All bad things must end - economists say recession is over

Wednesday, 02 September 2009

The most severe economic recession since the Great Depression is history, economists said Tuesday, after key early data for economic conditions in August came in much stronger than expected. Early on Tuesday, there was a report of a sharp jump in the Institute for Supply Management's factory index. The index rose above the key psychological 50% threshold indicating expansion for the first time since Jan. 2008.

"The rise in the ISM manufacturing overall activity index to a level firmly above 50 and the surge in the new orders index to the highest level since December 2004 are the clearest signs yet that the recession is over," said John Ryding, economist at RDQ Economics in New York.
Millan Mulraine, economics strategist at TD Securities agreed.

"Given the very good historical performance of this indicator in predicting U.S. economy activity, the [ISM] report provided further evidence that the U.S. economic recession may have now come to an end," Mulraine said in a note to clients.

Economists are calling for an inventory-driven recovery. With goods on their shelves now at low levels, businesses will have to order more in order to restock. This could turn into a virtuous cycle leading to more and more production.

"Even if it is slow and cautious, the change from drawdown to build up will require additional production and the process will take a long time to complete," said Joel Naroff, president of Naroff Economic Advisors.

Once purchasing managers are confident in stronger demand, "not only will they restock, but they should also begin to unleash pent-up hiring, capital spending, etc," said Steve Stanley, chief economist at RBS Capital.

"In our view, if/when we get to that point, the recovery will have crossed the point of no return," Stanley said.

Hold your horses

No official timing of the end of the downturn is expected for more than a year.
The National Bureau of Economic Research in Cambridge Mass. is the independent group given the responsibility for calling the end to recession. The firm is known to be very deliberate.
In the past two recessions, the NBER waited 20 months before pinpointing the trough.
That's because the NBER is mandated to certify a turning point, not forecast one, said Ed McKelvey, a senior economist at Goldman Sachs Group

For his part, McKelvey thinks the recession might have ended in June.
The nature of this recovery may delay the NBER further, economists said.
Economic research from Harvard professor Kenneth Rogoff suggests that economies are very slow to recover following severe financial crises.

Consumer demand, which accounts for more than half of U.S. economic activity, is expected to remain weak. And businesses are not expected to hire workers until they "see the whites in the eyes" of a vibrant economy, analysts said. The most recent forecasts from the White House, Federal Reserve, and the Congressional Budget Office all point to a "jobless recovery."
Questions about the durability of this recovery will remain on the radar screen for several months, according to Asha Bangalore, economist at Northern Trust in Chicago.
Pick a letter - W, V, or U. (with apologies to West Virginia University)

Letters are a quick short-hand for economists discussing the road ahead.
Analysts expecting the economy to weaken again speak in terms of a W-shape growth path. A quick turnaround is called a V-shape recovery, while a slow but steady recovery might look like a U.

There are strong arguments for each letter.
Some analysts are worried about a W or double dip. They note the recovery has been boosted by short-term initiatives like "cash for clunkers" in the auto sector, which has ended, and the first-time homebuyers tax credit that ends in November.

These programs can "pull spending forward," at the risk of a subsequent re-weakening of activity, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.
"It is possible this may happen to some degree, but we are confident the economy, as a whole, will not double-dip, because the drag from housing has dissipated and government stimulus spending is likely to add substantially to output over the next few quarters," LaVorgna wrote in a note to clients.

Sam Stovall, the chief investment strategist at Standard and Poor's Equity Research, says the improving economic is likely "to take root and actually make for more of a firm recovery." However, Stovall still looks for this recovery to take time and be a gradual improvement, and be more of "an elongated 'U'," as opposed to a 'V' shape bounce back.

Source: Marketwatch