The “less bad is now the new good." Many of the recent economic reports have continued to show weakness, but the rate of decline appears to be beginning to slow. Through the magic of television many market commentators have turned the concept of “less bad” into a bullish scenario. In addition, some analysts are attempting to put a positive spin on the situation by saying that a “slower rate of down is now the new up.” Actually there may be some validity to the “less bad is now the new good” argument since stock index futures and commodity prices have been able to put in a rather impressive performance in recent weeks.
While many of the recent economic reports continue to show further declines, there have been some reports that actually have been much better than the analyst expectations. The most recent and best example of this is the surprisingly better than expected May consumer confidence index report. The Conference Board, which is an industry organization, on Tuesday May 26th, said their consumer confidence index dramatically improved in May to its highest level in eight months. The index advanced to 54.9 from a revised figure of 40.8 in April. This is the largest one month increase since April of 2003 and spectacularly surpassed the median estimate, which was 42.6. Their present situation index rose to 28.9 in May from last month’s 25.5 and the expectations index improved to 72.3 from 51 in April. The data is based on a representative sample of 5,000 households.
This report is one of the few “green shoots” that the media used to describe rays of hope for an economic recovery. This term was originally coined by Federal Reserve Chairman Bernanke in March, when he was interviewed on the “60 Minutes” television program. When asked about the state of the economy, he said he detected “green shoots” of economic recovery. Specifically, he said "we'll see recovery beginning next year and I think as those green shoots begin to appear in different markets, and as some confidence begins to come back, that will begin the positive dynamic that brings our economy back and it will pick up steam over time." Since then, any news or event that even slightly may have contained the seeds of recovery was used to advance the argument of those favoring a better economic outlook.
In spite of the “less bad is good” commentary and the occasional “green shoot” economic reports, such as the consumer confidence report, current economic conditions, in general, still appear to be weakening, but at a slower pace. The simulative efforts undertaken by the Federal Reserve and the Treasury will soon start to have a noticeable positive impact. Currently it does appear that the rate of economic decline is slowing. It also looks like the multitude of support packages that have been put into place will cause the downturn in the economy to be of a shorter duration than it normally would have been if there was no “pump priming.”
Third Quarter Bottom
We do not agree that the recent “less bad” economic reports are anything to get excited about, at least for now. In the short run, the multitude of global economic stimulus packages, bailout plans and “bad bank” proposals have not been enough to offset the destruction of wealth that has taken place as a result of the subprime mortgage related write downs. There was little, if any immediate relief when the Federal Open Market Committee lowered interest rates to a range of zero percent to 25 basis points at their December 2008 meeting. There was a similar result when the Fed’s $300 billion quantitative easing program was unveiled in March. The main immediate benefit of both of these extremely accommodative policy moves appeared to be more psychological than substantive.
It also appeared that the major central banks of the world were not able to lower interest rates fast enough to offset the disinflationary and potentially deflationary impact of wealth lost as a result of the international economic crisis. A general rule of thumb is that it takes a minimum of six to nine months for any policy change to even begin to have a market impact. It should have been no surprise that there was no immediate positive economic impact when all of these global easing of credit policies were first announced.
In spite of the current market uncertainties and the double speak characteristics of the “less bad is good” and “green shoots” rhetoric, our analysis suggests that the most severe economic downturn in the last 25 years or more will continue into the third quarter of 2009. While more of the same is likely through the summer months, we are expecting that the economy will stabilize later this year. It appears that the myriad of government efforts that were designed to kick start the economy will finally bear fruit. More specifically, our analysis is telling us that the target period for a low in this recession will be late in the third quarter, which is when the expansionary impact of all the world’s interest rate cuts and stimulus packages will begin to show positive results. In the fourth quarter and more so into 2010 there will be a marked improvement in economic activity, as the expansionary efforts undertaken by the U.S. and overseas governments finally begin to take effect.
If you would like more information or have a question about this article, please contact Alan at 1.800.243.2649 or email him at alan.bush@archerfinancials.com.
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