Lok Sang Ho's  Instablog

There is still debate about whether the US economy is really recovering, and there is a lot of concern about the sustainability of the recovery.

I have little doubt that the recovery is real, despite the debt and the loss of wealth suffered by many.

This deepest recession was triggered by a credit crisis, which was itself triggered by the bursting of the housing bubble.  Some grave policy errors aggravated the crisis, but policy makers generally made very good moves after they recognized the gravity of the problem.

A lot of Americans are still suffering, and the threat of more layoffs is real.  However, asset values are rebounding, helping to ease the credit crisis.  While many have suffered losses in wealth others are enjoying gains.  This recession and subsequent recovery have produced a lot of churning and redistribution of wealth.

I can understand the anger of those who have suffered.  This anguish and the disbelief that accompanies it are reflected in the negative commentaries found on any analyses that predict recovery.  But they won’t change the fact of recovery, as firms have to replenish their depleted inventories and as overseas demand recover.  In time, too, job losses will turn into job gains, and the recovery will gain momentum.

The stock market had been going ahead of itself and needed corrections from time to time, but the trend will be up if the recovery is real.  I am bewildered by the strong gains among the financials that have yet to recover from their heavy losses. But the evidence remains that this recovery is real and sustainable.

So far economies that have already shown good growth in the second quarter include  China, India, Singapore, Hong Kong, Japan, and to a less extent Australia.  Even the Euro zone and North America are showing signs of life.  Economies that have PMIs at or (or ISM index) exceeding 50 and thus are indicated to be growing include the US, Canada, and the Euro zone. 

Job losses in America are declining.  Housing prices as well as stock prices are rising.  The tight credit situation is easing.  Export orders are rising.  Based on these I continue to predict earlier-than-expected peaking of the unemployment rate in the US. 

Many people are worried about reversal of easy money.  I am also worried too: because policy makers can err.  But reversing quantitative easing at the right time and pace need not be harmful to the economy.  While reversing quantitative easing in the form of reining in commercial lending would be bad for the economy, reversing quantitative easing by first reducing the scale of bond purchases and then by gradually selling some bonds may be unnoticeable.  Because there is so much excess capacity in the economy there is really no threat about run-away inflation and thus no need for a major and sudden reversal of quantitative easing.  I see talks about run-away inflation at this time as esssentially alarmist. 

There are people who worry about asset prices rising too fast because of quantitative easing.  If I were the policy makers I would not worry about this at all.  I might rein in credit for speculators in asset markets, but I would not rein in loans for homebuyers or for businesses.  If policy makers worry about asset prices rising too fast and start doing something silly like raising interest rates before any genuine overheating of the economy is in sight, I cannot rule out the economy slipping into recession again.  I am hopeful that Mr. Bernanke will not fall into this trap.

The global recession is coming to an end.  China grew at 7.9% in the second quarter and expects the pace to pick up to more than 8% in the third quarter. Singapore registered a 20.4% growth rate(annualized) in the second quarter.  Hong Kong’s (annualized) growth rate was somewhat less impressive, but still made 13.9%.  Japan's real gross domestic product grew at a pace of 3.7% per year.  Even in Europe, several economies are showing signs of recovery or have already registered positive growth.  The largest two economies, Germany and France, each grew at an annual rate of 1.2%.  Even though the UK economy still shrank at an annual rate of 3.2% in the second quarter, it is actually faring even better than most of the other European economies, as it had not declined nearly as much, and as its unemployment rate is much lower too, at 7.8% in the April-June period.  More important, the leading indicators are pointing in the right direction, with the manufacturing PMI exceeding 50 for the first time in months, standing at 50.8 in July.  New orders were rising for the first time since March 2008, and they were broad-based.  The PMI for services was even stronger, hitting 53.2 in July, up from 51.6 in the previous month, suggesting positive growth in the immediate future.

But many skeptics who will not accept a recovery in the United States point to rising unemployment and sagging domestic consumption.  They ask: if people are not buying and are still losing their jobs, where does the growth come from? 

The answer is overseas.  And an exports-led recovery is exactly the ideal course of the recovery for the United States.  The most recent Philadelphia Fed Business Outlook Survey's future indicators showed notable improvement in August. The future general activity index increased from 18.0 to 27.6.  The indexes for future new orders and shipments also rose 15 and 11 points respectively.  The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -7.5 in July to +4.2, which is the highest reading of the index since November 2007. 

When the exports-led recovery gathers momentum, unemployment will start falling, and with more people employed, domestic consumption will pick up.  There is a case to be made that the US needs a higher savings rate, as I have argued before.  Recent developments are pointing exactly to this direction.  So do not be disheartened if domestic consumption does not immediately rise.  As long as US exports continue to grow, and as long as the housing market continues to stabilize, gains in employment and revival of consumption is just a matter of time—and I would say: months. 

An exports-led recovery in the United States is the most ideal, as it is more sustainable, given the excessive indebtedness of the country.  Americans need to mend its ways of overspending, while households in Asia and elsewhere need to open their purse more.  People have been talking about the global imbalances for a long time.  This is the time to address it, and the signs observed so far are good.