After all the gloomy talk over the past three months with pundits, economists and top bankers predicting a bad, bad remake of the Great Depression or even worse, itâ€™s time to reflect and look at the facts. No, itâ€™s not all over yet. Weâ€™re still alive.
Some of us at HedgeWorld have been saying for months that the Titanic is not sinking yet. But we didnâ€™t have a blog then to voice out our optimism. Of course, others on our team will not be so cheerful. This posting only reflects its authorâ€™s opinion. And that is: Cheer up! We may be heading for a disaster. But the economic picture in the US is not all that bad. Yes, of course, it may be a different story in four months. But one must live for today. And if really the US economy is like the Titanic sinking into frozen water, I’d say, right now, time for a Margarita. Because the sun is still shining on the deck.
Leaving aside Titanics and Margaritas, some media stories are finally catching up with reality. In an article today called â€śRecession? Not So Fast, Say Someâ€ť, the Wall Street Journal reported this morning that a growing number of economists are now toning down their apocalyptic calls.
Itâ€™s all about perception and timing.
Itâ€™s also about simple definitions. The standard definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. One can always dispute the validity of this rule. But the rule exists. Most economists will use it.
So quotes or headlines along those lines: â€śIn fact, we already ARE in a recessionâ€ť may need to be revisited.
We havenâ€™t had two quarters of consecutive contraction of the GDP. We had a 0.6% growth rate estimate for this first quarter, a figure many expect will be revised upward. This tiny growth rate is the same as in the fourth quarter of last year. Itâ€™s weak. But weâ€™re not in contraction mode. Production has not been declining for six months. There is a difference between the negative and the positive. Itâ€™s true with moods and it’s true with numbers.
Additionally, the amount of job losses remains subdued. Past recessions over the past thirty years were characterized by losses comprised between 200,000 and 300,000 per month.
For our economy to be in a recession, many more jobs would have to vanish each month.
Last month, the US economy only lost 20,000 jobs and the unemployment rate fell to 5%.
Somebody needs to look at the big picture when uttering the big word â€śGreat Depression. A 5% unemployment rate is quite anemic when compared to the 24.9% unemployment rate of 1933.
The economy lost 240,000 in the first three months of the year, a number that looks like the kind of pain a real recession can inflict in just one month.
By the way, productivity is up too. And that means that we would need to lose many jobs in order to cut down the economic output.
Finally, even retail sales were exceptionally strong in April, up 0.5%.
So whatâ€™s wrong? Oil and food prices? Sure. But inflation is not that bad, according to the U.S. Consumer Price Index data released by the Labor Department today.
The 0.2% rise in the CPI was less than the gain that Wall Street analysts polled by Reuters were expecting. And that was a big surprise. Any good news in this economy comes as a big surprise. Perhaps what Wall Street needs the most is not cash, but Prozac.
Numbers were better than what the consensus expected. The core CPI (CPI without food and energy) may be less significant in todayâ€™s environment. Still its weakness deserves to be noted. It is only up 0.1% in April versus analystsâ€™ consensus of 0.2%. And from a year ago, the increase is 2.3%.
What does it all mean? Simple. Not only itâ€™s not 1933. Itâ€™s not the 1970â€™s either.
Despite all of the bashing, it looks like the Federal Reserve Board has indeed helped the markets, especially since March. But chairman Ben Bernanke, who has injected huge doses of liquidity and orchestrated with the Treasury the bailout of Bear Stearns & Co. Inc, seems to remain gloomy. Perhaps he is careful not to take credit for his good deeds too soon and he may right. In a speech yesterday at Sea Island, Georgia, Mr. Bernanke said that â€śconditions in financial markets are still far from normal.â€ť
Perhaps also there is a big difference between Wall Street and Main Street. Last month, Ken Griffin, chief executive of Citadel Investment Group LLC, said during a panel at the Milken Institute Global Conference in Beverly Hills, California, that â€śIt is the Great Depression on Wall Street. It sure isn’t on Main Street”.
But here again, even Wall Street is not the Titanic. After the Fedâ€™s frantic rate cuts of 325 basis points since September, after the Central Bank offered banks generous liquidity facilities, the use of its own balance sheet and a spectacular bailout that turned into a merger , the Street is finally catching its breath. Will it last? No one knows. But we have not seen a run on a bank in the US yet (knocking on wood.) Big financial institutions have undertaken an aggressive recapitalization process. In fact, the banks are able to issue new stocks and they are finding investors, other than just sovereign wealth funds, willing to buy those financial shares.
So the end is not nigh. Perhaps from now on, the use of the â€śDâ€ť wordâ€“for Depressionâ€”should be monitored like an economic indicator. If the indicator means nothing, someone needs to come up with a D-regulation.