Tuesday, May 5, 2009

Is the Recession Over Already?

Just seemed like yesterday that the US economy was headed to a 2nd Depression, but now some people including Brian Westbury in this Forbes article think the Recession will possibly end this month. Its hard to argue his points though logic and the current media makes it difficult to believe that the Recession could really be over so soon. Didn't the financial system just about collapse? Hasn't our favorite professors talked over and over about zombie banks?

Brian is also forecasting a V shaped recovery which is clearly not of the norm. Even Bernanke spent today talking about a slow recovery of only 2% in 2010. That little growth a year after a major Recession ends sure doesn't sound like a V shaped recovery.

Lets explore some of his claims:

  1. New claims for unemployment insurance are probably the very best single indicator of the end of a recession. The monthly average for claims normally peaks one or two months before the economy bottoms--and it appears to have peaked in March, at 658,000, versus April's 635,000. Now new claims are clearly a leading indicator, but I'd say that a drop from 658K to 635K doesn't warrant proclamation that a trend has changed. It's a good start and an investable start, but any trader better ready if the trend changes. Dropping below 600K in May would signal a trend.
  2. Also, given that the September recession was marked by consumer spending falling off a cliff, we look at this measure to signal a rebound. Consumer spending grew at a 2.2% annual rate in the first quarter, and it looks set to rise again in the second quarter. Meanwhile, both major measures of consumer confidence (from The Conference Board and University of Michigan) shot upward in April. This is a clear signal of a change. Most experts used the severe drop in Q4 as signs that the consumer was tapped out. That he'd now save a huge amount of his check sending us into a Depression. You should never doubt the US consumer. We know how to stimulate an economy unlike Japan.
  3. The housing market is also showing nascent signs of life. New home sales bottomed in January at a 331,000 annual rate, but the pace of sales in February/March averaged 357,000. After falling 80% from January 2006 to January 2009, the rate of construction of single-family homes has remained essentially unchanged for the past two months, although (thankfully) it is at a level where builders are still rapidly cutting into excess inventories. In all likelihood, a bottom has been reached for both home sales and housing starts. Though a turn, it's still not enough to write home about. Pricings are still falling and the change isn't enough like in unemployment claims to signal a change. It'd be difficult to build fewer homes so we're not likely to see further drops, but moving make above 400K builds would signal a real turn.
  4. April's month-to-month jump in the ISM Manufacturing Index--the second largest in the last decade--and recent sharp increases in the Chicago PMI, the Philadelphia Fed Index and the Richmond Fed Index. All show the manufacturing recession is rapidly losing steam. 2nd largest jump in the last decade does indeed seem bullish, but in a time period where we've regularly dealt with the worst and now even best so and so in the last 50 years its not surprising to see the best move in the last 10 years. Still its a much more significant move and very much a signal that the economy is snapping back.
Brian had some other good points in the article, but in general it seems unlikely that the recession will end this month. With the ISM at 43, we're unlikely to see growth in May. Also, the market didn't snap back until March. If the Recession ends this month, the market sure wasn't forward looking. What happened to our 6-9 month warning? I'd predict something around July as this point.

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