View From Down Under

Sometime in the next few years, the Business Cycle Dating Committee will determine when the 08/09 US recession ended.  The View From Down Under is that it ended last quarter.

The US economy reported its first quarter of growth since June 2008.  The world’s major economies are also improving.  The UK, although still down slightly in Q3, is recovering.  Europe is also recovering, led by France and Germany.  China expects 8% growth in 2010, back to pre recession levels.  ASEAN growth forecasts continue to move up.

The index of leading indicators was up in September for the sixth straight month.

The pessimists say the growth will not continue, but I disagree.  Not just because of my wonderfully optimistic nature, but mainly because of the data now coming in.  Four data points for this post:  inventory reductions, monetary policy, fiscal policy, and economic history.

The economy grew despite inventory reductions. The growth in the September quarter came against backdrop of continuing drop in inventories (US$130.8b drop v 160.2b drop in 2Q).  Destocking is a ‘one off’ kind of adjustment, and a trend that can’t be sustained.  When businesses start building inventories again, (or even just stop reducing them) it will be a strong boost to future growth.

Interest rates will remain low. The Federal Reserve reiterated its commitment to keep borrowing costs low for “an extended period”.  After what Bernanke and his colleagues have been through the last two years, they will be in no hurry to raise rates.  Low interest rates will continue to provide economic stimulus for some time to come.

Stimulus keeps on coming. Government fiscal policy is still strongly stimulating.  According the government’s recovery website, 26% of the $787 billion stimulus has been paid out as of 30 Oct, leaving 74% still to be spent.  Much of the rest will be paid out over the next 12 months, providing continued strong economic stimulus.  Cash for clunkers may have finished, but there is much, much more to come.

History hates a W recession. Since WWII, there has never been a period where 3 or more consecutive quarters of GDP contraction was followed by a W.  The closest the US has come in the past was in 1980-82.  This was a very short and mild recession in 1980, followed by a strong recession in 1981-82.  The impetus for the 81-82 recession was government policy of extended high interest rates designed to kill inflation.  There is no similar government policy looming this time.  History also shows that deep recessions tend to be followed by strong recoveries, not moribund growth.

Next post:  why this creates such fantastic opportunities.