Even a slight rebound makes things look better than they are
(WASHINGTON) The nice thing about a deep recession is that it doesn't take much of a rebound to make the official data look healthy even if the economy is not.
Recent readings across many of the world's biggest economies, including the United States, China, Japan, Britain and Canada, suggest the global recession is petering out. What is missing is a catalyst for a sturdy, sustainable recovery.
Figures due this Friday are likely to show that the US economy contracted for a fourth consecutive quarter - the first time that has happened in records dating to 1947.
But it will probably be the last negative quarter of this recession. Indeed, the second half is shaping up to be stronger than many economists had thought just a few weeks ago.
'We're starting so low, you can get some big numbers for a quarter, maybe even two quarters of good growth but then it all falls apart,' said Joel Naroff, head of Naroff Economic Advisors in Holland, Pennsylvania.
Mr Naroff was one of only three economists in a Reuters poll of 67 who thought second-quarter US gross domestic product would be positive, although he acknowledged that his timing of the turn may be a tad early. The consensus forecast is for GDP to decline at an annual rate of 1.5 per cent, a vast improvement from the first quarter's 5.5 per cent drop.
The reason for Mr Naroff's optimism is largely a matter of mathematics. Home building and auto manufacturing have fallen so far, so fast that eventually the pace of decline must slow. That is what began to happen in the second quarter. The trend will probably pick up steam in the coming months - not because demand is bouncing back strongly but simply because stockpiles are depleted and need to be replenished.
'If you're selling 10 million autos (at an annual rate) and it goes to 11.5 million, that's a 15 per cent increase in durable goods,' Mr Naroff said.
In the boom years before the financial crisis struck in 2007, auto sales were running at closer to a 17 million annual rate, so an 11.5 million pace is still 'something worse than atrocious', he said. As far as GDP calculations go, it's an improvement and therefore a positive.
Forecasting Friday's GDP number is unusually tricky because this instalment comes with a once- every-five-years revision of data going all the way back to the Great Depression era.
Barclays Capital economist Michelle Meyer is looking for a few tweaks to the US figures. In particular, she thinks the rate of household saving will be revised higher. It has been climbing as Americans try to rebuild trillions of dollars in wealth lost in the cratering of the housing and stock markets.
'This could mean that much of the saving rate adjustment has already occurred, providing less of a drag to consumer spending in the future,' she said.
That would add one more modest positive to prospects for the second half. Add in a pick-up in housing and auto manufacturing from dismally low levels and a flood of government stimulus spending, and it creates at least the potential for above-average growth in the next two quarters.
What might sustain that growth is less clear, particularly when unemployment is at a 26-year high of 9.5 per cent and likely to keep rising into 2010. With joblessness stubbornly high, spending will suffer and so will economic growth.
To bring down the jobless rate, the economy will need to grow considerably faster than the 0.8-1.8 per cent rate economists expect for the second half of this year.
Following the 2001 recession, for example, unemployment did not start receding until July 2003. In that quarter, US GDP advanced at a 7.5 per cent clip.
In the early 1980s, which was the last time unemployment was this high, the jobless rate fell by 2.5 percentage points in the first year after the recession ended, but the pace of quarterly GDP growth that year ranged from 5-9.3 per cent.
Mr Naroff pointed to another key difference between now and then. In the 1980s, manufacturers laid off workers when the recession struck and hired them back when demand returned. Many of the jobs cut in this recession are unlikely to return.
That means the US will probably need help from beyond its borders in order to claw out of its economic hole.
That may be too much to ask. Canada's GDP figures are also expected on Friday. Its central bank declared last week that the country's recession was virtually over, but said the recovery process was likely to be a long, drawn-out affair.
Britain produced its own nasty economic surprise last week with a report showing GDP fell 0.8 per cent quarter-on-quarter, far worse than economists had predicted.
This week, euro zone and Japanese unemployment data for June will be worth watching to gauge whether their economies are likely to provide much lift. Both figures are expected to show modest increases from May in the jobless rate, which suggests that much of the rich world remains in the same slow recovery boat. -- Reuters
Source: Business Times, 28 July 2009
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