Predicting the arc of economic recovery in the midst of the worst downturn since the Great Depression is like trying to do brain surgery with oven mitts.
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Much as you try, it’s going to be clumsy.
Yet, as the constant flood of economic indicators is released week after week, we scan them and analyze them in an effort to find some hint that this nightmarish chapter soon will come to a close.
Today in another hopeful sign that the economic slump may be easing, orders for American-made durable goods during May unexpectedly jumped.
According to the Commerce Dept., May’s 1.8 percent gain in bookings for items meant to last several years matched the previous month’s increase. The upswing in this critical consumption category was a surprise because most forecasters were projecting a drop in orders of 0.9 percent.
New Home Buying Down, a Surprise
After selling off for the past several days, stock prices advanced both here and abroad. In response, Europe’s Organization for Economic Cooperation and Development (OECD) augmented its economic forecasts by optimistically projecting a return to grown by the second half of the year.
Domestically, sustained gains in consumer spending may encourage businesses to boost investment and production after making an effort to slash inventories earlier this year. Still, economists anticipate that rising unemployment and continuing tight credit conditions will temper the recovery.
Countering the durable goods orders number was a surprising drop in new home purchases during the same period. Despite the deep promotional discounts extended by builders, new home sales failed to keep pace with the continued foreclosure-driven price declines for previously owned houses.
If the up-thrust in foreclosure and jobless rates persists, new home builders will continue to lose market share unless they are willing to make even bigger price cuts. The recent jump in mortgage rates also may put a damper on new home demand, threatening to undermine the stabilization in construction that has emerged so far this year.
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Stronger durable goods numbers, along with more positive earnings posted by companies like Monsanto, General Electric, Caterpillar and Oracle, seem to have lifted the otherwise moribund investor outlook.
In concert with the rise in stock values, higher oil and metal prices elevated commodity producers. Additionally, a better-than-estimated auction of Treasury notes eased concern that record government borrowing will lead to a bump up in interest rates.
An announcement from the Federal Reserve relating to its continuing interest rate policy is due out today. Although most analysts expect the Fed rates to remain unchanged, there will be particular interest in the public statement issued at the close of the FOMC (Federal Open Market Committee) meeting.
The Pace Remains Slow
The optimistic predictions by the OECD, which forecasts for the economy of its 30 member nations, was in sharp contrast to the negative pall cast last week by the World Bank. Where the forecasters at the World Bank saw a 4.1 percent growth decline through the middle of 2010, the OECD countered with a projected 0.7 percent uptick.
Complicating the recovery predictions is the scarcity of available conventional business credit lines combined with the gnawing surplus of inventory.
Because manufacturers have, in large measure, been unable secure cash-flow credit lines, they still are being forced to bridge the gap by slashing prices. While this may explain the rise in the demand for durable goods, the unit price reductions may prolong the pain on the bottom line for most companies, preventing them from taking on the risks associated with even modest expansion.
The good news for consumers is that it’s still a buyers’ market. This means that for the foreseeable future, consumers will have the rare opportunity to be in the driver’s seat when comes to buying anything from dishwashers and backhoes to flat screen TVs and new homes.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
