Economic Indicators Like Kissing Your Sister
The economy is on the mend, but we are obviously not out of the woods. Leverage and asset inflation through the housing bubble were major causes of the financial crisis of 2008-09. Now some of the major indicators are turning upwards with GDP expected to rise around +3% in Q3 this year and we are seeing housing units up, housing prices up, and housing inventories down (charts below). Although some of these numbers may create some warm and fuzzy sensations, abnormally high unemployment rates, massive budget deficits, and stuttering consumer confidence make this rebound feel more like kissing your sister.
There are, however, other signs of economic strength. For example, credit appears to be healing as well. Moodys predicts global speculative debt default rates will peak in Q4 this year at 12.5% – lower than the 18% Moodys predicted earlier this year in January. The CEO Confidence Board index, which typically leads profit growth by two quarters, jumped to a five year high in the 3rd quarter. The recovery is not limited to our domestic economy either – the International Monetary Fund (IMF) recently raised its global growth forecasts in 2010 from +2.5% to +3.1%.
How sustainable is the recovery? Bears like Nouriel Roubini still think we are likely heading into a double-dip recession, perhaps by mid-2010, once the temporary home purchase credits expire and the stimulus funds run out. A collapse in the dollar due to exploding debt and rising deficits is feared to cause a spiraling in debt costs – another factor that could cause a relapse into recession. Unemployment remains at an abnormally 26 year high at 9.8% (September) and any self-maintaining recovery will require an improvement from this deteriorating trend. Before consumers freely open their wallets and purses, consumer confidence could use a boost in light of the recent -10% month-to-month drop in October.
Fewer people are debating the existence of “green shoots,” however now the discussion is turning to sustainability. Time will tell whether those feelings of harmless sibling cheek pecks will lead to the discovery of a new long-lasting romantic relationship with a non-family member.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
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