The US recession may be easing, but the economy has not hit bottom yet and mounting unemployment looks likely to keep demand sluggish for a while.
A slew of recent data including stronger than expected reports on orders for big-ticket manufactured goods, housing and retail sales has led many economists to declare that the worst of the 15-month, housing led recession is over.
While the economy still appears on a downward path, the slope is not as steep as many had feared.
In the last few weeks enough meaningful indicators show the economic contraction has slowed. The odds have increased markedly that we are approaching an inflection point in the economic cycle and that the worst of the recession is behind us. US may be now probably months away from bottoming out.
The economy plummeted at a 6.3 per cent annual pace in the fourth quarter, and many economists were expecting a similarly sized drop in the first three months of this year. But the relatively upbeat data has led them to trim those forecasts.
Sales of both previously owned and new home sales rebounded in February. Still, the recovery was from historically low levels, making it hard for some analysts to look at the figures as a harbinger of a turn in the economy.
Some green shoots out there cam be seen in the economy, but that’s not enough at this point to tell definitively that US are close to bottoming out in this process.
There remain significant down drafts in the economy. The linkage between falling home prices, weak consumer confidence, squeezed corporate profits and deteriorating labor markets remain very much in place.
Housing is at the center of the worst economic and financial meltdown in decades, and stabilizing the sector is critical to reversing the economy’s fortunes.
The collapse in asset prices, combined with falling income on the back of escalating job losses, have curtailed consumers’ ability to spend. Household net worth plunged by $11.2 trillion in 2008,
Consumer spending, which accounts for more than two-thirds of US economic activity, tanked in both the third and fourth quarters of last year. But there are indications it may finally be inching up. Retail sales surged in January and fell only slightly in February.
There are increasing signs there could be a turn in the business cycle in the summer or fall of this year. More than a month or two can show us before we can get confident about it. If home sales are putting in a bottom here, it could be the case that home prices also bottom this year, which would mean that as we move into 2010, the financial crisis is really very much behind us.
While orders for long-lasting US manufactured goods rose in February for the first time in seven months, a weak global economy could keep pressure on US producers for some time. There may not be any support in terms of trading partners for quite sometime and the loss of export markets remains a significant drag on the manufacturing sector.
A true bottoming out process may not be possible until mid-summer. We should see that reflecting in third quarter GDP results.
Even with the consumer showing signs of life, incomes are falling and unemployment is rising as companies facing profit pressures aggressively cut payrolls to contain costs. This will keep demand subdued for a while.
The unemployment rate hit a 25-year-high of 8.1 per cent in February and the weekly count of initial filings for state unemployment benefits is holding above 650,000.
Claims tend to peak about two to three months before the recession ends. Claims have been making new highs, we have not seen them start pulling from their recent high and if that happens we can be confident that we are a few months away from the end of the recession.
While the government’s $787 billion fiscal stimulus and aggressive steps by the Federal Reserve to pump money into the economy to restore growth should gain traction later this year many analysts looks for only a tepid recovery.
US may be in the final stage of recession, one that will probably bottom out the next two quarters and perhaps the other developed global areas. A recovery is foreseen in the second half of the year, but growth will be so sluggish that most Americans will not make the distinction.