Earlier today, Simon suggested that “we are out of the panic phase of the crisis.” Bond Girl said in response, “There appears to be some confusion between exiting the panic phase of the crisis and actually recovering.” That is something that I certainly agree with, and I suspect Simon does as well (although he may not agree with her entire comment.)
There has been a lot of discussion of “green shoots” scattered around the Internet recently. Most of it, I think is premature. A lot of economic indicators seem to show that things are getting worse at a slower rate than before. One major source of optimism was last week’s jobs report, which showed a net loss of “only” 539,000 jobs. Here’s an excerpt from the New York Times coverage:
Yet the deterioration was milder than expected, prompting encouraging talk.
“The most intense spate of weakness is probably behind us,” said Michael T. Darda, chief economist at the research and trading firm MKM Partners. “Less bad is always a prelude to good. It’s going to take some time for this economy to get back on its feet, but we might be closer to the recession ending.”
Investors bought into that message, sending stock prices soaring.
To put this in perspective, I turn to the always-accurate Menzie Chinn (follow the link for a good picture):
As I’m sure other people have noted, these are second derivatives that are improving: the direction of change is still negative, but the change in the rate of change is positive. This is not too surprising, because some levels of economic simply cannot fall beyond a certain point in the short term. As Calculated Risk pointed out, the turnover rate for autos in the U.S. reached 27 years in February, which is clearly unsustainable; cars just don’t last that long. In the long term, maybe we can adapt to a society with fewer cars, but for now many people need them to survive, so someone will have to buy new cars. And, in fact, auto sales improved slightly in March (though not in April). Given the speed of the descent in Q4 and Q1, the bottom presumably cannot be that far off.
The four-week average of new unemployment claims is another indicator that the end of the recession (meaning the end of economic contraction) might not be too far off; James Hamilton and Calculated Risk both think this is plausible.
What happens next, however, is another question. Will the economy return to long-term trend growth of about 2.5-3.0% per year? Or will we muddle along with a “jobless recovery” where economic growth is barely sufficient to keep pace with population growth? The important thing to remember is that trend growth is just a long-term statistical average; there’s no magical mechanism that generates growth all by itself. I’ve said before that a lot of 2010 forecasts look like reversion to the mean, which is a valid way of forecasting, say, the expected height of the offspring of two tall people, but not necessarily economic growth.
For one thing, there’s no going back to the economy of 2002-07: a disproportionate share of economic growth then came from finance and real estate, and that isn’t happening again for a while. More fundamentally, as Calculated Risk points out, we have reason to believe that the usual engines of recovery – personal consumption and residential real estate – are likely to be missing in action, in part because the crisis is likely to have caused a long-term increase in household savings.
So what’s with all the optimism? To s0me extent, it reflects people’s personal predilections: optimists see a recovery in the same data where pessimists see a long, flat line. In addition, though, I suspect there’s at least a little marketing at work here. As Peter pointed out, Obama’s “buying stocks is a potentially good deal” remarks on March 3 almost perfectly picked out the bottom of the stock market – a better call than any stock market prognosticator. The man can do anything! Of course, there’s some endogeneity there; the most powerful person on the planet should be able to move the stock market, at least a little. And the administration seems to have nudged up its level of public optimism slightly, no doubt hoping to boost confidence and spending at the margin. If they can do it, more power to them. The economic stimulus package and, more likely, the monetary stimulus provided by the Fed will also have an effect. But they are fighting against millions of foreclosures to work through and a newfound desire to save on the part of the American consumer, and it will be a long battle.
By James Kwak