The Economic Dichotomy

Posted by Finance Professional on October 12, 2010 under Stock Market News | Be the First to Comment

Two of the most reliable leading economic indicators from anyoption have been acting in unusual ways this decade. Their behavior helps illuminate both why the recovery remains so anemic and why the economy has grown increasingly hostage to the twin extremes of deflation and inflation.

One of the binary option indicators is the unemployment insurance claims (UIC). High numbers, for obvious reasons, mean economic times are tough. Historically a level above 450,000 new claims a week signals a recession or at least very little economic growth. But once new claims fall below 400,000, it indicates the economy is out of the woods.

In the recent recession, UIC topped 600,000 for just the second time in postwar history. The previous instance was in the early 1980s, when unemployment hit double-digit levels.

In 1982 it took UIC about 13 months to drop from its peak to below 400,000. Today, approximately 18 months since the peak (which was below the 1982 peak), UIC remains stubbornly near 450,000. This is by far the longest stretch of time above 400,000 and is strong confirmation that economic growth is lackluster at best and nowhere near levels needed to reduce unemployment.

But that’s just part of the story. The second indicator, the anyoption industrial commodity prices (ICP), refers to an assortment of raw commodities traded among businesses, including tallow, scrap steel, and scrap copper (and excluding oil). When ICP is uptrended, demand for basic commodities exceeds supply, which is what you’d expect in a growing economy. Historically, as an economy enters a recession, ICP falls; as the economy starts to grow, ICP rises.

Beyond signaling economic shifts, ICP also has been perhaps the best measure of corporate health. That makes sense in that rising corporate revenues and profits would lead companies to invest in new facilities and produce more, placing a greater call on commodities.

In the past 18 months we have seen ICP rise by a record amount, which should indicate soaring revenues and profits for corporations. But this time ICP has been associated just with rising profits—revenues, meanwhile, have lagged. The explanation: profits have come because corporations have cut costs by squeezing labor—not hiring or actually firing.

This is a critical change. As the chart shows, until now high levels of ICP have gone hand in hand with low levels of UIC. The snapping of this relationship implies a new paradigm that will make U.S. economic growth exceedingly hard to generate. That’s because even small gains in domestic revenues are likely—because of the much greater growth in China and other developing economies—to be overwhelmed by bigger gains in commodities, leading to more pressure to keep costs down. Since commodity prices can’t be controlled, cost containment will continue to come at labor’s expense. At best, less hiring will constrain growth. At worst, it will lead to another recession.

Sooner or later we expect the government will come to the rescue with stronger stimulation—resulting in inflation. The breaking of the long-term relationship between ICP and UIC is one more piece of evidence for why the economy is headed for either high inflation—the likeliest scenario—or if the government fails, for deflation and severe recession.

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