Is the Recession Really Over?

We've been there before only to end up disappointed. Could this time be different?

One day the recession will end and we'll put a floor on the economy's deterioration. Are we there yet? This week offered several reasons to cautiously answer "yes," or perhaps it's better to say "maybe."

Today's news certainly offers one more reason to think that stability may be returning. Both new housing starts and new building permits issued rose again last month, the U.S. Census Bureau reports today. For the second month running, both series scored respectable gains.

Save for Wednesday's news that industrial production continues to slide, this was a modestly good week for dispensing numbers in favor of the idea that a trough in the business cycle may be near if it hasn't already arrived.

Yesterday delivered another encouraging number for initial jobless claims and on Wednesday we learned that the deflationary threat, if it isn't dead, looked mortally wounded in the wake of news that consumer price inflation was bubbling. Add to this some other positives, starting with the ongoing liquidity injections by the Fed, a la, extraordinarily low interest rates, and you've got some positive catalysts that may signal better times ahead, or at least less-painful times.

So, what's not to like? Well, for starters, even if the technical end of the recession is here, as we think it is or will be soon, that doesn't quickly translate into meaningful economic growth. As we've repeatedly discussed on these pages, we expect an unusually long interim period of subpar growth between the crisis of the recent past and a true recovery worthy of the name that presumably awaits down the road. And that's our positive scenario.

The darker outlook is that all the good news of late turns out to be statistical noise in an ongoing recession that continues to destroy wealth and keep the forces of stabilization at bay. That view looks increasingly unlikely, but no one really knows if we're merely in a transition phase that fools everyone into thinking that the bottom of the cycle has been reached. It's important to keep in mind that as mere mortals, we're inclined to take the latest data point and extrapolate into the future. But as the chart above shows, even a bounce that lasts for several months running barely begins to repair the massive damage that has occurred over the past year or so.

It's also worth reminding once again that even if the recession has technically ended, the labor market promises to remain weak for some time. The magnitude of what's unfolded recently virtually assures that a quick rebound in jobs creation will have to wait, probably until well into 2010. The labor market's always the last to join the rebound party, and that rule goes double this time around. Therein lies the biggest obstacle for a consumer-dependent economy a.k.a. the United States.

So, yes, we're encouraged by this week's numbers, but we also recognize that we'll need additional confirmation of the trend in the months ahead before we break out the champagne.

Comments

[Larry House]

This earnings' season is reflecting cost cutting measures at most companies. Earnings may beat estimate (a greatly reduced estimate) but the revenue is down for many companies that I have looked at so far. Companies can't cut costs every quarter. What is going to spur more robust economic activity? The consumer? The only thing we have going for the economy is government spending. They can stimulate but they can't sustain. We may have a bounce for some months to come, but at some point, the pump will have to draw water on its own; priming can't go on forever. We may get a trickle, but don't expect a strong flow.

2009 Jul 17 02:57 PM

[coldcall]

Dont housing permits and starts always have an upward blip in May/June? Looks like another temporary bottom to me.

2009 Jul 17 04:52 PM

[conceptwizard]

RealtyTrac forecasts about 4 million total filings this year on 3.2 million households with loans, which means little improvement from the first-half performance. The prior record was 3.1 million filings last year, up from a more typical year when about 800,000 foreclosure actions would be made.

Foreclosure filings jumped to a record 1.9 million on more than 1.5 million properties in the first six months of the year, RealtyTrac said on Thursday.

But there could also be a whiplash caused by "the big white elephant in the middle of the room" -- option ARMs, or adjustable rate mortgages with the option to make minimum payments. "A lot of them are going to be seriously upside down, probably at least 40 percent upside down."

That would mean a borrower owes at least 40 percent more on the mortgage than the home is worth.

A new U.S. program enabling borrowers are up to 25 percent upside down to refinance their loans would not be enough to help most option option ARM holders.

I think it prudent to wait until that chart line decides which direction it likes best.

2009 Jul 17 05:56 PM

[Socialism cannot compete!]

How can anyone think the recession is over or anywhere near over, when we have not faced the core issues, but in fact, have plunged in the direction opposite of what would resolve them? This is madness! States are issuing IOUs which are no longer being redeemed by banks; the Feds continue to spend us into unpayable debt; unemployment continues to rise...and people are thinking we are on the road to recovery? This is only the first inning....

2009 Jul 17 05:59 PM

[ShivaJim]

Look at the numbers, guys! We're talking 500-600 down from 2100-2200 or more. We're getting excited about a quarter of the volume. And this is the height of building season here!

2009 Jul 17 06:10 PM

[Russ Wetherill]

What does housing starts have to do with economic recovery? Let's say that housing starts double to about a million units. Who is going to buy them? Won't this just add to the glut of homes on the market, further pressuring prices and exacerbating the financial crisis instead of fixing it?

2009 Jul 17 06:16 PM

[Tony Petroski]

I agree with coldcall. There was a similar uptick in June of '08 on the housing starts/permits and that certainly wasn't the bottom.

Perhaps the best indicator of all was the bullish action in the market this week.

2009 Jul 17 06:33 PM

[enigmaman]

The best indicator the economy is turning up for real is when banks make money without "subsidies" from the Fed, when builders build and sell homes without buyers getting "buyer credits" from the Fed, when cars sales rise without "money for clunkers" incentives from the Fed, when unemployment comp is not extended by the Fed, when state Stimulus money is not used to subsidize gov social programs or used to keep teachers, cops and fireman on the job and so on. What we have here is an economy being keep alive by Fed intervention, an artificial recovery, when the economy can stand on its own we will know the worm has turned, until then any good news we hear will be suspect. If the US economy was traded like a stock nobody would be buying it because its business model is based on endless borrowing to manipulated (inflate) sales, to show improving health while the underlying numbers tell quite a different story

2009 Jul 18 08:39 AM

[W.E. Heasley]

Recovery?

Likely recovery will occur in some sectors and not in others.

Persistent high Unemployment will remain as there is absolutely no incentives for Private Capital Formation leading to Private Sector jobs.

Further, the Quasi-Stimulus Plan based on Political-Political rather than Political-Economy is a dud. Better yet, we 100% financed the dud! Brilliant! You know, the dud of a stimulus plan that has given rise the ridiculous Political Speak “Jobs Saved”. Right.

Recalling the stimulus plan, the recall based on the world’s worst stimulus plan design in Economic History, would be a wise move.

If you are going to deploy Keynesian Deficit Government spending at least base the plan on Political-Economy. Also, if you are going to Deploy Keynesian Theory, at the very least understand Keynes said deficit spending was temporary until the Private Sector Recovers.

Part “B” ….until the Private Sector Recovers …..must have escaped Summers, Romer, Bernstein and Goolsbee. The four horsemen of the Economic Apocalypse.

Here is a parting thought: exactly what does Carbon and Health-Care have to do with how we got into this recession and further how we get out of recession? Carbon and Health-Care did not cause the recession. Maybe concentrating on the real economic problems would be a good course of action. Gezzzz!

2009 Jul 18 09:13 AM

[whidbey]

The slowing of the decline is not necessarily the start of a recovery.

Job creation still rules our future.

That depends on consumers who can and will buy.

With all the debt created it would a shame if some signs of life did not show up.

2009 Jul 18 10:36 AM

[Bob'29]

Comment on a Barron's article:
"Blind Jockey Goads Horse Off the Track" Mr. Vito fails to inform us that some of the "spectacular" earnings of the week were actually abysmal. Intel beat their results of the '08 melt down quarter. Not exactly great...in fact very poor. Goldman Sacs made money after billions of government AIG bailout were siphoned in their back door. Both Paulson and Geitner are good ol' Goldman boys. A new rule prevents disclosure of where big block trades come from (the ones that have caused the late day moves this week). Can you smell Goldman Sacs? Are we happy that the government can now directly manipulate stock prices so that today's pain is put off until tomorrow. Unemployment is over 10% in fifteen states. The author is correct. We are we dupes with wool over our eyes. We are sheep ready to be skewered for the poolside barbecue. We are lemmings jumping into toxic water.

2009 Jul 18 11:16 AM

[1uncle]

People are still losing jobs. That is a definite negative. It is difficult to feel positive after 8 going on 9 years of lies and negativism. We need another Reagan not a socialist. How can you feel positive looking at that future?

2009 Jul 18 12:08 PM

[Erik150x]

I wonder how many people really understand the stats they are reading. I'd like to quote form another article:

www.ritholtz.com/blog/.../

"US Housing Starts Fall 46%
by Barry Ritholtz

Yet another set of odd and misleading coverage on Housing Starts.

BUILDING PERMITS: Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 563,000. This is 8.7% (±3.0%) above (revised) May rate, but is 52.0% (±3.6%) below the June 2008.


HOUSING STARTS: Privately-owned housing starts in June were at a seasonally adjusted annual rate of 582,000. This is 3.6% (±11.3%)* above the revised May estimate but is 46.0% (±4.3%) below the June 2008.



What can we tell from this data?


Nothing about monthly change in Starts (data points less than the margin of error are not statistically significant); We can say that permits were up month to month, although how much of that is seasonal is hard to decipher.


The year-over-year data is much clearer: New Starts down 46%, Permits down 52%.


Not exactly green shoot materials here — but given the enormous inventory overhang, less new building is better. And since year-over-year compares the same month, seasonality is not a factor.


Incidentally, much of the media reportage on this was simply innumerate — the numerical equivalent of illiteracy. Not just a little wrong, but totally, embarrassingly incorrect."

2009 Jul 18 02:42 PM

[sethmcs]

The leading indicators point to recovery. Unemployment will keep inflation at bay. Deflation of real estate and deleveraging of individuals and business is healthy in the long-run. Government stimulus will increase demand in the short run should be enough to kick start the economy. Growth should resume within the next two quarters. Bull market has begun.

2009 Jul 19 01:42 AM