Tuesday, April 14, 2009

U, V, L or W - a question over the shape of recovery

Business Times - 15 Apr 2009


U, V, L or W - a question over the shape of recovery

By LEON HADAR
WASHINGTON CORRESPONDENT

AFTER several months of depressing economic news and gloomy forecasts about the coming of Great Depression II, US President Barack Obama and his top economic aides are pointing to some progress on the horizon, including a rise in bank lending, easier credit for small businesses, and signs that economic stimulus spending is beginning to trickle down into infrastructure and energy projects.

Indeed, the US President referred to 'glimmers of hope' when he spoke with reporters after meeting members of his economic team as well as with government banking regulators and the chairman of the Federal Reserve in the White House on Friday.

'We feel very good about the progress that we're making in unlocking lending in some particular markets,' said Mr Obama, noting that Americans were starting to get their first cheques as part of the tax cuts included in the stimulus package.

'And when you combine it with the other efforts that are being made across the country for infrastructure projects, for the kinds of innovative energy programmes that were part of the recovery package, what you're starting to see is glimmers of hope across the economy,' Mr Obama emphasised.

Mr Obama's top economic adviser Lawrence Summers also sounded more upbeat when he addressed the Economic Club of Washington last Thursday. 'The sense of a ball falling off a table, which is what the economy has felt like since the middle of last year, I think we can be reasonably confident that that is going to end within the next few months, and we will no longer have that sense of a free-fall,' Mr Summers predicted.

Indeed, there was some encouraging economic news last week, including better-than-expected retail sales and record profits at Wells Fargo, one of the nation's largest banks. At the same time, there was a slight fall in new jobless claims, raising some hopes that the economic downturn is bottoming out.

Overall, as America's banks begin reporting their earnings for the first quarter of 2009 this week, some of the early indications seem to be positive.

And all these 'glimmers of hope' helped to drive a fifth straight week of gains on Wall Street. In fact, stock indices are up 20 per cent or more in the last five weeks. But economic pundits caution the bulls will not be returning to Wall Street anytime soon, and that what we were seeing in the last five weeks was a so-called bear market rally that tend to occur in the aftermath of a few bits of good news in the midst of a long and painful recession.

In this case, it was the better-than-expected news about the banks which led to a rebound in bank stocks, and by extension to a temporary rise in the averages. But a series of bad news could drive the markets down again sooner or later.

Moreover, notwithstanding the latest bear market rally, most of the data coming out of the 'real economy' - the unemployment rate stands now at 8.5 per cent and is expected to go up in the next months - continues to point to a long recession.

Indeed, the consensus among leading economists is that GDP should stop falling sometime in the third or fourth quarter but that the economy will not be showing real signs of recovery, especially when it comes to unemployment, before 2010 or perhaps even later.

The best 'glass-is-half-full' analysis of the current trends is that the American economy may be shifting from a very accelerating rate of decline to a slower rate of decline or a very fragile recovery, that jobs will continue to be lost for a while, and the unemployment rate will continue to rise as well into next year.

So it was not surprising that President Obama, while reflecting the mood in Washington and on Wall Street, also remained cautious last Friday.

Much of the progress on the economic front will depend on clear signs that the financial system is really recovering and that banks, with help from the Fed, are able to deal with their toxic assets. While the government will not issue the results of the banks' stress tests before April, some financial institutions, including Goldman Sachs, have suggested that they will be ready soon to pay back the billions they borrowed from the government.

At the same time, when it comes to the real economy, Washington and Wall Street are hoping that consumers will soon feel less indebted and more secure in their jobs and that this renewed sense of confidence will encourage them to start spending again.

And in any case, even if the recession starts to ebb and economy starts to pick up, the long-term health of the American economy will depend very much on the shape of the recovery, whether it will be a 'U' or 'V' where the economy comes down and then bounces up, or whether it will take the shape of 'L' where the economy reaches a bottom and remains there for a while.

Or the recovery may resemble a 'W' where the stimulus package and the Fed's monetary policy helps bring the economy up but also helps bring inflation up forcing the government to take anti-inflationary measures which could drive the economy down once again - before helping to bounce it up for the second time, a real bumpy ride.



Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

1 comment:

Valonia said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Ann

http://racingonlinegames.net