Paul Kasriel and Asha Bangalore of Northern Trust have done exceptional work on the economy in recent years. They were early in calling the recession, and they have now been early in calling the recovery.
Paul and Asha’s latest reports argue that the worst is over and that we’ll see a weak recovery by the end of the year. The stimulus is kicking in and the housing, manufacturing, employment, and consumer-spending trends are beginning to improve (which in some cases means “decline less”). Bank lending is loosening, finally, and spreads are returning to normal. But the plunge in household net worth relative to debt will likely keep a lid on spending and growth for at least the next year.
You can download Paul and Asha’s reports here. Here are some highlights:
Real GDP contracted at annualized rates of 6.3% and 6.1%, respectively in Q4:2008 and
Q1:2009. These rates of contraction would appear to be the largest that are likely to occur
before real economic growth commences in Q4:2009.
After having contracted in the second half of 2008, real personal consumption expenditures grew at an annual rate of 2.2% in Q1:2009. Although we expect that real consumption will resume its contraction in the second and third quarters of this year before posting growth again in the fourth quarter, the worst seems to be over for consumer spending.
Housing sales appear to be bottoming (in part driven by rapid foreclosure sales):
Housing starts are bottoming, too:
House prices are continuing to drop, especially according to the Case Shiller index. But the NAR’s index suggests that the rate of decline is now decelerating.
Manufacturing is turning:
The Index of Leading Economic Indicators (LEI) is turning up:
Unemployment claims appear to have peaked:
Credit spreads are returning to normal, and inter-bank lending is resuming.
Banks are starting to lend again:
Unfortunately, household net worth has been clobbered, and debt as a percentage of assets has hit an all-time high. This will keep a lid on spending and, likely, lead to a weak recovery.
Net worth has been crushed:
Liabilities as a percentage of assets have hit an all-time high:
And the savings rate still needs to increase:
BOTTOM LINE: Worst over, but expect a weak recovery.
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