It’s not over yet, but the end is in sight.
Economists are predicting an end to the current recession and Scott Anderson, Wells Fargo economist, is part of that group of optimists. “Green shoots have been proliferating in the economy and financial markets since January,” said Scott. “It’s a starting point, and these green shoots will turn into small plants. The economy could be growing by the third quarter this year and we’ll see stronger growth in the fourth quarter. I think we’ll see an end to the recession in a few months.”
A recession, according to the National Bureau of Economic Research (the organization in charge of declaring a recession), is a significant decline in economic activity spread across the economy, lasting more than a few months. It’s normally visible in real GDP (gross domestic product), real income, employment, industrial production and wholesale-retail sales.
“This recession is causing a lot of panic because many young people in the work force haven’t seen a recession. The last major one we had was 1982-83 and many Generation X team members were too young to understand what was going on,” Scott said.
Recessions tend to happen every six years on average, and they usually last less than one year. The current recession has lasted 18 months. “This is one for the record books in terms of loss and length,” said Scott.
The May issue of “Economic Indicators,” a bimonthly publication that Scott develops for Wells Fargo team members and customers, shares highlights of the “Great Recession” of 2008-09. However, these aren’t what you’d expect to see in a normal list of highlights; it’s a list of the record-breaking damage to the economy we’ve experienced.
“Corporate profits have declined, the decline in the stock market is the worst it’s been since the Great Depression and unemployment may hit 10% by the time this is all over,” Scott said. “But things are looking up. For example, consumer spending has stabilized due to lower gas prices and strong tax refunds. Gas prices have dropped about 50% since last summer, and that has helped pull down inflation,” he explained.
“There are a number of indicators that also show we’re a few months away from the end of this recession. We’ve already mentioned consumer spending, but the Federal Reserve’s monetary policy is at work and the credit/liquidity facilities are working their magic. That led to a spring thaw in the credit freeze, which allowed mortgage rates to drop to historic lows last month, which in turn refueled the refinancing boom, giving folks more room in their budget to spend,” he said.
Watch These Indicators
By definition, indicators are statistics used to measure current conditions as well as to forecast financial or economic trends. A leading indicator is one that changes before the economy does, and a lagging indicator follows a change in the economy.
“When I look into my crystal ball, I look at several different indicators that move well ahead of GDP and employment data,” Scott said.
Housing starts – that’s the number of residential building construction projects that have begun during any particular month. – increased by 1% in April, which is the biggest one-month jump in several years. “The housing market is tantalizingly close to hitting bottom. Housing starts dropped 80% from their peak, but buyers are starting to come back into the market to snap up foreclosed or bank-owned homes,” Scott said.
Another indicator to watch is the Conference Board Leading Economic Indicator Index, which is made up of 10 forward-looking economic variables. “One is Consumer Goods Orders, which measures order flow, and since consumer spending makes up more than 70% of our GDP, that’s a good one to watch,” he said. “The stock market is also a good leading indicator to watch. It bottomed in March 2009, but is up strongly. The stock market can give false hope sometimes, but when you combine it with other indicators, you can make a convincing case for economic recovery.”
Scott said there was also a nice turn in the Consumer Confidence Index, a survey by the Conference Board that measures how optimistic or pessimistic consumers are about the economy. If consumers are optimistic, they’ll tend to purchase more goods and this increase in spending can stimulate the economy. “Consumer Confidence hit 54.9 in May after bottoming out at 26.9 in March, so there’s been a nice increase,” he said. “In May, 5.5% of households were planning to buy a car, up from 4% in March; and 28.7% said they’d buy major appliances in the next six months in May, as opposed to 24.5% in March.”
Unemployment data tends to be a lagging indicator, which is why unemployment will continue to rise even after economists like Scott predict the end of this recession. But Scott says following Initial Jobless Claims is a timely way to track unemployment. “When people lose jobs, they file for unemployment and every week the Department of Labor surveys the number of applications for unemployment,” he explained. “It’s weekly information that leads the monthly employment data. Initial Jobless Claims have improved since they peaked at the end of March, showing that labor market weakness may be ebbing.”
The Bottom Line
“I think the worst of this recession is over, although this will be one of the worst recessions of our lifetime,” Scott said. “I like to remind people that this, too, shall end. The economy follows the business cycle and it won’t keep dropping forever. From this economic decline, we’ll plant the seeds for expansion.”