Thomas Oliver: Lesser known indicators not good

By Thomas Oliver

The Atlanta Journal-Constitution

If all you paid attention to were the Dow Jones index and the unemployment rate, you would be justifiably confused. The disconnect between Wall Street and Main Street has rarely been greater.

I asked a few economists what indicators they look at for clues beyond the headlines.

Jeff Rosensweig, professor at the Goizueta Business School at Emory University, watches the change in the final sales component of the Gross Domestic Product report. In other words, not just what was produced, but what was actually sold.

Here’s what the professor knows: Firms produce a product. If sales are better than expected, inventories are drawn down and firms will likely ramp up production. This might mean adding more hours for workers or more workers.

But if few are buying what is being produced, inventory builds up and firms will slash production by eliminating hours and eventually workers.

For the third quarter, production grew faster than sales. That doesn’t bode well for jobs.

“We will see more unemployment,” the professor says of the report that had GDP increasing 2.8 percent, vs. a 1.9 percent increase for final sales.

When Rosensweig sees final sales approaching the 3 percent growth rate, he expects hiring to follow.

Mark Vitner, managing director and senior economist at Wells Fargo Securities, watches what he calls the income proxy, a measure of income earned from work. Or in these times, how much purchasing power has been lost.

Income earned from work has fallen 14.9 percent since the recession began in December 2007, compared to a 6.4 percent drop in employment, according to Vitner.

Incomes have fallen more than employment because many who are still employed are working fewer hours or receiving smaller commissions and bonuses, Vitner explained in an e-mail.

“The drop in income earned from work tells me that the damage to household finances is far worse than you would assume by simply looking at the unemployment rate.”

Vitner says all this suggests the recovery will be extremely sluggish as households pay down debt, rebuild savings and find ways to make up for the income lost over the past two years.

For Adrian Cronje, chief investment officer and founding partner of Atlanta’s Balentine LLC, a recovery will take hold when the banks are back to lending and consumers and businesses are back to borrowing.

On the supply side of credit, Cronje looks at banks’ balance sheets to see that banks still aren’t lending.

On the demand side, Cronje watches the report on applications for new mortgages because he believes mortgages are the main “demand for credit” for households.

Yet, even with rates the lowest since spring, the four-week average for mortgage applications has barely nudged upward.

Cronje also watches “borrowing” through credit card debt, which continues to decline.

In total, what these economists see is hardly encouraging. The hemorrhaging may have stopped but the patient is still in serious condition.

Wall Street may be counting its year-end bonuses from this remarkable yet enigmatic bull market, but south of Manhattan there’s a world of hurt.

Thomas Oliver writes the Sunday business column. He can be reached at toliver.writeright@gmail.com