Recession: Is The End Really in Sight?

May 28, 2009

Given the failure of Japan, Canada, and Europe to decouple from the United States, the answer for most advanced economies rests with America.  Emerging economies, on the other hand, are demonstrating greater independence from the U.S. business cycle.

A view emerged this spring that a U.S. recovery will occur sooner than 2010 or even late 2009.  One of the best timing devices for past business upturns has been new jobless claims, which tend to peak shortly before but very close to overall economic troughs.  It is encouraging that new claims for unemployment insurance averaged 626.75K in the four weeks to May 23, down from 638.25K per week during the previous four weeks to April 25, and that in turn was down from 658.0K per week in the four weeks to March 28th.  The revival in the Conference Board consumer confidence index to 54.9 from 40.8 in April and 26.9K in March is another excitingly hopeful sign.

What worries me is the exaggerated market response to green shoots.  Economies are not sound enough to tolerate these changes.

  • Ten-year Treasury yields touched 3.73% earlier today, an increase of 120 basis points or 47.5% in merely ten weeks.
  • Oil prices poked above $64 per barrel today, an 88.5% rise in just fifteen weeks.  A headline story in today’s FT looks at the prediction by the Saudi oil ministers prediction of an $80 price soon.
  • An eighth of the recoveries in the Dow Jones Industrial Average and S&P 500 index have been eroded since May 6, and the DOW remains 33.4% below its year-earlier level.
  • Financial institutions are still viewed by investors with considerable suspicion.  Were the stress tests rigged?  Many people believe so.  Even if the tests had been administered fairly, the parallel to their use for measuring risk of heart attack or stroke underscores the limitation of lab experiments for identifying future problems.

Housing data continue to spoil the mood.  April new home sales of 352K in April were 3% lower than forecast and 34% below year-ago levels.  The Case-Shiller index of home prices in 20 urban areas is 31% below its 2006 peak and showing no sign of flattening like other downward trends.  At the worst moments of the recession this past winter, it was widely felt that a sustained U.S. recovery would be unable to begin until the housing market stopped bleeding.  That opinion made common sense then, and it still does.  The Case-Shiller index posted consecutive monthly declines of 2.2% in February and March.

Finally, there is the precedent of the Great Depression, when an initial real-side collapse in output and demand late in 1929 and very early in 1930 was followed by more stable data trends in the spring that proved short-lived when everything began to fall apart again in mid-year.  I’m currently reading Lords of Finance by Liaquat Ahmed, a detailed account of economic and financial developments from 1914 to the Second World War and strongly recommend it to anyone wishing to know more about the chronology of that tragic period.  One of many weird facts that resonates now was how investors became falsely convinced in the spring of 1930 that the worst of the downturn was over.

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



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