Getting Worse More Slowly

Ever since Ben Bernanke’s 60 Minutes interview where he used the phrase “Green Shoots,” many of the key data releases have been misinterpreted. This has led to a robust debate as to whether the worst is behind us.In recent weeks, I have keyed in on 4 data points that the mainstream has spun positively, despite the actual data being horrific. These four factors include ISM data, New Home Sales, Existing Home Sales, and Non Farm Payroll.Coming off historical lows (and in some cases, all time lows) in many data-points feels like things are getting better. In reality, things are getting worse, but more slowly. What is happening in the real world is the change in the rate of fall. The direction is still negative — the economy is still contracting — but it is doing so at a slower pace.

You may have heard the phrase “second derivative” bandied about; most users of the term fail to define it in plain English. Here’s my attempt: Imagine you jump from a airplane — for a while, you are free falling — accelerating downwards at increasing speeds*. After a few thousand feet, you pull the rip cord and your parachute opens up. In terms of direction, you are still heading down; In terms of speed, however, even though you are falling, you are falling at a much slower rate. As the parachute deploys, you are decelerating — the rate of your fall is slowing.

That pretty much sums up the economy lately — still contracting, but at a slower rate than the panic period from September to February. But this does not mean we are yet on the ground. That lack of change could be called stability. And the economy is  certainly not expanding. That is likely several quarters (or longer) away.

And those investors who made recent bets that Green Shoots are a great entry for investing — well, they may be somewhat disappointed . . .

*  We will save the discussion of terminal velocity for another time . . .

Previously: The Annual Existing Home Sales MSM Errata (March 24th, 2009) http://www.ritholtz.com/blog/2009/03/annual-existing-home-sales-errata/

Existing Home Sales, Non Seasonally Adjusted, Explained (March 25th, 2008) http://www.ritholtz.com/blog/2008/03/existing-home-sales-non-seasonally-adjusted-explained/

Temporary Help Services Employment Down 27% (April 3rd, 2009) http://www.ritholtz.com/blog/2009/04/temporary-help-services-employment-down-27/

See Also: The Economy’s ‘Green Shoots,’ Real or Imagined April 6, 2009, 6:32 pm http://roomfordebate.blogs.nytimes.com/2009/04/06/the-economys-green-shoots-real-or-imagined/

Ben Bernanke’s Greatest Challenge 60 Minutes, March 15, 2009 http://www.cbsnews.com/stories/2009/03/12/60minutes/main4862191.shtml

Recovery hopes begin to blossom Chris Isidore CNNMoney.com April 7, 2009: 7:29 AM ET http://money.cnn.com/2009/04/06/news/economy/recovery/index.htm?postversion=2009040615


Originally published at The Big Picture blog and reproduced here with the author’s permission.