Did the recession end in July?
There is increasing evidence that the economy is in the midst of a "V-shaped" recovery
According to Deutsche Bank economists, the Great Recession probably died in July. Yep, it's all over.
This is based on an analysis of the data the official arbiter of the business cycle, the National Bureau of Economic Research (NBER), uses to time the business cycle. In their words: "In effect, strong gains in both industrial production and business sales along with small increases in personal income have offset further significant weakness in nonfarm payroll.
The Deutsche Bank team based their prediction on the fact that the NBER leans heavily on four primary sets of data including personal income, business sales, industrial production, and payrolls. When combined, these data form what's known as the coincident index that reflects current economic conditions. After falling for 13 out of 14 months since May 2008, the index increased in July and again in August as three out of the four components rose. It maintained its level in September.
Corroborating the trend is the recent performance of the index of leading indicators (LEI) which includes exciting things like new orders for consumer goods, stock prices, jobless claims, and the money supply. The LEI increased 11% on an annualized basis in the third quarter, rising 1% in September. The gains were broad based as well, with all 10 components rising in either August or September.
The economists note that the LEI has "an unblemished record in predicting economic upswings." The one time the LEI was proven wrong was in 1966 when it predicted a downturn that never materialized.
What we have here is a situation where the economy is poised to grow despite a moribund consumer thanks to investment spending from the corporate sector. Factories will expand and replace old equipment. Inventories will be restocked. And home builders will start working on smaller, more affordable houses as new home inventories are restored.
Even the consumer is healthier than is commonly believed: After removing the "cash-for-clunkers" surge in auto spending, retail sales increased at a 3.6% annualized rate in the third quarter. This ended a run of four straight quarterly declines.
All of this bodes well for Thursday's initial read on GDP growth for the third quarter. As for stocks, Gluskin Sheff economist David Rosenberg estimates that they are pricing in 5% growth next year at current levels. The bears believe that, given the pressures on the household sector, 5% is simply unattainable.
While this may be true, it's worth noting that growth in the year following the end of a recession has tended to exceed 6%. Maybe 1,200 on the S&P 500 isn't so crazy after all.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
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