Arrgh!

DKW; April 20, 2009

Just when we thought we were seeing some glimmers of hope on the possibility of perhaps defining maybe the beginning of the end of the rapid rate of the economic downturn, we get hammered by the latest economic data. With pressure mounting to find good news in the economic situation, spying the "green shoots" of recovery in Fed parlance, we were grasping at things such as the "rate of the downturn has lessened". In other words, we were looking at the second and even third derivatives of the data trends, and comparing them with recessions passed to see if we could raise consumers' confidence a bit and send them back on a spending spree supported by the pending flow of stimulus money.

I even printed out a packet of graphs for internal discussion complete with little orange circles showing where the indicator was not, indeed, as bad as the previous recent data points. By not as bad, I mean not necessarily good. For example, industrial production was only declining by two percent instead of four percent last month and the ISM manufacturing index had climbed from 35 to 36 (below 50 means contraction). Or, housing starts had popped up to a 580,000 annual run rate (we figure the equilibrium annual run rate is something like 1.6 million units). Even news of April 15, from The Associated Press, "Housing index posts biggest jump in 5 years. Economist: 'We are at or near the bottom of the current housing depression'." (My emphasis added.) The article goes on to say, the builders' confidence index "posted its biggest one-month jump in five years"; all the way to 14. Later the article mentions that "readings lower than 50 indicate negative sentiment".

Well, it was working. The stock market launched a rally March 9th. Then some big banks issued positive earnings reports. Well Fargo was first out of the shoot, even reporting early, with first quarter profits. Imagine, banks actually making money. Halleluiah, the market is risen. Let's get back in. The market recovered twenty percent off the lows. The Dow Jones 30 Industrials has been meandering around the 8,000 level for a couple weeks now, up from the 6,500 level in early March.

Oh, Rats

Beginning the week of April 13, a spate of significant economic data releases came out: Tuesday, retail sales, business inventories, and producer price index; Wednesday, consumer price index, industrial production, and housing market index; Thursday, housing starts and jobs numbers; and Friday, consumer sentiment.

But before we lose all hope, these data points do show a change in the economic trends. The fact that the data are volatile instead of just monotonically decreasing is usually the first sign that the economy has seen the worst. Right now, it appears that it will be sometime yet before we build a critical mass of optimism, confidence, consumer spending, and business investment to truly turn the economy around. Jobs recovery is a lagging activity and it may well be another year before job gains begin in earnest.

As an old baseball voice was heard to say when the chips were down, "Huh, we gotta do sumptin' ", (unattributable).

Much is resting on the success of stimulus package, thawing the credit crisis (which is actually making progress in several quarters), and re-instilling confidence in the consumer and business sectors, not only in the U.S. but in Europe and Asia as well. China's stimulus package amounts to what would be about $2.5 trillion for the U.S. in equivalent GDP terms (non-purchasing power parity). I think that the U.S. and China working together could, and probably will, bring about the global economic turnaround, maybe even by the end of this year.

Written by Dennis Winters, Chief Economist and OEA Administrator. April, 2009.