A Structurally Damaged Economy

The current recovery remains overall weak and an extremely uneven affair (see e.g. yesterday's comment on Zerohedge regarding the Dallas and Richmond Fed manufacturing surveys).

Economic data releases continue to be 'mixed' – not so weak as to warn of an imminent downturn, but remarkably weak considering the amount of funny money production courtesy of the Fed in recent years and the huge increase in the federal debtberg. This is not meant to say that these interventions are apt to actually increase economic prosperity, but they usually create at least a temporary illusion of prosperity, as resources are diverted toward various bubble activities. The fact that they have failed to achieve the usual result this time around is a strong hint that the economy has suffered a great deal of structural damage in the last iteration of the credit boom, and that there is not enough real wealth left to create the 'normal' diversion effects.

One area that reflects the fact that a fundamental change that has taken place is the labor market. This is reflected in the employment population ratio, which is back at late 1970s/early 1980s levels:

The economic recovery since the financial crisis has failed to revive the labor market. The  unemployment population ratio essentially tells us that many more people are actually unemployed than the official unemployment rate indicates – they have simply fallen out of what is officially considered to represent the work force – click to enlarge.

Employment Related Google Search Data

Google publishes two employment related search indexes, the Unemployment and the Jobs Index. There are a few interesting features that differentiate the current period from previous periods during which the economy has done comparatively well. The Unemployment Index has moved into a higher range compared to pre-crisis times, and as of 2014, its annual growth rate has turned into positive territory again:

The Google unemployment index, which tracks queries related to unemployment, food stamps, disability, social security, and so forth. The index has established a new, higher trading range compared to the pre-crisis era – click to enlarge.

As of this year, the annual rate of change of the Google UE index has moved back into positive territory – the last time it did something similar (i.e., move from negative into positive territory) was in 2007 – click to enlarge.

The Jobs Index tracks queries like 'job, resume, career, employment, and so forth. This index has displayed a regular seasonal pattern over recent years: it spikes to an annual peak early in the year, then trails off into a downwardly sloped range, and falls sharply in the fourth quarter. Its behavior during the recession was only slightly different from its 'normal' pattern. However, this year something has changed – the index is clearly deviating from its usual pattern. Our friend BC suggested that this may be due to many people no longer receiving unemployment support, which rings true (in the chart annotation we mention that we have no explanation for the change in the index pattern, but this may well be the reason):

Google Jobs Index – this year it is suddenly diverging from its usual seasonal pattern – click to enlarge.

Initial Claims

Since there is a well-known close correlation between initial weekly claims and the stock market, we are always keeping an eye on this data series. Currently it still remains in the range usually associated with economic expansion. Should it break out of this range, it would represent a major warning signal. Note that claims remained well within this range throughout most of 2007 as well. They only started to move higher late in the year and the stock market's decline  began concurrently. However, some indexes such as e.g. the Dow Jones Transportation Average made new highs as late as May 2008. The transports were apparently tracking crude oil prices at the time, as strange as that may sound. Although crude oil is an important input cost item for many transportation companies, investors apparently took its uptrend to indicate that the global economy was still on track for expansion. That was an erroneous interpretation – in reality, crude likely rose as a late stage effect of monetary inflation combined with an increasingly desperate short squeeze (shortly before it topped out, a major commercial hedger defaulted due to margin calls).

Weekly initial claims (the seasonally adjusted version) – still in the economic expansion range for now – click to enlarge.

We are now waiting to see whether there will be any correlation between the Google UE and Jobs indexes and initial claims in coming months. It is possible that the former are giving advance warning of impending trend changes (especially the annual rate of change of the UE index). It is also possible that the fact that unemployment support has run out for many people will produce an uptrend in the employment population ratio in coming months and that the recent strong divergence in the Jobs Index from its usual seasonal pattern is an early indication of this.

Charts by: Google, stockcharts, St. Louis Fed