There are indeed some signs that the worst might be over for the economy. Which is why the violent rally in the stock market isn’t obviously a sucker’s rally.
(If it were obvious, it wouldn’t suck so many people in. The folks who fall for bear-market rallies aren’t morons).
Paul Kasriel of Northern Trust was way ahead of the curve in spotting the downturn. In the past month or so, he’s turned more bullish, and he is now more confident in his forecast that economic growth will resume in Q4. Here’s a synopsis of his current thinking:
Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the
decline in February nominal retail sales of 0.1% suggests that the decline in real consumer
spending that month will not be severe. For the first quarter as a whole, we now expect a
contraction in consumer spending much less severe than last year’s fourth-quarter contraction
of 4.3%. Although we do not expect to see outright growth in real consumer spending until the
fourth quarter of this year, we believe the deepest quarterly contraction is behind us.
With light motor vehicle sales idling just above 9 million units at an annual rate, it appears that for
the first time since 1945 there are more used cars and trucks being scrapped than there are new ones getting out on the highways. At some point in the not-too-distant future, the purchases
and production of cars and trucks will be stepped up. In fact, production increased by almost
24% in February, admittedly from an extremely depressed January seasonally-adjusted
annualized base of only 4.6 million units. When the Fed’s Term Asset-backed securities
Liquidity Facility (TALF) kicks into a higher gear, more credit will start flowing again to
households for the purchase of motor vehicles.
And, of course, we households still need to buy staples, not to mention toothpaste and food. As an aside, the TALF program is now authorised to provide up to $1 trillion of financing for the purchase of newly-issued asset-backed securities. This amount is approximately one-third of the net credit created by the private financial system in 2007; one-half the net credit created in 2008. So, the TALF program is considerably more than chump change.
Here’s Paul’s story in pictures…
The consumer ATMs that fuelled consumer spending from 2002-2007–homeowner mortgage equity withdrawals–have run dry.
But disposable income is finally on the rise again.
In part because of unemployment insurance, which is spiking as a percentage of disposable income.
Houses are now more affordable than any time ever (for those who can sell their existing houses).
In the Great Depression, the money supply shrank, which made the crisis worse.
In the current Depression, the money supply is growing.
Private lenders have indeed reined in their lending (somewhat–far from the disaster some folks make it out to be).
But the Fed has picked up the slack.
Lastly, commodity prices have stabilised even though the dollar is holding steady. This is a sign of increasing demand.
You can find a lot more Paul Kasriel here >