Have the Green Shoots Turned to Brown?

Posted by John Slater on June 26, 2009

As I write this, summer has officially begun with 100° plus days to prove it.  The past two summers have not been kind to the financial markets.  The collapse of the leveraged loan market in August 2007 marked the beginning of the current financial crisis and July of last year witnessed the initial low for collapsing bank stocks, setting the stage for much more dramatic pain in the fall.  I’m not predicting any surprises for this summer, just suggesting that we’re in the witching hour and should all be on the lookout for things that go bump in the night.

The jury’s still out on the shape of the recovery.  I have been expecting a W shaped recession, with economic strength appearing later in the summer to be followed by another step backwards toward the end of 2009 or sometime in 2010, as the impact of the financial stimulus wears off.  Recent events have increased my concern that the economic trajectory in coming months could look more like a landing between two flights of stairs on the way down.  There’s lots of reason to think that the decline is leveling out, but much less reason to expect a strong upturn.  Consumer credit is just too weak and, with many consumer balance sheets irreparably broken and consumer credit standards showing no signs of easing, it’s hard to see what will serve as the engine for growth.  At this point I’d be pretty happy with an L-shaped recovery in which we maintain something like current activity levels (perhaps after a short bounce off the bottom) while balance sheets are given time to recover.

For a good overview of the current condition of the real economy I suggest this article by Steven Hansen in Seeking Alpha.  Bottom line is that the economy is still in decline, though at a slowing pace, and will likely be on that path until the fall.

leading-indicators-newsletter

ECRI Weekly Leading Indicators

On the brighter side, the Weekly Leading Indicators series published by the Economic Cycle Research Institute has been trending up since the first of the year, predicting at minimum an end to the decline before the end of the year and perhaps some real improvement, not just a slowing of the decline, going into the fall.  For now that feels more like a best case scenario with the risks on the downside.

Share Button

Categories: Economics, Uncategorized

Tags: Tags:

Permalink | Comments Off on Have the Green Shoots Turned to Brown?

Leave a Comment

If you would like to make a comment, please fill out the form below.

You must be logged in to post a comment.