Looking for a Lopsided Recovery

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Instinctively, most market-watchers want to classify any economic data release as bullish or bearish. This knee-jerk, one-dimensional perspective can severely limit insights into a multidimensional economy.

The current situation is a case in point. Kick-started by massive stimuli, the economy is evidently poised for stronger growth in the second half. Earnings are improving, the Fed is determined to keep rates down, and if the jobs numbers are bad, no problem -- aren't they lagging indicators?

Well, not exactly.

Contrary to popular belief, employment is a roughly coincident indicator. On average, it peaks and troughs around the same time the business cycle does.

A trough in the jobless rate is actually a leading indicator of a recession, with an average lead-time of seven months. If you find that hard to believe, just check the historical record.

But because of the widespread misconception, anyone pointing to the rising jobless rate as a harbinger of recession was considered uninformed in early 2001 because, of course, everyone else just knew it was a lagging indicator of the 2000 slowdown. I vividly remember my frustration at the ability of so many observers to ignore reality, with recession staring us in the face.

The jobless rate does tend to lag behind the end of a recession, but that's mainly in slow recoveries and sometimes when the economy is undergoing great structural change.

For the past year and a half, I've been predicting a subpar recovery, which is precisely what we got. Back in May, when many were still worried about a double-dip recession and deflation, I emphasized that neither was on the horizon. The stock market has now rallied in recognition of that fact, and even the bond market is having second thoughts about whether deflation is truly a danger.