Financial Crisis: Have We Hit Bottom Yet?

These are not boom times for optimists. But I believe that – combined with knowledge of what has worked in the past – there are numerous signs that the economy may turn around faster than many think.

Bottoming Signs

Here are some small signs that the economy is at last bottoming:

- The ISM non-manufacturing services report for December came in at 40.6 on the composite index, compared to 37.3 in November. New orders, employment, backlogs, and exports all ticked higher than the previous month. So did the overall-business-activity index.
- November factory orders rose at a 3.9% annual pace, the first increase in four months and the best gain in 10 months. Computer orders surged 12.5%.
- Pending home sales declined again overall, but in the West pending sales continued to increase, up 27% since the August 2007 bottom.
- Commercial construction rose 0.7% annually in November, and is up 12.1% over the past three months.
- Real disposable personal income jumped 1% in November and is up 7.1% at an annual rate over the past three months. Real consumer spending rose 0.6% in November.
- Inflation is plummeting, largely a function of collapsing oil and retail gas prices.
- The money supply of liquid assets, as measured by M1 and M2, is growing robustly, fueled by the Fed’s gigantic increase in the monetary base.
- The credit freeze continues to thaw. The three-month LIBOR rate is all the way back to 1.4%. Corporate bond rates continue to decline.

The Economic News Isn't All Bleak

What happened after the collapse of Lehman on Sept. 15 was a global, synchronous cessation of all but nondiscretionary economic activity. It came in the wake of a near-collapse of global credit markets. The fall was remarkably rapid. But if things came to a halt more quickly than ever before, they could also restart more quickly than ever before. Zachary Karabell, president of River Twice Research, calls attention to some positive signs:

- “First, we haven't seen war, revolution, the collapse of states and governments, or massive demonstrations sweeping the globe.” It is a remarkable testament to global stability even in the most difficult time.

- “Second, consumers in many parts of the world are in relatively good shape.” A third of American households have no mortgage. The savings rate in China is 50%. The accumulation of wealth is still massive in the US, Europe, Japan, China, the Gulf region, Brazil, India and Russia. Even at its most promiscuous, the credit system did not allow consumers to leverage themselves to the obscene 30:1 ratio that some financial institutions did.

Karabell continues:

People have also reacted swiftly to the current problems, paying down debt and paring back purchases out of prudence or necessity. That's a short-term drag on economic activity, but it will leave consumer balance sheets in good shape going forward. Low energy prices and zero inflation will boost spending power. Even if unemployment reaches 9% or more, consumer reserves in the US and world-wide are deeper than commentary would suggest. Household net worth in the US is down from its highs but is still about $45 trillion. As the credit system eases, historically low interest rates also augur debt refinancing and constructive access to credit for those with good histories and for small business creation in the year ahead. Entrepreneurs often thrive when the system is cracking.
In addition, corporations generally have very clean balance sheets with little debt and lots of cash, unlike the downturns in 2002 and in the 1980s. And government has more creative ways to spend, which both the current Federal Reserve and the incoming Obama administration intend to do.

2009 Could Be Better Than You Think

Here are five good reasons why 2009 could be better than you think, according to Alan Murray:

1. This will be a good year to invest in stocks (the bottom will be found sometime this year, and it probably won’t be too far below where the market is today).
2. It will be a good year to invest in real estate (fixed-rate mortgages are at historic lows).
3. Americans will learn to live within their means (you can’t spend what you don’t earn).
4. President Obama will have a historic opportunity to reshape public policy (sure, some of the stimulus money will be wasted, but a lot will be beneficial).
5. Your (federal) taxes won't rise (not this year, anyway).

What Could Go Right in 2009

Superstrategist Ed Yardeni is quoted by James Pethokoukis in US News & World Report on what could go right in 2009:

1. Lower mortgage rates fuel a refinancing boom which lifts consumer spending.
2. Home sales increase and home prices stabilize.
3. Easier credit conditions increase auto sales.
4. The drop in fuel prices also boosts consumer spending; the unemployment rate peaks below 8%.
5. Massive spending on infrastructure by the US government offsets weakness in such spending by state and local governments.
6. The money supply grows rapidly.
7. Stimulative monetary and fiscal policies overseas revive global economic activity and US exports.
8. Depleted inventories and improving sales trigger a big jump in industrial production.
9. Credit quality spreads narrow significantly and rapidly as investors seek better returns than available in Treasury securities.
10. Stock prices rise 30%-40% in anticipation of better earnings during the second half of 2009 and in 2010.
11. Inflation remains subdued, and productivity pops.

Looking on the Bright Side

Martin Walker, Senior Director of AT Kearny’s Global Business Policy Council, is not down-hearted, for the following reasons:

First, the financial crisis is starting to ease. The LIBOR rate is back down below the panic level. Credit Default Swaps look much less worrying. International coordination to ameliorate the crisis is unprecedented, and includes China.

Second, we now have a reasonable sense of how long the recession is going to be; it started in the third quarter of last year, will last for at least 18-24 months, and will see a decline in GDP among the G-7 countries of 2 to 3 percent.

The growth rate of the BRIC economies – Brazil, Russia, India and China – will slow, as will the growth of such middle-income countries as Mexico, Australia, Turkey, Taiwan, Indonesia, Saudi Arabia and South Korea. But they will all still be growing.

Third, there is some very good news on innovation which points to a much brighter future. All previous predictions of gloom and despair – from Thomas Malthus in 1798 predicting human population would overwhelm food supplies to the Club of Rome’s forecast of major minerals and commodities shortage in the 1970s – have been proved wrong by human ingenuity and technological progress. Brains, brawn and sheer effort have a remarkable way of overcoming obstacles.

Dr. Roger Selbert is a business futurist and trend guy. He publishes Growth Strategies, a newsletter on economic, social and demographic trends, and is a professional public speaker (www.rogerselbert.com). Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American representative for its US Consumer Demand Index.