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Disappointment, Not Tragedy
By: Dr. Charles Lieberman
Date: 7/6/2009
Payroll employment fell more than expected in June, setting off a wave of equity selling, as investors fear that the recession will persist. What happened to all the green shoots? Should they be dismissed so quickly? Shifting from recession to growth is not like turning on a light switch. It is a process and the data tend to be quite mixed initially and they tend to turn largely positive only after some months. The processes currently underway should result in economic growth in the second half. Moreover, it is way too early to judge whether the gains will be tepid or strong.
Green shoots abound. Consumer spending is showing small gains, orders for manufactured goods have increased, inventories of manufactured goods are being depleted at a very high rate, production schedules are being increased in the auto sector, capital goods orders have increased, initial unemployment claims have declined meaningfully, real disposable income has picked up (with most of that incremental income elevating the savings rate), housing inventories have plunged and home sales and new housing construction have flattened out, credit market risk spreads have narrowed sharply, bond issuance has picked up sharply, liquidity is improving, and I could continue and fill the page. In fact, the data are not uniformly positive, even during an economic expansion. But why would anyone expect them to be consistently positive, particularly as the economic shifts from sharp recession to expansion? The data ought to be quite mixed now and turn more consistently positive over the course of the next two quarters.
The most worrisome aspect of the recent data is that most of the gains in household income are coming entirely from government disbursements, not from wages and salaries, at least not yet. Wage rates have flattened as employment is still falling. While government benefit programs will continue for some time, we do need to see job growth, even if it is small, so that sustainable growth in household income can support growth in consumer spending. If this does not become evident soon, alarm may be justified. More likely, a rebound in manufacturing and home building will lead to improvements in headcount in the very areas that have been weakest during this recession. Data for the next few months will be critical in resolving this uncertainty over the economic outlook. Bet on the green shoots producing buds this summer and flowers by fall.
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