Signs of Recovery are Sprouting

From Bloomberg today, two bright spots on the economic landscape:

• The Conference Board’s sentiment index climbed to 39.2, the highest level since November, from 26.9 in March, the New York- based research group said today. The gain was the biggest since November 2005.
• Home prices stabilize: A report from S&P/Case-Shiller today showed that the slide in home prices in 20 U.S. markets slowed in February for the first time since January 2007. Prices fell 18.6 percent in February from the same month last year after dropping 19 percent the previous month.

These are welcome developments.  In a financial and economic world beset with bad news, these data emphasize that the dragon of recession can be slain. The programs put in place in the U.S. are beginning to take effect.

Further analysis of the Conference Board sentiment index is also illuminating. The Conference Board’s measure of present conditions rose to 23.7 from 21.9 the prior month. The gauge of expectations for the next six months surged to 49.5, the highest level since the collapse of Lehman Brothers Holdings Inc. in September of last year.

This jump in optimism is encouraging, because if and when the economic recovery begins, it must be supported by strong consumer spending. But, if consumers are pessimistic about the future, their wallets are likely to remain closed. The hunker-down syndrome is strong when the outlook is sour.

As for housing prices, recent reports show government efforts to support housing and revive lending may be starting to work. Combined purchases of new and existing houses have hovered around a 5 million annual pace since November, and sales at retailers improved in the first two months of the year.

Add to these new developments the fact that the American and many foreign equity markets are on a fairly sustained up-trend, and you get more signals that the worst may be over, and that investors and consumers are loosening their retrenchment. It looks good for an actual recovery some time this year.

Good News Amid the Bad Employment Numbers

The three charts below explain our current economic state of affairs with good clarity.  Three additional charts show signs of a recovery in the making.

The first chart tracks job losses over the last one year and two month period, beginning in January of 2008 and ending in March, 2009. The bad news, we lost 663,000 jobs in March, similar to the February numbers, but less than January of this year and December of 2008. So far, at least, job losses have stopped getting worse.

The Next chart shows stock prices (Dow Jones Industrial Average) over the same period. From early March, equity prices have been improving, although it is too early to know if the trend will continue. If the six –nine month lead times holds during this recession, then the economy could be expected to turn around sometimes from September through November of this year. There are forecasts that also focus on the last quarter as the turnaround time for the economy. (See below)

The next chart shows the overall unemployment rate, and it has reached a new high with the March report of 8.5%. I expect this number to continue rising, perhaps to as high as 9.5-10%, although I hope I am wrong. Employment is a lagging indicator, so I wouldn’t look for much improvement in this measure until the last quarter, if the turnaround occurs at that time.

In support of an early last quarter turnaround, Professor David Beckworth of Texas State University in San Marcos, TX, posts the following chart:

Projection of Industrial Production based on yield spread from the BAA grade commercial bonds to AAA

Mr. Beckworth insists that the BAA/AAA spread is a clear and unambiguous indicator of investor sentiment with respect to risks. The turnaround in his projection is roughly August–October of this year. This projection is for industrial production, which is not the same as GDP, but it is a large component of GDP and a good indicator of the general health of the economy.

These are tentative signs that a recovery may be building for an American recovery. The world’s economies are following about the same signs. Stock prices have recovered for emerging markets equities, for example the ETF, VWO, which is Vanguard’s Emerging Markets Index, shows a bottoming process in the following 1-Year chart:

The last chart, below, is share prices of two ETFs: VWO, and Brazil (EWZ), except I change the time frame to the last three months.  This change will help highlight the recovery in prices of both VWO and EWZ during the first quarter of this year.

It’s too early to make a definitive call on this turnaround, but if it does hold, it bodes well for a general recovery, since the emerging markets are generally considered to more risky than developed economies. If investment money is beginning to flow once again into the developing economies, it indicates a strong reversal of risk preferences that characterized this market for much of the last year.

Another encouraging sign is the conclusion of the G-20 meeting yesterday, where a trillion dollars of new money was pledged to the IMF and World Bank to help the emerging markets with currency loans and international trade financing for those countries most strapped by the slowdown.

In my view, it is not Spring, yet. But there are some signs that the economic flowers are beginning to bloom.