Upcoming Recovery? Choose Your Metaphor

The Massive Ordnance Air Blast bomb known technically as the GBU-43/B and affectionately as the Mother Of All Bombs is a 30 foot, 22,600lb honey that actually explodes about 3 feet above the ground and clears a 900 foot circle around wherever it strikes.

Since it first blasted onto the scene in 2003, its colloquial moniker has been used repeatedly to describe things never before seen and unlikely to be duplicated in the near future. It seems fitting then that after the release of June’s employment figures on July 2nd that Alan Sinai of Decision Economics used the phrase in describing this country’s economic future when he said, “the mother of all jobless recoveries is coming down the pike.”

Nouriel Roubini, never one to miss an opportunity to spread the gloom, wrote on the RGE Monitor website that, “the June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure.”

Janet Yellen, President of the San Francisco Federal Reserve Bank, used slightly less hyperbole, describing the economy thusly: “Right now, we’re like a patient whose condition has stabilized and whose fever is just starting to come down.”

Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University have examined 14 of the largest global financial crisis and concluded that “the aftermath of banking crises is associated with profound declines in output and employment.” Through their research they found that GDP usually bottoms after about 2 years but that unemployment remains high for an additional 3 years climbing by 7% on average. We have experienced about 5% of that 7% ascent so far but that still means double digit unemployment into 2011.

The key is when the U.S. economy can hit what Fed Chairman Ben Bernanke calls “escape velocity’ which is the point where there is enough momentum from consumers and businesses to increase employment and go from slump to bump.

The real question all of this raises is whether another round of stimulus is needed and on this front it appears the feeling by most economists is that it is not, at least not yet. A recent poll by the WSJ showed that only 8 of the 51 practitioners of the “Dismal Science” they polled think “more is better”.

Even Mr. Sinai believes “lags in monetary and fiscal policy actions” should be given some time to “work through the system”.

Speaking for those who think another round of stimulus punch is in order, Nicholas Perna of Perna Associates said, “The most obvious reason is the need to offset the large fiscal drag just getting under way as state and local governments raise taxes and cut spending as they attempt to balance their budgets.”

Part of the problem is the structure of the American Recovery and Reinvestment Act of 2009 passed on February 17th. As of June 26th only $56BN of the $787BN had been spent and a majority of that were transfer payments from the federal government to state governments. The CBO estimates that the largest share of the spending will occur in 2010 with the amount scheduled for 2011 larger than what is expected to be spent in the current fiscal year. So much for timely, temporary and targeted.

Investment Grade and High Yield CDS indexes were at 131bps and 941bps respectively on July 1st. They closed last Friday at 145bps and 982bps after topping out at 145bps and 1019 on Wednesday of last week and then backing off for a day. Interestingly the High Yield index continued to fall on Friday from 999bps on Thursday while the Investment Grade index went back up to its Wednesday high after falling 3bps on Thursday.

With all of the experts weighing in it will be interesting to see how long the repercussions from the July 2 bomb of an employment report reverberate through the market place.

Enjoy the week.

Comments

[The Arthurian:]

It wasn't Saddam Hussein in the first Gulf war (1991) who used the phrase "The Mother of all Wars" ... ?

It's sad, but we don't really have a "stimulus" bill. What's funny is that some people say we should give the lame-ulus a chance to work, while others say it has already failed. As you note, less that 8% of the money has filtered down from one level of bureaucracy to another, while approximately NONE of it can yet be counted as spending!

Jul 13 10:14 AM

[Thomas MacLeod:]

It is not just junk grade bonds but also emerging market bonds as well! The strenght of emg mkt bonds is a real big hint that the smart money is betting on a world economic recovery

Jul 13 06:14 PM

[W.E. Heasley:]

Good article.

A stimulus plan metaphor?

Try "Mother of all Duds".

Jul 13 09:11 PM