Is That Some Light at the End of the U.S. Tunnel?

March 26, 2009

Since March 9th, the S&P 500, Nasdaq, and DJIA have each recovered around 20%.  During the previous worst postwar U.S. recession in 1981-2 when the U.S. jobless rate peaked at 10.8%, U.S. stocks bottomed out some three months ahead of the turn in the business cycle.  U.S. data are producing more frequent upside surprises.  Although the broad picture remains one of continuing severe recession, U.S. trends do not look quite as alarming as their counterparts in Europe and much of Asia.  The second take of Treasury Secretary Geithner’s bank rescue plan elicited a much more receptive market reaction than what he offered in early February, and investors are no longer running for the hills every time he or Bernanke testifies in Congress.  Progress can be detected.  And as they say, in the land of the blind, the one-eyed man, or economy in this case, is king.

Today’s weekly  U.S.  jobless claims and revised quarterly GDP numbers underline how depressed the economy remains.  New jobless claims, a gauge of the layoff rate, averaged 637K over the last eight weeks, an increase of 85K or 166% at an annual rate from the previous eight weeks.  Continuing jobless claims, which capture the increasingly long period that workers are remaining jobless, advanced by 114K per week over the last seven reported weeks, which is fast enough to more than double to over 10 million if sustained for a full year.  Revised national income accounts showed 16.5% annualized plunge of profits last quarter and a drop of 21.5% from the final quarter of 2007.  Real GDP fell 6.3% saar in the fourth quarter.  A breakdown of that decline attributes negative growth contributions of roughly 47% from personal consumption, 40% from non-residential investment, and 13% from housing, while tiny drags from net exports and inventories exactly offset a small boost from government spending.  The table below compares on-year changes in GDP and components of final demand in 4Q08 with the year to 4Q07.

On-Year Changes 4Q08 4Q07
Real GDP -0.8% +2.3%
Consumption -1.5% +2.2%
NonRes Investment -5.2% +6.4%
Residential -19.4% -19.0%
Government +3.2% +2.4%
Exports -1.8% +8.9%
Imports -7.5% +1.1%


Not everyone is convinced that elements for recovery are falling into place.  Three notable and prophetic doomsayers last year remain troubled, and their concerns are centered on the toxic bank asset removal plan’s continuing failure to dispose of institutions that may be insolvent.  NYU Professor Nouriel Roubini today predicted that more bank nationalizations lie ahead than generally appreciated and that such will drag down equities anew and prevent a recovery this year.  Nobel laureate and New York Times columnist Paul Krugman wrote much the same earlier this week.  A similar sentiment was also voiced by Martin Wolf of the Financial Times, whose column opened declaring, “I am becoming even more worried” and concluded that “with the public enraged, Congress on the war-path, the president timid and a policy that depends on the government’s ability to pour public money into undercapitalised institutions, the US is at an impasse.”

The fate of the United States holds the key to a global economy and to whether this downturn qualifies as a severe recession, a replica of a Japan-style of in-and-out decade of recession with deflation, or a genuine depression.  So far, the dollar has done well in worst-case circumstances by attracting safe-haven, highly risk-averse flows. If that pattern holds up, the dollar would seem likely to do better if the doomsayers are correct again than if the bounce in stock prices has done a better job than they of detecting the beginning of the end of the economic contraction.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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