Relevant and even prescient commentary on news, politics and the economy.

Private Real GDP in Recoveries

Update: Paul Krugman at Conscience of a Liberal points to Spencer England’s post in his column 8/1…Dan

I thought it would be interesting to post this chart of real private GDP in recoveries.

It clearly shows that since the great moderation we have experienced three recoveries that compared to previous recoveries were very weak.  Whether this is the new norm is open to debate.

But interestingly, at this point in the recovery this measure of real private GDP is exactly the same as it was in the last cycle under Bush that Larry Kudlow called the “Goldilocks” recovery.

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2012 = 2006?

It’s not just that you make a mistake; it’s that you cling desperately to that mistake and let it define you.

Katrina revealed George W. Bush’s basic incompetence in a way that 9/11, Afghanistan, and Iraq had not. So he was weak going into the 2006 midterms. There were going to be losses. No one who wasn’t being paid to say otherwise thought there were not going to be some losses.

And you have to assume that some people thought those losses would be smaller: they got rid of “Brownie,” made a lot of noise about “Katrina and Rita,” put Hayley Barbour on television as often as they could, talking about how Mississippi was rebuilt.

Damage control.

The problem was that one failure got people to look at other failures. And the sacrifices didn’t come from there.



After the 2006 election, Donald Rumsfeld resigned. There were rumors it might happen before then, but it didn’t.

A few weeks ago, going into the Wisconsin recall elections, there were rumors that Tim Geithner would resign.

That’s not going to be true now. So Barack Obama is going to go into a re-election campaign running what John Hempton astutely described as “the cravenly pro-finance Obama administration.”

Not pro-economy: that would involve employment and GDP growth, neither of which has been happening for so long that Sensible Centrist Brad DeLong is sounding more and more and more like me.

The center isn’t holding. Every pictures tells the same story.





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The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

by Mike Kimel

The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

A few weeks ago, I had two posts looking at the relationship between the S&P 500 and real GDP (Part 1 and Part 2).

The first post noted that using data from 1950 to the present, the adjusted close of the S&P 500 appears to lead real GDP by about 10 quarters… and real GDP appears to lead the S&P 500 by 16 quarters. That is, each factor appears to influence the other with a lead time of a few years. In the second post, I noted that while the S&P 500’s influence over real GDP appears to have remained relatively stable over the decades, real GDP’s influence over the stock market seems to have gone by the wayside some time in the 1970s.

Today’s post is similar to Post #1, but instead of looking at how the S&P 500 influences real GDP and vice versa, it looks at the relationship between the S&P 500 and the civilian employment to population rate.

The adjusted close for the monthly S&P 500 comes from Yahoo. The employment to population ratio is generated by the Bureau of Labor Statistics, but I pulled it off the Federal Reserve Economic Database (FRED) maintained by the Federal Reserve’s St. Louis Branch. Monthly data is available for both series – data for the S&P 500 was available going back to 1950, and the employment to population ratio was first computed in 1948.

Following the same practice as in Post #1, I computed the correlation between the S&P 500 and the employment to population ratio, the correlation between the S&P 500 and the employment to population ratio lagged one month, the correlation between the S&P 500 and the employment to population ratio lagged two months, and so on, all the way through 15 years worth of lags. I also computed the correlation between the employment to population ratio and lags of the S&P 500. Graphically, it all looks like this:

Figure 1.

The graph shows that the S&P 500 doesn’t seem to lead the employment to population ratio. The correlation between the S&P 500 and the employment to population ratio in the same period exceeds the correlation between the S&P 500 and any lagged employment to population ratio.

However, the employment to population ratio does appear to lead the S&P 500… and the correlation is highest at about 123 months… or about ten years. In other words, the share of the population that is employed seems to lead the stock market, with the strongest effect generally being observed ten years out.

I’ll be looking at how stable that result is in the next post in the series, but for now, let’s just take it on faith that the result doesn’t just go away when we change the dates in our sample. So… assuming the results are stable, they suggest the following story: more employed people mean more people putting money in the stock market, more people buying stuff, and more companies making stuff. Nevertheless, all these good things happening take a while to have an effect on stock prices. In fact, a ten year lag time seems to indicate that the benefits of more employment don’t get felt until the next business cycle comes around.

Now the really bad news… here’s what the employment to population ratio looks like:

Figure 2.

I note a few sorry portents….
1. The employment to population ratio peaked at 64.7% in the year 2000.
2. Its since dropped quite a bit, and is now at a level last since in the 1980s.

Anyway, in closing, a few more notes
a. I am not an investment adviser. I’m merely looking at some historical correlations, and this is only part of the story. I would strongly advise against trading on this information.
b. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at gmail.com.

The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

A few weeks ago, I had two posts looking at the relationship between the S&P 500 and real GDP (Part 1 and Part 2).

The first post noted that using data from 1950 to the present, the adjusted close of the S&P 500 appears to lead real GDP by about 10 quarters… and real GDP appears to lead the S&P 500 by 16 quarters. That is, each factor appears to influence the other with a lead time of a few years. In the second post, I noted that while the S&P 500’s influence over real GDP appears to have remained relatively stable over the decades, real GDP’s influence over the stock market seems to have gone by the wayside some time in the 1970s.

Today’s post is similar to Post #1, but instead of looking at how the S&P 500 influences real GDP and vice versa, it looks at the relationship between the S&P 500 and the civilian employment to population rate. The adjusted close for the monthly S&P 500 comes from Yahoo. The employment to population ratio is generated by the Bureau of Labor Statistics, but I pulled it off the Federal Reserve Economic Database (FRED) maintained by the Federal Reserve’s St. Louis Branch. Monthly data is available for both series – data for the S&P 500 was available going back to 1950, and the employment to population ratio was first computed in 1948.

Following the same practice as in Post #1, I computed the correlation between the S&P 500 and the employment to population ratio, the correlation between the S&P 500 and the employment to population ratio lagged one month, the correlation between the S&P 500 and the employment to population ratio lagged two months, and so on, all the way through 15 years worth of lags. I also computed the correlation between the employment to population ratio and lags of the S&P 500. Graphically, it all looks like this:

Figure 1.

The graph shows that the S&P 500 doesn’t seem to lead the employment to population ratio. The correlation between the S&P 500 and the employment to population ratio in the same period exceeds the correlation between the S&P 500 and any lagged employment to population ratio.

However, the employment to population ratio does appear to lead the S&P 500… and the correlation is highest at about 123 months… or about ten years. In other words, the share of the population that is employed seems to lead the stock market, with the strongest effect generally being observed ten years out.

I’ll be looking at how stable that result is in the next post in the series, but for now, let’s just take it on faith that the result doesn’t just go away when we change the dates in our sample. So… assuming the results are stable, they suggest the following story: more employed people mean more people putting money in the stock market, more people buying stuff, and more companies making stuff. Nevertheless, all these good things happening take a while to have an effect on stock prices. In fact, a ten year lag time seems to indicate that the benefits of more employment don’t get felt until the next business cycle comes around.

Now the really bad news… here’s what the employment to population ratio looks like:

Figure 2.

I note a few sorry portents….
1. The employment to population ratio peaked at 64.7% in the year 2000.
2. Its since dropped quite a bit, and is now at a level not seen since the 1980s.

Anyway, in closing, a few more notes
a. I am not an investment adviser. I’m merely looking at some historical correlations, and this is only part of the story. I would strongly advise against trading on this information.
b. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at gmail.com.

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The Historical Relationship Between the S&P 500 and the Economy, Part 2: The Abrupt Rise of Short Term Investing

by Mike Kimel

The Historical Relationship Between the S&P 500 and the Economy, Part 2: The Abrupt Rise of Short Term Investing

Last week I had a post looking at how long it takes for events in the economy (in the guise of real GDP) to affect the stock market (represented by the S&P 500), and vice-versa. I noted that if you go back to 1950 and played with some correlations, you’d find that the S&P 500 tends to lead real GDP with the maximum effect occurring after about 10 quarters, and real GDP tends to lead the S&P 500 with the maximum effect occurring after about 16 quarters. Put another way – both the S&P 500 and real GDP affect each other (i.e., there seems to be virtuous cycle when things are going well, and a vicious cycle when things are going badly).

But… what if you look at shorter periods of time? Do these results hold? Using the same methodology as in the previous post – i.e., comparing the the correlation between the S&P 500 and real GDP in the same quarter, the correlation between the S&P 500 and the real GDP in the next quarter, the correlation between the S&P 500 and the real GDP two quarters later, etc. – we can find the number of quarters for which the effect of the S&P 500 on real GDP is greatest. But this time, instead of looking at for the period from 1950 to the present, we also look at it for the period from 1951 to the present, from 1952 to the present, from 1953 to the present, etc. This can tell us whether the degree to which the S&P 500 leads real GDP changes over time.

And here’s what that looks like graphically.

Figure 1.

So how do we interpret this? Well, for the 1950 to the present period, the strongest correlation between the S&P 500 and a lagged real GDP (lags checked: 0 to 24 quarters) occurred at around ten quarters. That rose to 11 quarters for the 1970 to the present period, and then in 2002 that rose again to 13 quarters. Results from the most recent sample periods may simply be a factor of there being very few years in those periods. Nevertheless, it does seem that the relationship between the S&P and lagged real GDP is fairly stable. The stock market does seem to be leading the economy, and it seems the biggest effect of the stock market on the real GDP seems to occur after 10 to 13 quarters.

But what about the other way? For the 1950 to the present period, it does appear that real GDP takes about 16 quarters, or four years, to have its greatest effect on the stock market. (That isn’t to say there aren’t shorter term effects – announcements about the latest quarter’s economic growth do tend to move the economy, but that effect may be short lived in the fickle world of modern stock market trading.) But has that relationship changed over time? Here’s a graph:

Figure 2

Urghhhh. How do we interpret this? The graph seems to indicate that early on, the economy led by about 4 years, and that lead-time slowly decreased over time until…. it simply dropped off a cliff in 1974. When the maximum lag is zero, that means that the highest correlation between the economy and the S&P 500 occurs with no lag at all. Note … not shown in the graph is the fact that the correlation between the real GDP and the S&P 500 in the same period began dropping at the same time as well.

What was that all about? My guess, and it is just a guess right now is that when the economy started to suffer high inflation, people lost the ability to judge whether there was “real” growth or not. When prices are rising rapidly, who really knows how the economy is performing or what they might do to company’s listed on the exchange. An alternative explanation that may be related… maybe big market players started paying a lot more attention to real GDP all of a sudden, and started becoming more interested in the short term.

The interesting thing is that once the stock market started to decouple and/or focus more on the economic short term, it stayed that way. To tie it in to something I wrote a while back, in Presimetrics, Michael Kanell and I note that the stock market performed better during the George Herbert Walker Bush administration, when the economy grew mediocrely, than it did under a number of presidencies that produced rapid growth, such as those of LBJ or Reagan.

So what about that big change at the end of the sample? Is the market starting to pay attention to the long term again, or is that spike a function of a very short sample toward the end? My bet, given how unstable it is, is the latter.

I wonder what all this means for value investing.

This post is the second in a series on the historical relationship between the economy and the stock market.

1. Data used in this post is the adjusted close of the S&P 500 going back to 1950 and quarterly nominal GDP going back to the same date. Because quarterly GDP figures measure the economy at the midpoint of the quarter, the S&P 500 for February, May, August and November are considered the analogous “quarterly” S&P 500 figures.
2. I’m not a financial advisor. I strongly suggest against making investments based on anything written above.
3. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at gmail.com.

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