Green Shoots: Fact or Myth?

July 8, 2009

The dominant theme of market chatter as G-8 leaders kick off their annual summit in Italy is whether the recession’s slackening intensity, characterized by several better-than-expected economic reports this spring, represents a transitional staging ground for positive growth in developed economies. Green Shoots continue to pop up, such as the reported German increases in May of 4.4% in industrial orders and 3.7% in industrial production.  Manufacturing has revived in many emerging markets, providing a source of demand for more developed economies, and the inventory cycle is entering a supportive stage.

Nonetheless, major doubts still surround the outlook for private consumption and business investment.  Labor markets remain poor, with a jobless rate of 9.5% in both the United States and Euroland.  The 467K drop of U.S. jobs last month was greater than the 421K per month decline in April-May.  Weak labor markets in turn are exerting downward pressure on wages, with latest on-year increases of 2.7% in the United States and 0.8% in Great Britain.  The volume of retail sales in Euroland fell twice as much as projected in May.  Japanese private core domestic orders for machinery in April-May were 8.8% below their depressed first-quarter level, and foreign orders for machinery were 15.6% under the 1Q level.  These changes point to continuing depressed investment, and they connote considerably more weakness than suggested by business surveys.  Settlement-basis Japanese exports recorded 12-month declines of 40.6% in April and 42.2% in May, only slightly less severe than a 47.7% drop in the first quarter.

A desired effect of quantitative monetary easing is not yet visible.  If working as intended, such operations ought to accelerate money and credit growth.  However, British M4 decelerated in each of the last three reported months to 16.6% in May from 18.6% in February.  In Euroland, M3 and bank lending to the private sector rose only 3.7% and 1.8% in the past year, down from gains of 10.0% and 10.5% in the prior statement year.  On-year Japanese M2 and bank lending expansion rates of 2.5% are also slowing.

The real side of economies and financial markets are intertwined in a mutual cause-and-effect relationship.  Markets take their cue from economic performance but also shape future aggregate demand and production.  A sustainable recovery is not possible without the participation of consumers, who must not only express greater confidence when surveyed but back up such words with more spending.  Consumers need the means and will to spend, namely an ample stream of income, stock of wealth, and access to affordable credit plus some assurance that such prerequisites are going to continue.  Jobs are still disappearing at a rapid rate, income growth is low, and wealth looks less stable than a month ago.  Memories of the impressive rally in equity values for three months this past spring have been overshadowed by losses in the United States of around 7.5% during the past month and a residual net drop since the end of August 2008 of nearly 30%.  Comparisons of the German Dax and Japanese Nikkei produce similar results, suggesting that gains in the spring may have been no more than a transitive bull rally within a prolonged bear market.  If that is indeed what has happened to equities, Christmas cactus would seem a more apt metaphor to describe the current stage of the U.S. and world business cycles than green shoots.  Monetary and fiscal support, like home heating, will be necessary extra ingredients for some time further before a sustainable upswing that needs no artificial help kicks into gear.

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


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