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Is "still getting worse, but more slowly" really such a tough concept? [ClearOnMoney]
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Is "still getting worse, but more slowly" really such a tough concept?

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Commentary

Is "still getting worse, but more slowly" really such a tough concept?

12 Nov 2009 by Jim Fickett.

It is a very common mistake in the finance and economics world to confuse “still going down, but more slowly” with “starting to go up”. The difference does matter! Just catching this common reporting error can put one ahead of the crowd in understanding financial, economic, and business conditions.

Anyone can understand the concept in the title. Imagine a road that descends into a valley and then ascends again on the other side of the valley. Isn't it rather obvious that there is a difference between the following two parts of the journey?

  • Still doing down, before the bottom, but the road is leveling out
  • Past the bottom and starting up the other side

Yet in the business news these two are confused constantly.

I look daily at the very useful Econoday site, which reports, among many other things, the initial claims numbers weekly. They have this in their boilerplate text:

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market.

No, that is just plain wrong. I grant that “deteriorating” and “improving” are not technical terms, making a technical argument difficult. But as long as the level of claims is above about 325,000, even if the trend in claims is downward, the total number of jobs is probably decreasing and the unemployment rate rising. Does anyone really think that rising unemployment constitutes an “improving labor market”? Briefing.com got it right:

More workers are still losing their jobs than finding new ones and we expect the data to show a slight uptick in unemployed workers over the next three months.

Even David Rosenberg, a very insightful economist and market commentator, fell into this trap. (If Rosenberg can get caught, we had all better be on our guard!) In his 10 Nov 2009 commentary (free subscription required) Rosenberg wrote,

The latest Fed Loan Officer Survey suggests that bank lending guidelines are getting less tight …

Roughly 15% of commercial banks, on net, were still tightening loan standards for businesses but this is about half the share of three-months ago (even credit standards to small companies, while still tight, are less so). On consumer loans, again there were 15% of banks, on net, that were still tightening their standards, but that figure was at 35% back in July.

No, if 15% more banks are tightening than loosening, then credit conditions are getting tighter, not less tight. As the Fed correctly says in the The October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices,

In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year.

Presumably the misunderstandings are not due to any great conceptual difficulty, but just sloppiness. If a graph is about something bad and the curve is going down, then something is getting better, so people tend to write that the market is getting better, without stopping to think about what is actually being measured.

But it makes a difference. A market is difficult to understand at the best of times, involving many, many interactions of different forces. You can't expect to get very far if you mis-state the basics. So to understand the impact of the news on your investment goals, that bit of extra mental effort really is required: one must ask what is actually being measured.

Right now, the jobs market and credit conditions are both still getting worse. In fact, it is significant and quite discouraging news that, despite epic interventions from the Federal Reserve, bank credit is still getting tighter. We are still on the downhill stretch. It may be leveling out, but we are not in sharp recovery mode, as some think.