Monday, July 27, 2009

Is the Recession Nearing an End?

In the July 27, 2009 editorial "GDP: Don't believe the hype," CNNMoney editor Paul R. LaMonica cautions:
Even if the government reports a surprise boost to second quarter GDP, few economists are predicting a massive recovery just yet.

This question seemed unthinkable to ask just a few months ago, but here goes: Did the economy actually grow during the past three months?

A few brave economists actually think it did. But we'll find out for certain on Friday when the government unveils its first take on gross domestic product (GDP) for the second quarter. Still, even the average forecast is for a drop of just 1.5%, significantly better than the previous two quarters.

GDP plunged 6% in the fourth quarter of 2008 and 5.5% in this year's first quarter.

"The pace of decline has slowed way down and we are seeing signs of stability. I expect a negative number in the second quarter but maybe zero growth or better for the third quarter," said Chris Probyn, chief economist with State Street Global Advisors in Boston.

Probyn argues that the recent improvement in home sales, consumer spending and exports is evidence that the recession may soon be nearing an end.

Talk back: Do you believe that the economy is really stabilizing or do you think the numbers don't tell the true story of the economy? Leave your comments at the bottom of this story.

Zach Pandl, an economist with Nomura Securities in New York, also thinks that the second quarter GDP report will reflect a stabilization in the economy and early stages of a recovery.

"The big story in terms of the second quarter is that contraction is getting close to zero. I wouldn't rule out a positive number," Pandl said. He said the primary reasons that the economy is getting closer to actually resuming growth are that businesses are finally showing a greater degree of confidence that the worst may be over.

Pandl expects a smaller decline in business investment during the quarter as well as a slower level of inventory reduction as companies begin to realize that economic conditions are slowly returning to normal after last fall's credit crunch paralyzed the financial markets.

"Companies are going through an adjustment from the shocks hitting the economy late last year," Pandl said.

Not everyone shares such a rosy view though.

"There has been an abatement of bad news rather than emergence of good news," said Diane Swonk, chief economist with Mesirow Financial, a diversified financial services firm based in Chicago. "Stabilization in a deep hole is not something to pop champagne corks over."

Swonk said she remains concerned about the effect that lingering job losses and high unemployment could have on consumers.

A weak labor market, coupled with banks continuing to tighten credit standards, could mean that even if the economy technically emerges from recession this year, a recovery could be dampened by anemic consumer spending.

Kurt Karl, chief U.S. economist with Swiss Re, agreed that consumers may still be a little cautious and that until consumers turn the corner, it's tough to imagine how the economy can show overall growth.

Karl said that there isn't likely to be as much of a boost to consumer spending from tax breaks in this year's stimulus package as there was from tax rebates a year ago.

Last year, the economy grew at a nearly 3% annual rate in the second quarter, but that turned out to be a short-term sugar rush.

"Stimulus didn't dribble out much as it did last year and some of that money was saved," he said, adding that he believes personal spending dipped slightly in the second quarter and that GDP fell at a 1.8% rate.

Finally, both Pandl and Probyn noted that the second quarter report may need to be looked at a lot more closely than most. That's because the Commerce Department will be including so-called benchmark revisions to much of the data used to calculate GDP, particularly to the savings rate and personal income.

This revision is the first since the end of 2003 and the changes could very well wind up showing that the economy was in worse shape a year ago than originally reported.

"The comprehensive revisions are going to be a bit of a wild card since it could change our view of recent history," Probyn said. "The changes will affect every quarter, and I bet that the gains in the second quarter of last year will be revised away."

While it may seem that changing the numbers from prior quarters is something that only matters to academics, that's not the case.

If it turns out, for example, that the savings rate is higher than once thought, that could be further proof that consumers are really changing their behavior. And even though that's good news for the long-term, it could make it tougher for the economy to grow at a robust pace over the next year or so.

Talkback: Do you believe that the economy is really stabilizing or do you think the numbers don't tell the true story of the economy?

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