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Has the US economy bottomed?

The mixed economic numbers begin to make a little more sense if one considers the typical flow of a recession. While no two recessions are identical, some patterns tend to repeat themselves.

Robert Johnson, CFA 08 May, 2009 | 0:00
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The ghosts of the past, the present and the future US economy all revealed themselves last week with a plethora of economic data to digest. Our key takeaways: the backward-looking indicators like investment spending looked horrendous, current indicators like GDP looked bad but showed signs of improvement, while the more forward markers such as manufacturing new orders and initial unemployment claims were very encouraging. Net, we are at or very near a bottom in the US economy in our opinion. We expect the June quarter to be very near the flat line and for the economy to show some signs of growth in the September quarter. However, unemployment will continue to worsen throughout the year, perhaps peaking in the 9%-10% range, up from 8.5% currently.

To the layman, and even some professionals, reading the news headlines over the past few weeks has proven extremely confusing. One day we read of capital goods shipments being the worst since World War II and the next we see sharply improving new orders. We have seen unemployment go through the roof month after month, but consumer spending actually increased in the first quarter. The juxtaposition of all the divergent economic statistics is behind some of the volatility in the stock market lately and the confusion among even experienced money managers.

The mixed economic numbers begin to make a little more sense if one considers the typical flow of a recession. While no two recessions are identical, some patterns tend to repeat themselves. The consumer, which represents more than 70% of the US economy, generally leads our economic train. As consumers loosen their purse strings and spend more, businesses initially may ship from their inventories before stepping up production. Next we might see manufacturers place orders for raw materials to up their production rates, then actual industrial production might pick up. The final car in the train is capital equipment. Businesses will step up their capital spending (or stop cutting it) only when consumer spending has picked up and production at current facilities is maxed out. The time between the beginning (consumer spending) and the end (capital goods) is large enough that one metric can be showing some nice improvement while another still looks like it is falling to pieces.

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About Author

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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