Michelle Girard: Recovery Ahead — With Jobs

Michelle Girard is a managing director and senior economist at Royal Bank of Scotland. She appears often on NBC, CNBC, Nightly Business Report, Bloomberg, and Fox News.

H.L.: Does the recent batch of data justify the conclusion that the recession is over and recovery is starting?

M.G.: It’s clear that the data have in most cases turned a corner in the sense that they’ve stopped declining and seem poised to resume growth in the second half of the year.

The progress has definitely been uneven, with housing and manufacturing activity doing better in recent months than the consumer and jobs data, but we believe that the official end date for the recession will ultimately be sometime in the third quarter.

H.L.: Let’s look at August housing starts up 1.5 percent from July, new home permits up 2.7 percent, stabilizing home prices, and stronger retail sales. What do you think of those items?

M.G.: Housing has had a boost with the first-time homebuyer $8,000 tax credit, so we’ve definitely seen a pickup in demand as well as construction activity related to that. Similarly, the “Cash for Clunkers” program boosted retail sales noticeably in the month of August. In both cases I think some of the strength may come at the expense of future demand, but even taking that into account, it looks like in both cases the worst of the downturn is certainly over.

H.L.: What about the labor situation: initial jobless claims declining 12,000 from the week before, continuing claims up 129,000, and the 9.7 percent jobless rate?

M.G.: Certainly the job situation has not improved nearly enough as some of these other indicators. The initial claims figures remain stubbornly high, not far from their recent peak, and even the declines in continuing claims appear to be due mainly to people exhausting their regular unemployment benefits and moving into the federal extended benefits program.

So the declines in continuing claims are a bit misleading. However, looking at the payroll figures we are certainly seeing a gradual slowing in the pace of decline, and while many are pessimistic about the labor market and believe this will be a jobless recovery, we are more upbeat.

In our view, the declines in employment registered during this recession are among the most severe on record, and history shows that sharper payroll declines such as we saw during the contractions of the 1970s and 1980s actually lead to sharper rebounds when the economy improves.

The problem is that the last two recessions, which stand out most in people’s minds, were very shallow downturns followed by very gradual upturns. Therefore, comparing the potential recovery after this recession to those recent recoveries may not be appropriate. We think the rebounds in the 1970s and ’80s are more relevant.

H.L.: Since credit is still tight and our deficit is exploding, how can there be clear sailing upward for our economy?

M.G.: The amount of monetary and fiscal stimulus added to support the economy will lead to a recovery in economic activity. Of course there will be headwinds, and the relatively tight credit conditions and the overhang of debt are two examples of this.

In our view, neither factor will be sufficient to prevent a recovery but instead may just moderate the pace of growth. Our forecast for growth in gross domestic product next year is 4 percent, which actually takes these drags into account. If it weren’t for those factors and some others, such as the need for consumers to increase savings, we would expect a much more vigorous rebound in activity, such as those seen in the ’70s and ’80s, when GDP growth in the first year of their expansions was as strong as 6 or 7 percent.

We keep telling people not to confuse levels and changes. It’s like a stock that falls from $100 to $10. It can rebound to $40, marking a huge increase, but the level is still lousy. It’s the same for the economy. GDP fell so sharply in this downturn, that you can have 4 percent growth, and the level of activity is still relatively low, so things don’t necessarily feel all that great.

H.L.: As our deficit soars into the trillion-dollar range, are you worried that China and other global buyers of our debt, which finances U.S. spending, will buy less and therefore mute any economic recovery?

M.G.: The problem is bigger than China in that it’s been easy for the government to issue debt and fund the deficit when there’s been few alternatives for investing. People have been willing to buy Treasurys in the midst of a recession, because they didn’t want to buy stocks or corporate bonds. When the economy recovers, as we’re starting to see and alternative investments begin to look much more attractive, it will become much more difficult for the government to fund its deficit and that will likely mean higher interest rates to entice investors.

You’re going to have higher tax rates, which wil work against growth. You’re going to have reuglation which will be much more burdensome than it is now — all of these factors do pose risks for the strength of expansion after we get past this recovery period. So we may have a year or two where growth looks very strong, but over the subsequent five years because of these factors, growth will struggle to stay above trend.

H.L.: The dollar has been weakening dramatically, raising commodity prices, among other effects. Is dollar weakness good or bad for our economy?

M.G.: It’s never a positive for our economy in that it signals reduced desire for people to invest in the U.S. The dollar weakness that we are seeing is actually not terribly surprising, given the fact that we are looking at an incredibly stimulative monetary policy. In effect, the Federal Reserve has flooded the system with dollars, and the value of a dollar has gone down, and that’s consistent with the rise in commodity prices.

In our view the Fed will start to reverse course next year, soaking up some of these dollars. That should be supportive for the greenback.

H.L.: What do the stock market fluctuations tell you — a bear market six months ago and now one of the strongest updrafts since the 1930s?

M.G.: From a fundamental standpoint that’s exactly consistent with our view that the economy is on the road to recovery. The timing in terms of the bottom in March is historically consistent with the end to the recession sometime in late summer or early fall.

There has been a lot of sentiment shift in the equity market since spring. We’ve had periods of optimism and periods when people have been relatively pessimistic, but all the while the economic data has signaled a bottoming out and the early stages of a rebound.

Comments

[Wildebeest:]

I agree with both of you but when will the penny drop? A recovery without the consumer isn't likely to be a recovery with (significant) company profit growth (other than financials making money from trading activities). It might take until the next reporting season before we see sentiment change.

Sep 23 09:51 AM

[ctjaeger:]

It sure seemed that Michelle glossed over the extremely high debt burdens in all sectors. With wages/hours down and credit tighter, I'm not seeing where the consumer will have the ability to resume consumption at anything like the previous levels. The big difference between the current Recession and most previous ones is the credit issue. The consumer appears to be working down their debt loads and this certainly does not bode well for a 4% GDP growth rate.

Sep 23 11:25 AM

[Socialism c...:]

Housing has not turned up. It is being artificially *propped* up! Watch out below!!

Sep 23 01:15 PM

[Archman Inv...:]

<<<Michelle Girard is a managing director and senior economist at Royal Bank of Scotland. She appears often on NBC, CNBC, Nightly Business Report, Bloomberg, and Fox News.>>

This woman is just another I D I O T. Period.

She is in essence a sales person. Period.

It is her job to go out there, and tell people what they WANT to hear, rather than tell people what they NEED to hear.

What we know:
Unemployment: awful
Credit Card defaults:awful
Mortgage defaults: awful
Retail Sales: awful
Durable goods: awful
The FED is pledging to: But another trillion in MBS
A few more hundred billion of other crap, and
today they said they have to increase consumer help.

Why? Because things are so great, right?

Stop falling for the lies!!

compdivplan.com

Sep 25 02:27 PM

[Mono:]

your an ass

i follow you

the end

On Sep 25 02:27 PM Archman Investor wrote:

> <<<Michelle Girard is a managing director and senior economist at
> Royal Bank of Scotland. She appears often on NBC, CNBC, Nightly Business
> Report, Bloomberg, and Fox News.>>
>
> This woman is just another I D I O T. Period.
>
> She is in essence a sales person. Period.
>
> It is her job to go out there, and tell people what they WANT to
> hear, rather than tell people what they NEED to hear.
>
> What we know:
> Unemployment: awful
> Credit Card defaults:awful
> Mortgage defaults: awful
> Retail Sales: awful
> Durable goods: awful
> The FED is pledging to: But another trillion in MBS
> A few more hundred billion of other crap, and
> today they said they have to increase consumer help.
>
> Why? Because things are so great, right?
>
> Stop falling for the lies!!
>
> compdivplan.com

Sep 25 02:43 PM

[Archman Inv...:]

<<your an ass

i follow you

the end >>

Feel free to un-follow me at any time. I do no post here to please people nor make friends. All are welcome to un-follow me if they choose, and trust me, I will no lose a moments sleep.

My comments are nothing but the truth and expose people like Ms. Girard for what they are: salespeople for Wall Street.

Sep 25 02:54 PM

[dw57:]

they didn't mention that the dollar has been falling since what 2002? or that the consumer has been taught a lesson like in the GD, they won't be back. and they won't trust the financial industry any more just like back then. and oddly enough all of the dollars from the FED? are in the banks not doing any thing. and i seem to recall that RBS was rescued by England wasn't it?

Sep 25 03:39 PM

[Belome:]

I am getting very tired of the same old sales pitch/song and dance of restating rationale of data and market trends after the fact. This is such an "Investing for idiots" explanation of the market it's insulting. A more complete market analysis put into proper historical perspective tells you that we really are in a more serious situation than Ms. Girard is willing to admit to or understands. I either case this lame attempt to sell us on the idea that everything is ok and go back to your normal beahvior should not be tolerated.

Sep 25 03:59 PM

[a fat panda:]

"Michelle Girard is a managing director and senior economist at Royal Bank of Scotland. She appears often on NBC, CNBC, Nightly Business Report, Bloomberg, and Fox News."

The question is that I want to see asked is why are you talking to the chief economist of a failed bank? She clearly didn't see any of this coming, so why would anyone think that she knows where it is going?

Sep 25 07:51 PM

[TinyTim:]

T.T.: Is it true that RBS came within a hairsbreadth of doing a Lehman a few months ago?

M.G.: Yes, that's very true, but with all this new economic activity, we fully expect to have all our toxic assets shilled off. Right now, our future looks very bright to us.

T.T.: Can I have some of that Kool-Aid too?

M.G.: Most certainly, but be sure to finish first.

Sep 25 10:52 PM

[Teutonic Kn...:]

Guys, don't be so hard on M.G., she is just trying to make a living, like many but not most of us, myself ione of those many though. But I guess most of you folks on SA are "financially independent".

Sep 26 02:44 AM

[chap08:]

Archman - agreed that she is a sales person, as are all in similar roles. To me there is a definite trend for more "media friendly" faces in such people, but perhaps I'm just getting old. Probably a bit hard to call her an idiot though. Some of the things she says are true.

One thing I'd pick up on is her statement re a weaker dollar: "It’s never a positive for our economy". I know that many agree with this but it is simply untrue. An over strong dollar v. mercantilist currencies has been one of our biggest problems. It makes no sense to look enviously at China's growth and then say "now we need a strong dollar". For China, a weak currency has been a necessary part of building an export driven, productive economy. Now, if we want to rebalance towards production over consumption and exports over imports, then we need the same. You can argue all you like about sound money, but the truth is that we live in the real world and in the real world deficits and unemployment matter.

Sep 26 08:19 AM

[Gary A:]

Oh, expert commentary from the Royal Bank of Incompetence and Mistakes. That should sooth us that the green shoots are growing!!

Sep 26 10:35 AM

[kuala88:]

i admire u for your independent thinking and courage to post here .


On Sep 25 02:54 PM Archman Investor wrote:

> <<your an ass
>
> i follow you
>
> the end >>
>
> Feel free to un-follow me at any time. I do no post here to please
> people nor make friends. All are welcome to un-follow me if they
> choose, and trust me, I will no lose a moments sleep.
>
> My comments are nothing but the truth and expose people like Ms.
> Girard for what they are: salespeople for Wall Street.

Sep 26 12:04 PM

[CLH:]

A good article and a lot of nitwit comments.

Sep 27 01:17 PM

[Mono:]

thats why i follow you- the truth

ass or not


On Sep 25 02:54 PM Archman Investor wrote:

> <<your an ass
>
> i follow you
>
> the end >>
>
> Feel free to un-follow me at any time. I do no post here to please
> people nor make friends. All are welcome to un-follow me if they
> choose, and trust me, I will no lose a moments sleep.
>
> My comments are nothing but the truth and expose people like Ms.
> Girard for what they are: salespeople for Wall Street.

Sep 27 02:06 PM

[docsdoc:]

Yes, the recession is over. Unfortunately, a worse "recession" is about to begin.

Sep 27 08:58 PM

[rick12345:]

Like a manic depressant on a downward binge, most of you are determined to live out your self fulfilling prophecy in despair and gloom while censuring anyone who would dare to offer an alternate or incongruent view. Just like you can't cure an alcoholic with alcohol, you cannot fix the economy with pessimism.

Sep 27 11:52 PM

[MikeD71:]

True, but you can't fix it by drinking Kool Aid, and blowing sunshine up people's ***es either. There are serious problems, both continuing, and newly created that have yet to be seen. This parade of rosy forecasts is dangerous, and could get a lot of people burned. Could you honestly tell your neighbor..."everything is going to be fine, go spend money"??
We all want things to be better too...but they aren't. This isn't pessimism. It's realism.


On Sep 27 11:52 PM rick12345 wrote:

> Like a manic depressant on a downward binge, most of you are determined
> to live out your self fulfilling prophecy in despair and gloom while
> censuring anyone who would dare to offer an alternate or incongruent
> view. Just like you can't cure an alcoholic with alcohol, you cannot
> fix the economy with pessimism.

Sep 28 08:39 AM

[Whippet:]

You're right- we should all follow Nero's example. Let's hit the fiddle while the world is on fire.

You can't cure an economy with unwarranted optimism, either- even if you are a delusional hyper-Keynesian. And I would argue that pessimism CAN cure an economy-especially one that has been inundated with painkillers (government backstops), amphetamines (obscenely low interest rates, money printing, and unsustainable consumer tax cuts), and Valium (paying all debts forward one to three generations). We need to dry out, in the worst way.


On Sep 27 11:52 PM rick12345 wrote:

> Like a manic depressant on a downward binge, most of you are determined
> to live out your self fulfilling prophecy in despair and gloom while
> censuring anyone who would dare to offer an alternate or incongruent
> view. Just like you can't cure an alcoholic with alcohol, you cannot
> fix the economy with pessimism.

Sep 28 10:26 AM