 58.4 in January). This number, where 100 is defined as the positive response net in 1985, is still at typical recession levels – but about as high as it has been since 2007. People are becoming more positive, if cautiously so. It’s hard to expect this to climb out of the ditch in 2013, but it should normalize in the 70-80 range this year if we are to believe consumers are less pessimistic. February saw us hit that.

The Case-Schiller index of home prices, which should also start hitting more normal ranges in 2013, takes more than 2 months to compile. So like youth unemployment, we can’t say yet.

Given these stronger numbers and solid profits, the rise in the DJIA should be taken as a real thing. If nothing else, the zero overnight Fed rate means that money has nowhere else to go – so we can expect the ride on Wall Street to continue just because it is the only big show going.

The only dark clouds on the horizon come out of Washington, which has slouched its way into austerity even though everyone knows it is a bad idea. At least congress is predictable even if they aren’t all that helpful. This one problem could easily overshadow everything good into next month as the population is spooked by sequestration. Hiring at small businesses can be as emotional as it is practical, and small business owners are notoriously cautious about bringing more people on if they believe they will have to look them in the eyes and lay them off in a few months – if not for the emotions involved, at least for the sunk costs of training new hires. Horrible news of a broken government can have a terrible effect in the kind of economy we have now, also wreaking havoc on consumer confidence.

In the short term, we have everything set up for a good party. Over the longer haul there are a few idiots who stand a good chance of blowing it bad. Is the DJIA record for real? You can look at it either way. What we can say is that, unless it gets screwed up, the solid foundation set a year ago is starting to have a shiny new economy built on top of it. We’re still on track for a 2017 full recovery.