Home OP-ED The Worst is Over … Maybe

The Worst is Over … Maybe

100
0
SHARE

[img]537|left|||no_popup[/img]It’s been a rough year for the economy.

As we get ready to shut the books on May, the timeline for the recovery of the economy still remains uncertain.

Reading the tea leaves of the economy has never been a precise science.  Doing so when the economy is in a heightened state of flux, as it is now, is nearly impossible.

Some of the numbers out this morning underscore this point. 
According to the Reuters/University of Michigan index of consumer sentiment, confidence among U.S. consumers rose this month to the highest since September.   For some analysts, this is a reinforcing sign that the worst recession in half a century is abating. 

The monthly consumer confidence reading increased to 68.7, more than forecast from 65.1 in April.

In sharp contrast, the monthly accounting released by Chicago-based Institute for Supply Management (ISM), which tracks corporate buying habits, showed that U.S. business activity contracted at a faster pace than forecast. 

This widely watched and respected business barometer decreased to 34.9 from 40.1 in April.  Readings below 50 signal an economy in retreat.   

Then there is the economic news from abroad. 

No matter your political viewpoint, only a myopic few still believe that our economy can stand alone.  More than at any time in the past 50-years, the events of the last 18-months have demonstrated that we are now, more than ever, inextricably intertwined with the global economy.

It is for this reason that economists have been keeping a close watch on other major industrial economies for markers that the recession may have run its course.  In particular, analysts are buoyed by projections that show that both the Japanese and Indian economies are starting to show signs of revival.

Japan’s industrial production jumped the most in 56 years in April and India’s economy expanded more than economists forecast in the first quarter. Japanese output surged 5.2 percent in March while India’s grew 5.8 percent.  The Indian economy exceeded its expected growth rate of 5 percent.  

[img]538|left|||no_popup[/img]The economic recovery in these countries has been more rapid because unlike the U.S. where the recession was triggered by a credit crisis, the downturn of industrial economies like Japan and India was precipitated by an abrupt fall-off in consumer demand for their products.  As a consequence, unlike the U.S., these economies are better able to “manufacture” their way out of the crisis.

Although May saw the S&P 500 climb nearly 3 percent, numbers released by the Commerce Department show that the U.S. economy violently contracted during the first quarter of the year.   The Commerce Department figures indicate that the U.S. Gross National Product slid to a 5.7 percent annual rate during the first quarter.  While dramatic, this rate of contraction is markedly less than the 6.3 percent drop-off during the fourth quarter of 2008.

The two quarter contraction was the worst in more than 60-years.  Since the 1947, the economy had never contracted by more than 4% for two consecutive quarters.

To some analysts and commentators, the first quarter numbers combined with the stock market expansion is an indication that the economy is becoming “less bad.”

The optimists in the crowd expect the economy to continue contracting by 2% for the second quarter and to grow 1.5% in the third quarter.  Others see the contraction persisting through the third quarter with a rebound in growth occurring during the final quarter of the year.  Under either scenario, unemployment which is now above 9 percent nationwide will continue to grow to as much as 11.1 by the end of the year. 

An economic recovery may be in the offing, but the buying power of the U.S. dollar is in a steady retreat.  

The dollar declined beyond $1.41 against the euro for the first time this year as growing evidence the global recession is easing sent investors in search of assets with higher returns.

The U.S. currency headed for its biggest monthly drop versus the euro in 2009 and fell today against major counterparts including the Australian and New Zealand dollars after South Korea said its state pension fund plans to hold fewer U.S. Treasuries.

This deterioration of the dollar has also driven precious metal prices higher. 

Silver headed for its biggest monthly gain in 22 years and gold rose to a three-month high in New York and London to $980 an ounce as a weaker dollar increased demand for precious metals as an alternative investment.  With oil prices now topping $65 a barrel, this trend of dollar weakness is likely to continue throughout the summer months. 

While the recovery may be at hand, it will be tougher for most Americans to perceive it because in the coming months all of us will be buying less with more.

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