End of the Recession?

The following commentary is from the August issue of the Forbes Growth Investor, which was released to subscribers on August 3.

Is the recession over? With Q2 GDP falling just 1%, many economists are asking themselves this question. There is a general sense that the economy hit bottom during the second quarter and is already on the mend. While some corporations have been reporting better-than expected results, the evidence for an economic recovery is not entirely convincing.

Corporations that beat their earnings estimates did so largely because of cost cuts, not because of higher revenues. In fact, in many cases the year-over-year revenue declines were simply frightening. While some CEOs claim to see signs of stabilization in their markets, almost no one is saying that things are getting better.

The decline in GDP was better than expected, but only because net exports and government spending contributed 1.38 and 1.12 percentage points, respectively, to growth. Ordinarily, a contribution to growth from net exports would be good news.

However, exports did not rise in the second quarter. They fell. Net exports rose only because imports fell even more. This slowing of international trade is due to the weakening dollar as well as to consumers saving a greater share of their income.

In fact, personal consumption expenditures, the largest component of GDP, fell 1.2% as the personal savings rate surged to 5.2%. As for government spending, there is no comfort in the fact that its role in the economy is growing. Even so-called "Blue Dog Democrats" are beginning to ask if this makes sense.

Measured in 2005 dollars, second quarter seasonally adjusted real GDP was $12.892 trillion, down almost 4% from its peak exactly a year ago. You have to go back almost four years to find a lower figure. If economic growth hits the top end of projections made by Federal Reserve economists, it will take well over a year to get back to where we were one year ago.

Ironically, while those Fed economists have become slightly more bullish about growth, they have become considerably more bearish about employment. They now expect the unemployment rate to peak at 9.8-10.1% this year, an estimate that could easily prove conservative. Even by 2011, they don’t see it dipping below 8.4%.

Although rising unemployment puts a housing recovery at risk, the housing market may have already bottomed. Both existing and new home sales have climbed three months in a row and inventories have fallen. More importantly, prices are beginning to firm. The S&P/Case-Shiller Home Price indexes posted month-over-month gains for the first time since mid-2006. Because the most recent figures are for May, there is real hope that things are even better now than the data suggest.

The bulls got what they were looking for—evidence that the worst is over. They reacted by pushing stock prices to their highest levels since last October. I doubt the euphoria can last. Corporations can’t produce earnings by cutting costs forever. Eventually, they will need revenue growth. With consumers still cutting back on their purchases, the 46% rally in the S&P 500 from its March 9 low seems premature. Stocks are already pricing in a strong economic recovery. Evidence contradicting this thesis will likely cause a significant sell-off.

Comments

[mishamadison]

Haha, loving that cartoon. As for the recession, please let it ease up soon!

2009 Aug 06 04:43 AM

[expat in China]

Its just not over, but this is beyond understanding!

LONDON (MarketWatch) -- U.S. stock futures were mixed on Thursday as Cisco Systems reported a 46% profit drop and as retailers reported a month of slumping sales. S&P 500 futures rose 3.7 points to 1,004.50 and Nasdaq 100 futures edged up three-quarters of a point to 1,615.20. Futures on the Dow Jones Industrial Average rose 43 points.

2009 Aug 06 08:00 AM

[Old Trader]

expat,

No worries, its merely bulls cherry-picking data. Weren't Cisco's numbers "better than expected"?


On Aug 06 08:00 AM expat in China wrote:

> Its just not over, but this is beyond understanding!
>
> LONDON (MarketWatch) -- U.S. stock futures were mixed on Thursday
> as Cisco Systems reported a 46% profit drop and as retailers reported
> a month of slumping sales. S&P 500 futures rose 3.7 points to
> 1,004.50 and Nasdaq 100 futures edged up three-quarters of a point
> to 1,615.20. Futures on the Dow Jones Industrial Average rose 43
> points.

2009 Aug 06 09:13 AM

[Michael Clark]

The bottom line is that revenue growth is less important than analyst expectations. Ok, I can buy that. (If I drink enough first.)

2009 Aug 06 11:50 AM

[Arthur Hau]

With an increase in government spending contributing to boost GDP by 1.38%, and yet consumption is still falling. That means the so-called "multiplier effect" of government spending is virtually non-existence.

That also means once the government stop pumping money into the economy, the recession will worsen.

What's wrong with the Keynesian theory? Everything is wrong with the Keynesian theory!

The Keynesian model was invented more than 7 decades ago when there was no derivative in the financial market, when the social security program was not in place, when people die less than 10 years after retirement, when a low interest rate environment almost always raised investment and consumption, when there were a lot of manual labor and few professionals, when corporations were not too big, when income inequality was not as bad, when people were working very hard and asking only for a little, ...

All signs are indicating that the economy is still in a recession, why do some people still deny this?

- The unemployment rate is not improving.
- Real investment in non-real-estate sectors is not increasing.
- Consumption is still very weak.
- Consumer confidence is at its lowest level.
- Trade deficit is still worsening.
- The credit market is still tight.
- Foreclosure and bank failure are still above their normal levels.
- The sustainability of the OASDHI program is worsening.
.
.
.

2009 Aug 06 01:41 PM

[Stockpickingpros]

very nice article, thanks for your time!

2009 Aug 06 07:22 PM

[Broxburnboy]

Don't blame Keynes for the government spending, he believed in priming the economy at the lower end of the economic pyramid. The Keynesian solution to inflation has always been higher interests
and wage and price controls.
The current borrow, spend and inject money at the top of the pyramid is "supply side economics" , embraced by the Reagan administration and fully practiced under Bush II. The theory is cut taxes and subsidize the top of the economic pyramid and benefits would "trickle down" to the masses. Conservatives used to call this "voodoo economics", but it won out over those who wanted to make balanced budgets a constitutional mandate and the march toward stifling debt began. Only since the Reagan administration has the Fed had an active manipulative monetary policy, trying to reinflate every bubble that needs to burst. These twin whammies in fiscal and monetary policy have created the credit bubble that must implode either sooner or later.


On Aug 06 01:41 PM Arthur Hau wrote:

> With an increase in government spending contributing to boost GDP
> by 1.38%, and yet consumption is still falling. That means the so-called
> "multiplier effect" of government spending is virtually non-existence.
>
>
> That also means once the government stop pumping money into the economy,
> the recession will worsen.
>
> What's wrong with the Keynesian theory? Everything is wrong with
> the Keynesian theory!
>
> The Keynesian model was invented more than 7 decades ago when there
> was no derivative in the financial market, when the social security
> program was not in place, when people die less than 10 years after
> retirement, when a low interest rate environment almost always raised
> investment and consumption, when there were a lot of manual labor
> and few professionals, when corporations were not too big, when income
> inequality was not as bad, when people were working very hard and
> asking only for a little, ...
>
> All signs are indicating that the economy is still in a recession,
> why do some people still deny this?
>
> - The unemployment rate is not improving.
> - Real investment in non-real-estate sectors is not increasing.<br/>-
> Consumption is still very weak.
> - Consumer confidence is at its lowest level.
> - Trade deficit is still worsening.
> - The credit market is still tight.
> - Foreclosure and bank failure are still above their normal levels.
>
> - The sustainability of the OASDHI program is worsening.
> .
> .
> .
>
>

2009 Aug 06 08:23 PM