When Will It Improve Out There?

There are some tentative signs of a developing recovery.

The U.S. recession is expected to last until late 2009 or early 2010. Most of the economies of the world are sharing the pain, which, for some reason, makes some people feel better. In reality, though, this hurts us, as exports dry up despite the relative weakness of the dollar.

This is the first in a series of quarterly columns on the state of the economy written by Alan Beaulieu of the Institute for Trend Research.

There have been a number of well-intentioned folks who have talked about a V-shaped recovery beginning in mid-2009. You may have noticed that it did not happen. There has also been discussion that the recovery is “here.” Sorry, not yet. Annual U.S. Industrial Production is 7.6 percent below the year-ago level, which is the worst year-over-year comparison in more than 33 years. New orders are in a well-defined negative trend and the consumer sector trends are bleak heading through midyear. It is going to take some time for these trends to reverse direction. The global recovery is going to have its start here in the U.S. if it is going to be a viable upturn that will endure.

Positive Signs
Fortunately, there are some tentative signs of a developing recovery. The U.S. Leading Indicator, the Purchasing Managers Index, corporate bond prices, existing home sales and the money supply are all throwing off positive signals, indicating that a recovery is coming in the United States beginning in early 2010. There is even good news coming from the stock market, with a better-than-even chance that the bear market is over and better days are ahead.

The housing industry is extremely important. It led us into the recession, and it will lead us into a recovery. There is some good news in that the sales of existing homes have improved over the last several months. The input from housing starts itself is still weak, but we think we are on track for a leveling of the housing trend for 2010 and a rise for 2011.

The consumer price index has been rising steadily this year. Don’t worry about deflation; consumer prices have risen at a normal pace every month since December and general inflationary pressures are building. It will take a long time before inflation gets problematic, but 12 to 18 months from now we will be facing higher interest rates. Higher interest rates and inflationary pressures will make things tougher on our budgets and on our cash flow.

A fair amount of speculation has kept oil prices higher than what seems reasonable given global demand is suppressed as the recession continues. With prices floating around $64 a barrel, there should be no real concern that high energy costs will hamper the recovery or cripple business or consumer budgets. Flight from the U.S. dollar and anticipated economic growth has kept prices creeping higher recently, but eventually prices will have to reflect the current economic situation. Our analysis suggests that oil prices will ease off in conjunction with the pullback in demand in the second half of this year.

Retail sales must begin to improve before we can say a recovery has begun, and we are not there yet. Consumer spending on an annual basis is four percent below last year, reflecting the worst year-over-year comparison in 60 years! That means most of us have never lived through this severe a consumer problem, let alone figured out how to deal with it. The dramatic makeover among retailers adjusting to fearful, fickle consumers remains a work in progress. Keep in mind that the seasonal rise in retail sales to date is very weak, similar to the last two years. Christmas 2009 is projected to come in below Christmas 2008.

Consumer spending on hand tools, as measured by personal consumption expenditures, is 4.2 percent below this time last year on an annual basis and 7.5 percent below this time last year for the latest quarter. There are no internal indications of a near-term low, but the leading indicator input cited above suggests that spending on hand tools will improve in the second half of 2010.

Gases and Welding Distributors Association
Alan Beaulieu Meet the Author
Alan Beaulieu is an economist with the Institute for Trend Research, located in Concord, New Hampshire, and on the Web at www.ecotrends.org.