View From Down Under

Back in November, I wrote that the recession was over – though it may not feel like it.

This week, the Conference Board released their data on leading indicators.  The index was up again in December, and has “risen steadily for for nine consecutive months.”  Here’s the chart:

The Coincident index has been rising as well, up for five of the last six months.  Building permits, stock prices, consumer expectations, business capital expenditure, industrial production, manufacturing sales – all up.

Interestingly, consumer confidence is lagging, and consumer assessment of the economy is decidedly bad.

A recent Gallup poll shows how pessimistic consumers are on the economic situation.  Asked the open-ended question “Just your best guess, how long do you think it will be before the US economy starts to recover?”  Remember that, from an economist’s perspective, recovery probably began in July/August last year.  Here’s the results:

Fully 85% of the people surveyed expected it would be one year or more before the economy starts to recover.  About half the survey expect it will be three years or more.  Put another way, half of the population thinks the US will be in recession for at least another two years.

Now, it’s possible (in fact, highly likely) that the average consumer’s definition of recovery is different to economic definitions, and the survey respondents are actually answering a different question.  They may think it will be two years before the economy is back to where it was in 2007 (which is also historically pessimistic).  Psychologically, the last 18-24 months experience is much more relevant to most people than experience prior to that.  Recent experience is still felt emotionally while more distant experience is only a memory.

Clearly, to most Americans, it does not feel like the recession is over.  And there are some highly acclaimed economists who are concerned about a ‘double dip’.  But with leading indicators climbing that dramatically, and the rest of the world pulling out of recession as well, a double dip looks less and less likely.

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I can’t find many journalists, politicians, or even bloggers willing to go on record that the recession is over, even though technically it is.

The politically correct thing is to say we have a long, hard path ahead.  This will continue to be the case for up to a year.  Politicians in power will argue that their policies (whatever they are) are obviously starting to work but more needs to be done.  Politicians in opposition and other pundits will point to the lack of improvement in lagging indicators like unemployment and commercial bank lending as signs of the apocalypse and failure of current policy.  Both will be wrong.

Emotionally charged events are generally remembered more strongly than emotionally neutral ones  (google “emotional memory” for more info).  For anyone involved in business, the events of late 2008 were highly emotionally charged.  These events make a lasting impression, and it takes quite some time for the emotion to fade.  Eventually we remember the emotion without feeling the emotion, but this process usually takes a couple of years.

As a result, most people are still fearful about the economy, caught up in the emotional trauma of a year ago, and taking baby steps until they’re sure the ground is solid.  Although there has been a strong move out of cash over the last six months, risk taking is still near its cyclical low.

Now is the time of the cycle when bold moves are rewarded.

What bold moves are you planning today?

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Over the weekend I read of the final communiqué put out after the G20 summit in Pittsburgh. Amidst the high sounding intentions, there was this gem:

2. When we last gathered in April, we confronted the greatest challenge to the world economy in our generation.

5. It worked.

With many developed economies still struggling with increasing unemployment and contracting GDP, this may seem a bit bold. What would the data say?

In my opinion, Bernanke is right, the US recession is technically over, although unemployment is likely to continue to rise for a while longer. The stock market agrees, with the Dow up 26% in the last three months.

Most Asian countries have already returned to growth, led by China (who had one of the world’s biggest government stimulus programs). Growth in the Euro area is turning positive. Even the UK is starting to show signs of recovery.

The leaders of the G20 nations take the credit:

6. Our forceful response helped stop the dangerous, sharp decline in global activity and stabilize financial markets. Industrial output is now rising in nearly all our economies. International trade is starting to recover. Our financial institutions are raising needed capital, financial markets are showing a willingness to invest and lend, and confidence has improved.

All recessions eventually end, is it a bit presumptuous to say global government stimulus plans helped stop this one? Can they take the credit?

There is no doubt that the global government reaction to this downturn was much more decisive (in terms of both speed and volume) and coordinated than at any time in history. The programs begun by President Bush and continued by President Obama were historically quite amazing. And the US wasn’t alone. Every developed country introduced some kind of fiscal stimulus in late 2008 and early 2009, usually quite dramatic, that included monetary (interest rate reductions), fiscal (tax breaks, handouts), and financial (guaranteeing bank liabilities, assistance to financial institutions) stimulus. They literally pulled out all the stops.

The data seems to suggest that in fact, it has worked. Government stimulus packages probably saved between 7 and 11 million jobs in the G20 countries. In Australia, retail sales jumped in months where government payments were flowing, then reduced again when the payments stopped – pretty strong evidence for the effectiveness of stimulus. Cash for clunkers was a tremendous boost to the auto industry.

Difficult to know how much of the recovery should be allocated to the financial measures, monetary policy, economic stimulus, or the normal course of time. Also difficult to allocate how much credit goes to Bush and how much to Obama.

But it does seem clear that the G20 governments are justified in their gloat. The coordinated governmental response to the downturn seems to quite clearly have made things better – or at least better than they would have been without the intervention.

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