Not long ago, the talk around Wall Street concerned the sharpness and length of the coming recession. But after last week’s string of sunny economic and earnings reports, that’s changed. Bear Stearns released a report yesterday titled “How Strong a Recovery?”, and it is fabulously bullish.
Bear thinks that not only will we avoid a recession, but in Q2 real GDP will expand a sluggish but respectable 2%. And the firm forecasts 3% growth in the next two successive quarters:
With the March Crisis winding down, credit spreads are narrowing. The growth outlook should improve, creating an investment climate somewhat similar to 2003… [There will be] resonably favourable conditions for consumption due to: the correlation between consumption and jobs; cash flow benefits of lower interest rates; rise in household wealth in previous years.
We don’t get it. Sure, the jobs picture remains relatively solid, but it’s hard to see how consumption will rebound if payrolls continues to shrink, albeit at a slower rate. And how can household wealth–one contributor to free spending habits–rise by any significant level when house prices, the chief source of wealth for many Americans, continue to slump? This is not to say that there won’t be a recovery, just that it will likely take longer than one or two quarters. Bear does get one thing right, though: The effect that the weak dollar has had on the economic picture:
The weak dollar trend has damped U.S. equity gains and pushed commodity prices higher. If the trend reversed, either by an inflation-fighting Fed, G-7 actions, or presidential election politics, we think it would have a major positive impact on the U.S. growth and equity outlook and reverse the uptrend in commodities.