When will the recession end?
By
Associate Editor
David Stevenson
Aug 29, 2008
Despite the rise of China, India, and the other Brics, the US is still by far the world's most important economy, which means it's the one we should be looking to if we're hoping to work out when things might turn up again, writes David Stevenson. So it's not very cheering to hear that David Rosenberg, Merrill Lynch's North American economist, thinks that "we probably aren't even past the halfway point yet of this recession". That's bad news for US consumers battling with 5.6% inflation – the highest rate for 17 years – and house prices that have dropped some 16% over the year to June, according to the latest S&P/Case Schiller index.
Technically, of course, the US recession hasn't started, as GDP is still in positive territory. Yet the official numbers are a classic lagging indicator. The US economy is "running on empty", says Capital Economics, who reckon that consumption is on the verge of suffering its first quarterly decline since late 1991. And the number of Americans out of work is rising at its fastest rate for more than six years; unemployment has just hit a four-year high of 5.7%. But, what signs might let us know that the States' economic pain finally is coming to an end?
Not current stockmarket rallies, for one. The Dow Jones Industrial Average is bouncing all over the place at the moment, but 300-point rallies are not bull market behaviour, says Rich Bernstein, also of Merrill Lynch, rather "the hallmark of a recession and a hallmark of a bear market".
Since 1900, US bear markets have mostly occurred against a recessionary backdrop, according to the strategy team at JP Morgan, with the S&P 500 index "posting median falls of 32% over an average duration of 14 months, and equities typically bottoming out up to six months ahead of a clear improvement of economic dataflow". So history suggests that with stocks down 'just' 20% so far, and the current bear market a 'mere' nine months old, there's almost another year of US recession to endure yet. That concurs – rather neatly – with Rosenberg's view that things won't be picking up "any time before the mid-part of 2009". He's looking out for three "markers" to occur before he turns more bullish on the US economy:
1) The personal savings rate needs to return to the 8% level of the late 1980s and the early 1990s. Last year the savings rate even turned negative for the first time since the 1920s, as people started believing they could retire on the back of soaring asset prices. Now the reverse is happening: saving must rise again from the present 2.5%, so as to store up demand for the next bull market and period of economic expansion, reckons Rosenberg.
2) House prices have to hit bottom. For Rosenberg, this means the inventory-to-sales ratio, which "including total vacant units for sale, plus foreclosed properties", is around 17-months' supply, and should be sliced in half. All that housing stock could still take several quarters to work through.
3) The household balance sheet needs to improve sharply. The ratio of total debt to income, now at record levels, must be reduced. But specifically, the interest coverage ratio – the proportion of household income absorbed by principal and interest payments – is currently at a near-record high of 14.1%. It needs to drop to 10.5%. That's the level it fell to in 1992, and 1982, in both cases providing a launch pad for multi-year bull markets and economic expansion. But remember that there's never been a recession with household debts as high as they are right now. So maybe this ratio needs to fall even further.
Perhaps that sums it all up. As Rosenberg puts it, economists base their forecasts on the past, yet we're in uncharted economic territory. New York University professor Nouriel Roubini has said that total credit write-downs in the financial system could reach $2 trillion – we've never seen anything like that before. We certainly don't know how bad the fallout might be on the US economy. That all makes end-recession estimates very open-ended.
Published in Economics
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David Stevenson
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