Much has been made recently of green shoots in the economy. Optimists point to the fact that the rate of decline – the ubiquitous “second derivative” – has turned positive, signaling that the economy is contracting at a slower rate. Pessimists would prefer to see a positive first derivative before accumulating risky assets. In this blog entry, we look at the second derivatives of key data series and compare the current episode of less-bad data to similar periods in the past. Using Palantir’s ‘Date Set’ application, we conclude that a change in the second derivative tends to signal the end of recession, although the indicator is not foolproof.
This study was created by Jeff Lonsdale of Clarium Capital, who made it as a response to a Palantir analyst asking him what it meant that there are “green shoots” in the economy.
Continuing jobless claims
Unlike GDP – a variable for which a higher number is preferable – when it comes to continuing jobless claims a lower number is better. In such cases, a negative second derivative is a net positive for the economy. As the green line below indicates using Chart, the second derivative of continuing claims has recently turned negative.
Initial Jobless claims
The weekly claims number is already a measure of change, and is thus a first derivative; the first derivative of this series is equivalent to the second derivative of absolute measures of the economy. The first derivative of initial claims is also negative, a positive for the economy (see blue line below).
ISM Manufacturing Survey
This survey of manufacturers measures the change in manufacturing activity. A value above 50 indicates expansion, while below 50 signals contraction. Again, we need only examine the first derivative as the ISM is already a measure of change. The first derivative has been positive since January.
Conference Board Consumer Confidence
As with ISM, the consumer confidence figure is a measure of change and we again look to the first derivative. Unlike ISM, the consumer survey is not normalized to “growing or not growing” but is instead normalized to a value of 100 starting in 1985. The first derivative has been significantly positive in recent months.
Combining the indicators
The second derivative of numerous indicators has clearly indicated a decrease in the rate of contraction of the economy. Below we create a custom Date Set that layers the various derivative indicators and shades the periods during which the derivatives indicated positive shifts for the economy. This allows us to isolate periods when the second derivatives behaved similarly in the past.
We can now graph these comparable periods and compare their timing with past recessions:
The white vertical lines on the chart indicate periods during which the second derivatives behaved as they are currently. The blue lines indicate past recessions. With the lone exception of the early 1970s, each time the second derivatives turned positive during a recession it marked the end of that recession.