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Thursday, April 2, 2009

Economy Raises Tentative Hopes a Trough Is Finally in Sight

Just as the U.S. recession is set to become the longest since the Great Depression, some economic signs are encouraging, if tentative.

April will mark the 17th month of the recession that began in December 2007, making it the lengthiest downturn of the post-Depression era. For the most part, forecasters don't see U.S. economic growth turning positive until early autumn, and even then, expect the unemployment rate to hit double digits this year or next.

This week, though, has brought a spate of good economic news. Consumer spending rose marginally in February, the Commerce Department said Friday, as did consumer sentiment in a household survey by Reuters and the University of Michigan. The housing market also appears to have stabilized from its free fall, and an uptick in orders for big-ticket items is helping raise hopes of a future pickup in manufacturing.

During a meeting with President Barack Obama and other bank executives Friday at the White House, Bank of America Corp. Chief Executive Ken Lewis and Northern Trust Corp. CEO Rick Waddell expressed cautious optimism that the economic downturn was either at or near the bottom of the cycle, according to people at the meeting.

Nation's Unemployed: February

[unemployment data]

Click on the image for state-by-state unemployment data from the Bureau of Labor Statistics, with year-over-year change in percentage points.

"There's growing evidence supporting the optimists' view, and I am surprised at that," said Robert J. Gordon, an economist at Northwestern University and a member of the National Bureau of Economic Research committee that is the official arbiter of when recessions begin and end. "I was sort of in the pessimists' camp until I started looking at things."

He points to one indicator in particular with a remarkable track record: the number of Americans filing new claims for unemployment benefits. In past recessions, it has hit its peak about four weeks before the economy hit a trough and began to grow again. As of right now, the four-week average of new claims hit its peak of 650,000 in the week ended March 14. Based on the model, "if there's no further rise, we're looking at a trough coming in April or May," he said, which is far earlier than most forecasts currently anticipate.

But a turn toward positive growth is not the same as a recovery, particularly now with the current 8.1% unemployment rate at a quarter-century high and marching higher by the month. Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass., says unemployment could hit 10.5% by late next year, even if the economy is growing at a 3% rate by that point.

"What comes next, I'm afraid, will be the mother of all jobless recoveries," said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, N.J. "While we may emerge from recession from a statistical standpoint later this year, most Americans will be hard-pressed to tell the difference between a recession and recovery the next 12 months."

In a reflection perhaps of households' angst, the personal saving rate in February was 4.2% of disposable income, compared with the near-zero rates seen during the boom. A survey to be released Saturday by AlixPartners, a business-advisory firm, shows Americans' "new normal" spending levels will return to just 86% of pre-recession levels in the next 10 years.

Income growth is showing signs of weakness after a decent performance in the past year. The Commerce Department said personal after-tax income fell 0.1% in February, its third decline in four months, and a reflection of U.S. companies' aggressive cost-cutting amid a difficult business environment. But aggressive efforts by the government and the Federal Reserve to counteract the financial-market meltdown are seen as kicking in to help offset that.

The Dow Jones Industrial Average has rebounded by some 20% from its lows, though it lost some ground on Friday, and credit markets have calmed as well. The $8,000 tax credit included in the stimulus package for those who purchase a home before Dec. 1 is helping to draw buyers into the market, while mortgage applications to purchase or refinance a home jumped 32% last week, boosted by the Fed's efforts to drive down mortgage rates.

Even so, IHS Global Insight estimates GDP fell at a 7%-8% annualized rate in the first quarter, topping the fourth quarter of 2008's steep 6.3% drop, as weakness shifts from consumers to businesses. Business investment and exports could both post nearly 30% annualized declines, Mr. Behravesh said, a severe restraint on growth, even if the largest component of GDP -- consumer spending -- is flat or shows modest growth.

"We've passed the period where every indicator is plummeting, and that's good news," he said. "We may not be exactly at the turning point, but we're getting pretty close to it."

Source  The Wall Street Journal  April 2, 2009

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