- The Washington Times - Tuesday, April 21, 2009


After what has been (and continues to be) the longest, deepest and most punishing economic and financial downturn since the 1930s, some very early signs of some sort of coming recovery have appeared. With massive monetary policy easing, sizable fiscal stimulus in the U.S. and other countries, and the cyclical adjustments in the private sector that set up for the next upturn, a turn from recession to recovery is in sight.

What are the “glimmers of hope”?

One is recent data, which indicate most of the worst of the U.S. economic downturn is behind.

Decision Economics’ proprietary early indicators of housing activity suggest an end to the housing bust and bottoming-out in coming months, although here the lags between these early signs and the real thing can be very, very long. Housing activity traditionally leads the U.S. economic upturn.

Also suggested by a bottoming-out in housing activity would be an end to housing-price declines. While not likely until early 2010, this is the first time in many years that a look ahead on housing prices suggests no price declines. The backdrop for all derivative securities using residential real estate as collateral then would change quite radically; most noticeably in the values of the “toxic assets” on the balance sheets of financial institutions. Credit availability could then loosen up.

Similarly, the worst of the free fall in consumer spending appears to be over. Although consumer spending, in the aggregate, likely will grow anemically as households save rather than spend, reduce rather than accumulate debt and credit, take actions to shore up retirement funding and work to improve their financial positions, the intense free fall in consumer spending that occurred between August and February is unlikely to continue. Consumer confidence has bottomed out and is beginning to rise after record lows in sentiment for some time.

Since consumption is nearly 71 percent of real gross domestic product, even a low growth rate in that field will help the economy. Consumer-related businesses still are in for a continuing tough business climate, but not anywhere near what went on for the past couple of quarters.

Additional encouragement shows up in the purchasing managers surveys of industrial-side activity, now stabilizing and picking up some. These are early and forward-looking indicators of U.S. industrial activity and offer hope for the future. However, the U.S. business sector is in a state of free fall, slashing expenditures, production, inventories and jobs. But the worst of this probably will pass sometime in the next few months.

Indeed, an early sign of a reduction in the pace of layoffs shows up in initial claims for unemployment insurance, which have declined for a couple of weeks. However, rehiring is nonexistent, the jobs market is slack, and high unemployment will linger long after the U.S. economy makes a turn.

The lagged effects of low interest rates and increased Federal Reserve credit starting to take effect, plus the beginning of the stimulus to the economy from increased government purchases and transfer payments to state and local governments, also should have greater impact as the year wears on.

A final glimmer of hope lies in the strong stock market rally of recent weeks, perhaps the beginning of some sort of new bull market after the second-worst bear market since the 1930s.

The stock market is a classic leading indicator for the economy, virtually always leading the next upturn or downturn, but also often giving false alarms - rising but with no subsequent turn in the economy. However, no upturn or downturn in the economy has failed to be preceded by a corresponding move in the markets.

Thus, the sharp and strong rally since March 9, some 26 percent in the S&P 500 from its lows and 30 percent in the Dow Jones industrials, hints at a coming economic recovery, with lead time anywhere from a couple of months to eight months.

The stock market’s role as a leading indicator is cause and effect, with a rising or falling market having much greater effects on economic activity, confidence and financing than is commonly thought. The stock market’s rise and resiliency lately are notable and significant in terms of offering hope on coming recovery.

The U.S. and global economies still are beset by a large number of economic and financial problems and issues that do not make a path to recovery, despite these positive early signs, a slam-dunk. Nevertheless, the glimmers of hope in the data, because of policy, from the stock market, and in the processes within the economy that set up for the next upturn, are notable with the glimmers most likely to turn into rays of sunshine from a rising sun for a real upturn after what has been the most cloudy and stormy economic and financial downturns ever in modern history.

Allen Sinai is chief global economist, strategist and president of Decision Economics Inc., a global economics and financial markets information support and advisory firm.

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