Published: September 06, 2009 04:28 pm      

Recovering is not recovery

In one of my recent articles, I noticed that my picture had been bumped for other news.

Ah, a face for radio and voice only suited for newspapers. What came to mind is the current beginning phase of the recovery. One economist was recently quoted that “it’s going to be a recovery only a statistician can love.”

We may read about or hear about it, but it is going to be difficult to see any immediate improvement. High unemployment rates will continue for some time and households and businesses will need additional time to repair their balance sheets.

There are signs of improvement, but recovering is not recovery. The housing sector continues to improve with one set of data indicating June home sales rose 11 percent, existing home sales increased by 9 percent and housing starts were up 21 percent. Inventory of vacant residences fell to 5.3 months, the lowest level in 11⁄2 years. The S&P Case-Shiller Housing Price Index showed the first uptick in housing prices in three years at the end of July.

Durable good orders, those goods expected to last more than three years, were below expectations in June, but subtracting transportation orders, orders were up an annualized 7.2 percent over the previous three months. Recent data indicates that inventories are still being reduced, 10 straight months through June. Sales are picking up, June posting the first increase in total sales since July 2008, indicating that inventories will need to be replaced, possibly giving a further boost to goods orders. Retail sales continue to be weak with a 0.1 percent decline in July, reflecting consumers’ hesitance to spend.

Investors are returning to the risk markets. Stock fund flows were up $4.2 billion the last week of July, making it the best week for equity funds in two years. Equities rose by 8 percent in July. A gauge of inter-banking lending risk is at its smallest spread since January 2008. Corporate bond deals coming to the market are multiple times oversubscribed. What appears to be stabilization of both the housing and credit markets has added to the argument that the economy is in the process of a rebound. Even with the flood of government borrowing, Treasury auctions continue to perform reasonably well, with the amount held in custody for foreign accounts topping $2 trillion for the first time.

Even the Federal Reserve Open Market Committee sees signs of improvement, as indicated by their statement of August 12 following their most recent meeting. They stated that “economic activity is leveling out” which differs from their statement of June 24 that “the pace of economic contraction is slowing.” The Fed also announced a slow down and eventual halt to their program of purchasing Treasury securities this fall. This was an effort to keep interest rates low to allow refinancing. Many home mortgages are tied to Treasury rates and low rates permitted those able to refinance at these lower rates. The Fed feels there has been sufficient improvement in the credit markets to allow market forces to set these rates rather than set by monetary policy.

As mentioned above, recovering is not recovery. Unemployment stands at 9.4 percent, despite a recent uptick. Productivity measures have jumped but this is due to producing the same amount of products with fewer workers. Wage deflation will continue to impact the economy as corporations continue to cut costs. In many cases, improved corporate earnings were due to cost cutting measures (labor reduction) rather than any increase in sales or revenues.

Washington reported that personal consumption expenditures rose 0.4 percent in June while personal income fell by 1.3 percent, including a 4.7 percent annual decline in wages and salaries. As a result, the personal savings rate declined from 6.2 percent in May to 4.6 percent in June. Foreclosures continue to climb, rising 7 percent from June to July, outpacing government programs to assist with mortgage modifications. It is estimated that only 400,000 offers have been extended to 2.7 million eligible borrowers, those more than two months behind on their payments.

There are also some wild cards that could derail the recovery. One of these is oil prices, which have remained subdued for the past several months. An increase in demand by emerging markets or an unknown political shock could send crude oil prices higher, further reducing the consumer’s ability to purchase other goods and services. Another risk is that interest rates rise, whether due to reduced foreign purchases of Treasury debt, the Fed raising rates too early or the reassertion of market forces.

The economy is in better shape than it was six months or a year ago. The bottom in the current downturn may have already occurred but the recovery is likely to be slow. Unemployment and soft consumer spending will weigh heavily on the recovery. The upturn will be subtle and we will hear about additional positive signs but it is unlikely that most of us will see improvement in our own situation for a while.



David Helscher is a senior vice president and trust officer with Clinton National Bank.