First, A Little History
When the Great Depression kicked off in 1929, US industrial
output plunged, falling by nearly 53% until mid-1932. As 1932
commenced, the Fed finally began injecting liquidity heavily into
the system. By Half 2 1932, production started to rebound and
rose by 62% over the next 12 months. It was difficult to balance
supply and demand within the economy with such long range
volatility, and not surprisingly, production fell by 20% over Half 2
1933, before enough balance was restored to enable the economy
to begin to recover more smoothly.
Economic Free Fall: Mid 2008 - Early 2009
My best guess is that we had experienced a mini replay of the
Depression over the 2008-09 period. From its 06/08 peak of
350.0, my index of the $value of US production plunged 15.7% to
a cyclical low of 295.0 in 04/09, before it recovered 9.4% to 322.8
in 06/10. By, post WW2 standards, this action reflects phenomenal
volatility, and I suspect it has proven difficult for households,
businesses and banks to adjust to it. Thus, we see a recovery in
retail sales, along with the paydown/liquidation of consumer
debt and an effort to boost personal savings. We see businesses
re-tooling equipment but only very reluctantly hiring. And then,
there are the banks. They stuffed loans in your pockets in 2005-06,
but now they are reluctant to lend to top quality smaller credits.
Mentality Not On Fast Forward
The economy has moved ahead, but many folks have yet to catch
up with it. Economic free fall and an initial quick bounce happened
so fast that restoring and maintaining balance and perspective have
been difficult to accomplish.
Something Not So Nice Is Ahead
Since the end of April, the weekly leading economic indicator sets
I use have declined sharply. Both have stabilized a bit in July, but
the damage has been heavy enough to signal that an economic
slowdown of some meaningful proportion lies ahead. The ECRI
WLI*, now watched very closely by throngs, has experienced a
two month decline that is consistent with development of an
economic recession. This index went into free fall from mid-2008
until early 2009, and then experienced its fastest rebound ever.
In fact, it rose by more than it normally rises in the first two
years after a recession and the decline it has experienced since the
end of April brings it down to a level consistent with a 12-14 month
timeline of recovery from a substantial recession.
Most of the classical elements which presage a recession are not
in place. What we do have are confidence levels across the spectrum
that are so low, that if folks do "freeze up" -- do not spend, do not
lend and do not hire, we could be in the soup.
Now I follow a very simple maxim: The money gets spent in the
USA. The Fed has added prodigiously to the basic money supply.
"Pushing on a string" is not an American economic concept. I think
we move forward with recovery, but its resumption could await
restoration of more of a sense of balance among the players and a
boost to confidence, which incidentally, can turn on a dime.
Now, in the next couple of months, we need to see folks loosen up
a little and get with the program. Such does not mean return of
prodigality but a balanced response to a recovering environment.
* ECRI website.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!