Finally...signs of life

In an article from http://www.economist.com/displayStory.cfm?story_id=13411349 the author states how this recession is likely bottoming, but a full recovery will likely take some time. Over the last month, we've seen more and more positive economic reports, in contrast to three months ago where positive news was nowhere in sight. National home prices are now considered 10% undervalued relative to income, and this is leading buyers back into the market. Auto sales recently saw an 8% jump from February to March, creating a glimmer of hope in a dismal market. Larry Summers recently said that the current annualised vehicle sales of 9 million are well below the 14 million needed for replacement and rising population. Larry continued to say that the current level of the stock market might be the 'sale of the century.' Investors certainly have known how cheap stocks and houses have become, but with the good news we're seeing people are starting to buy once again. Despite all this good news, certain parts of the economy are likely to take longer to recover. Consumer spending in general will continue to be depressed by the 18% drop in household net worth last year. More job losses are inevitable as unemployment is a lagging indicator. These job losses are likely to lead to more defaults on loans, thus causing more problems for an already battered financial system. The Federal Reserve should counter this by continuing to buy the bad assets, as an economic recovery isn't likely without the financial industry on board. It will take macro economists months to call March 2009 the trough, but I think the evidence exists to already label it as such. The lagging indicators will certainly take a while to get better, but the leading indicators (such as the stock market) are pointing to a recovery.


Riley said...

I agree, these indicators of new life in the economy are a great thing. The stock market appears to be pointing toward recovery, which is a good sign. The smart investor might look at the signs that say that the economy is at the bottom, or close to, at this point in time, and invest in bottomed out stocks, real estate, etc. There is incredible opportunity here if the economy is actually at the bottom, but you can never be too careful. I don't agree however, that the government should keep buying up all bad assets. This is not a good long-term strategy at all. It sets the U.S. up for a socialist or even dictatorship type of government. From history, it has been proven that these governments don't work out very well, so I think it would be a mistake for the U.S. to go in this direction. Let the economy self-correct as much as possible, and reduce government intervention. I think this is a much better long-term strategy.

Anonymous said...

It is great to finally see some green numbers up on the trading board, as has been the case for the last few weeks. I agree that since prices are at extreme lows people are entering the market. I agree with what Riley said concerning the government buying up bad assets. I still don't understand how we think it's okay to bail out companies who do a poor job. You look at some companies like Goldman Sacs and Wells Fargo who were forced to take TARP funding. These companies may have taken a big hit over the past few months, but overall, they are sound and ready to move forward (without the government). Let's let the inefficient companies like GM and others struggle for a little while. They will either cease to exist because they can't compete, or they will emerge a much stronger and viable company.

Dr. Tufte said...

This is exactly what we should see more of: people publicly calling turning points when they happen. If the pundits did this, and there was a place we could go check them for accuracy, we'd probably get a lot better economic analysis on TV.

Let me emphasize that you're spending too much time looking at the market. It is a leading indicator, but not a very sharp one.