It's a V...Oops

We are seeing some very encouraging signs of a recovering US economy. Astute readers are aware of the V-shaped recession curve. That is an optimistic view of economic recovery. It now seems that even the optimists were too pessimistic!

The U.S. recession will probably end before the summer is out, the Economic Cycle Research Institute (ECRI) says. This research group says enough of its key gauges have turned upward to indicate with certainty that a recovery is coming.

The "giant error of pessimism" is now rampant. This is why many will be blind to the light at the end of the tunnel that marks the exit from this recession.

For example, a key measure of manufacturing activity rose for the fourth straight month in April, suggesting the sector may be stabilizing. Assuming continued increase in May and June, there is a good chance that second quarter real GDP will be positive, or at least very close to zero.


In fact, the following chart shows how well correlated the ISM's manufacturing index is to the Gross Domestic Product (GDP), which represents an overarching view of the health of the US economy.


We also experienced a significant bounce in the ISM service sector index in April. The new orders component of this index increased 8.2 points. This is the largest one-month increase in the history of the ISM service index (back to 1997).


Next we see that real disposable income continues to improve. This is the sixth consecutive month of positive growth in real personal income compared to the same month in the previous year, following negative growth in August and September 2008.


You may recall my April 21 article, Let's Get to Work. Weekly unemployment claims seems to be signaling the end of the current recession.

New claims for unemployment insurance are probably the very best single indicator for the end of recessions. The monthly average for claims normally peaks one or two months before the economy bottoms.

If subsequent data confirm that the 4-week average of initial claims did indeed reach its peak on April 2, and if Robert Gordon's pattern holds up, the recovery may start in June.


Now for the really good news. GDP acts as a scoreboard for the economy by measuring all goods and services produced. Its biggest component is consumer spending, which accounts for about 70% of GDP. First-quarter spending increased 2.2%, after dropping 4.3% in the fourth quarter.


The end of the recession does not mean we won’t lose more jobs. Employment is always a lagging indicator.

We will still face challenges with some banks. GM has yet to resolve its problems.

The stock market does not increase in a straight line following recovery from a recession. We may well see a correction during the summer months.

Nor is this the last recession we will ever experience. Consider my recent article about the average length of recessions, and you will see that about 30% of the time the US experiences a recession. It's a common occurrence. So that alone implies we will have to endure 3 years of recession in the next decade--and with the massive government spending now afoot, the US may be poised for even greater hardship. (But that will be the subject of future articles--much unrelated to this current recession.)

Of course, these negatives are always the fodder of naysayers. In my next article we will examine some of the reasons things went right.