Recession Might Be Over, But Recovery Not Yet Here

There’s been some good news lately, including the encouraging signs in real estate. New home sales (.pdf) rose last month, posting the third straight monthly increase. For some, the writing is now on the wall. “Recession is over, economy is recovering,” declared John Silvia, Wells Fargo’s (WFC) chief economist, in a research note, according to The New York Times.

We’re of a mind to agree with the first part of the statement, but not the second, at least not yet. As we’ve been discussing for some time, the technical conclusion of the recession is near or perhaps already here. We began considering the end back in March, when we examined the business cycle forecasting powers of the trend in initial jobless claims. In the months since, the reasoning grew stronger for anticipating that the recession’s end was approaching. News such as yesterday’s pop in new home sales only strengthens the case. But as we’ve said many times in recent months, the end of the recession this time is likely to be followed by an unusually long period of stagnation before economic growth returns in earnest.

Today’s update on durable goods offers another statistical clue for thinking so. New orders for manufactured durable goods in June fell 2.5%, the U.S. Census Bureau reports. That comes after two straight increases. As the chart below suggests, the trend looks like one that’s settling into a new period of stabilized but diminished levels.

click to enlarge

The danger at this juncture is mistaking the long-awaited arrival of stability for the launch of a robust recovery. Indeed, even the jump in new home sales is reportedly dependent on increased speculation as opposed to the return of the consumers proper to the housing market. Make no mistake: the encouraging news from new home sales and other metrics is critical, and it suggests that the forces of recovery are bubbling. But it’s too soon to expect that the necessary factor—consumer spending—is about to re-emerge until the labor market shows more encouraging signs of life, i.e., growth. We’re still a long way from that happy day.

Meanwhile, the evidence is mounting in favor of the idea that the economy has hit bottom. Our view is that stability will last a lot longer this time around. Some will mistake that for the arrival of a new round of growth, which is premature.

Yes, a full recovery is coming, but it’s not imminent.

Comments

[DannyBoy29:]

It seems as if the media and many people believe that if the recession is over than the recovery must be starting. Reality is however that just b/c the recession is ending that does not mean we will go back to growth like we saw before the credit crisis. I am in the Bill Gross/PIMCO camp where we need to be prepared for a "new normal" where we will be looking at many years of very slow growth.

Jul 29 12:21 PM

[Nick36:]

Perhaps the recession is over. And now the depression will set in due to high unemployment, large public and private debts, and the lack of economic growth.

During the Great Depression of 1930s, the first recession was over within three years. But that didn't stop the Depression from continuing until the second world war has started.

Jul 29 01:21 PM

[jimboy:]

I too am highly sceptical of any recovery talk. Governments worldwide have done some pretty extreme things this last year to reflate their economies and some kind of "stabilisation" was to be expected. A real recovery will take the private sector to take up the baton: to get out of survival, cost-cutting mode and begin investing and hiring for growth again. Aside from certain emerging markets and some investment banks drunk on bailout cash, all I can see is a still fearful, credit-starved private sector certainly not one which is going to be picking up any batons for a while.

Jul 29 01:22 PM

[TradingHelp...:]

"Yes, a full recovery is coming, but it’s not imminent."

Wise words. It's just over that big hill, but the consumer has forgotten his hiking boots.

Jul 29 02:13 PM

[Bjarne Jensen:]

Other than, it always does, can you explain why a full recovery is coming?

Jul 29 06:42 PM

[j_remington:]

Its all smoke and mirrors but trade the direction and follow the charts

Jul 29 10:31 PM

[PainfullyAware:]

Arizona proposing selling its capital building for cash and other state Governments feeling the pinch - This is a "Ledge" Not The Bottom.

Weak 2 and 5 year bond auctions - Wonder if the Fed is going to step in on the longer term markets to "Instill Confidence".

The "Market" is disconnected from the Real Economy and the "Private Sector" Is Skittish For A Reason.

Jul 30 01:02 AM