A few weeks ago, the most optimistic observers of the world economy began talking about “green shoots.” As economic metaphors go, it was pretty powerful: a post-volcanic wasteland, oh-so-gradually coming back to life. Well, don’t those shoots just grow up fast these days? A few weeks on, and you’d get the idea we’re in the middle of a thriving rainforest. Mark Zandi, chief economist of Moody’s economy.com, captured the popular consensus in a report to clients this week. “Consumers are no longer retrenching, and businesses are successfully clearing out unwanted inventories,” he wrote. “Global financial markets continue to rally, and even the beleaguered banking system seems to be on the mend.” He, like so many other top economists in the past week, entitled his report “The Worst is Over.” A steady procession of top executives—from Sumner Redstone to Rupert Murdoch to Manulife Financial’s new boss, Donald Guloien—were eager to echo the all-clear.
But isn’t all this just setting us up for another fall? Has anything really been fixed in the economy? And aren’t the summer months generally lousy times for the markets? Maybe, maybe not. UBS Strategist George Vasic has put together a convincing statistical analysis, showing that just because the market has surged through the spring, doesn’t mean it’s doomed to fall through the summer. The old saying, “sell in May, and go away” need not apply.
But at the risk of trampling on all these green shoots, it seems prudent to temper this sudden resurgence in optimism. First, an economy that’s getting less bad isn’t nearly the same as one that is stable, let alone strong. Just because the stock market is rallying doesn’t mean the economy has to follow. Vasic noted that we’ve just witnessed the strongest bear market rebound since 1933. That’s great, but the years between 1933 and 1939 were no picnic. Neither were ’39 to ’45 for that matter. And finally, we’d all do well to remember that any unforeseen disaster—a global flu pandemic, for example—could dig a new basement beneath our “worst case” scenario models.
This may be the beginning of a long, slow recovery. And if it is, we’ll soon have to face all the horrible precedents and ugly bargains we made to contain a crisis that very nearly spun out of control—the de-facto nationalization of the U.S. banking system and unprecedented deficits, to name just two. Otherwise, this is just the mother of all head fakes—a rally that made suckers of us all.
GRAPH OF THE WEEK: The job market reversal
For decades, Canada dealt with consistently higher levels of unemployment than the U.S. But that has changed dramatically over the past year. Even taking into account the much-larger U.S. economy, job losses down south have been twice as severe. Over the past 12 months, 5.1 million Americans have lost their jobs, compared to a net decline of 270,300 in Canada.
THE GOOD NEWS
Last week marked the eighth out of the past nine weeks that North America’s stock markets have risen, and the S&P/TSX composite has now surged by 35 per cent since hitting bottom on March 9. Perhaps just as telling: the price of oil hit US$60 a barrel this week, its highest close since November and a gain of almost 31 per cent in just over six weeks.
The Ivey Purchasing Managers Index doesn’t normally get a lot of attention, but when it surges by 10 points in a month, it’s hard to ignore. The index rose to 53.7 in April (up from 43.2). Anything over 50 indicates growth in business purchases.
Some pessimists will not believe this recovery is for real until they see real, sustained action in retail sales. Fair enough. April provided a bit more evidence that sales are rebounding—a small (0.7 per cent) but significant upturn in U.S. chain store sales. It was the first rise after six straight monthly declines, but it was driven by gains at drug stores and discounters, while department and clothing stores continue to slide.
A permit to ride
Canadian municipalities issued a whopping 23.5 per cent more building permits in April than in March—led by commercial and industrial construction.
THE BAD NEWS
The truth about jobs
The buzz in the press last week was all about the “great employment news” in Canada and the U.S. But a closer look tells a different story. Yes, U.S. job losses in April slowed to 539,000, but that is still a devastating pace. The unemployment rate went from 8.4 to 8.9 per cent, and if you take into account those who’ve given up looking for work, the unemployment rate is actually 15.8 per cent. Yes, first-time claims for jobless benefits fell, but continuing claims rose by 56,000—suggesting people are having an extremely hard time getting rehired. And in Canada, we added 36,000 jobs—great, except that it was entirely due to a spike in self-employment. With all due respect to the self-employed, the job market won’t be in recovery until there’s a sustained rise in full-time, private-sector work.
The insiders’ track
Is this market rally for real? Corporate insiders seem to doubt it. Directors and senior managers of U.S. companies sold US$353 million in stock last month—8.3 times more than they bought. That’s a terrible sign. After all, why would anybody want to buy a stock when the CEO is selling?
Government “stress tests” revealed 10 of America’s biggest banks must raise US$74.6 billion in additional capital to weather the economic storm. If markets relapse, that could be a big problem.
SIGNS OF THE TIMES
- The “underwater mortgage” has become the symbol of consumer pain in this economic downturn. A new study published by real estate website Zillow.com estimates that 20.4 million U.S. homeowners now owe more on their mortgage than their home is worth—that’s equal to roughly 22 per cent of all homeowners. By comparison, analysts estimate that in the last real estate bear market in 1991, just 94,000 mortgages slipped under water.
- There are few economic barometers more reliable than the fortunes of Las Vegas casinos. When the world economy is strong, gamblers and conventioneers converge on Sin City by the millions. But last week, Wynn Resorts and Las Vegas Sands both reported quarterly losses of US$33.8 million and US$34.6 million respectively.
- Now is not the time to start hitting up customers for more cash. British retailer Marks & Spencer recently announced plans to charge higher prices for larger bras (cup sizes DD and up), because of the additional material they require. Busty customers overwhelmed M&S with complaints, and the company backed down last week after a consumer group, “Busts 4 Justice,” threatened a boycott.
- Companies looking for ways to beat the recession would be wise to start targeting the gay community. A new survey from Harris Interactive shows that gay households are more likely than others to increase spending on travel this year; plan to eat out more at restaurants; and are more likely than heterosexual travellers to stay at hotels while on vacation, rather than crashing with friends.
Economists, executives and politicians have rushed to declare that the worst of the global recession is behind us. Some are even predicting strong global stock markets through the normally sluggish summer months. But many still believe there are more shoes to drop as the financial system faces the prospect of more home foreclosures and job losses. Some say the biggest risk now is too much optimism.
“There are some glimmers of hope, not to put it any stronger than that. There’s some good signs in the economy.”—Jim Flaherty
“I think that everybody was in shock by the economy and all the business that was falling off a cliff in the last three months of last year, including me . . . It is increasingly clear that the worst is over.” —Rupert Murdoch
“After back-to-back declines in real GDP of more than six per cent (annual rates), the period of economic free fall seems over.” —Nigel Gault“While the worst consequences of the freezing of credit markets as a result of the failure of Lehman Brothers is now easing, it would be wrong to think that the global economic downturn is over. There is every reason to be concerned.”—Joseph Stiglitz
“The [summer] rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the world.”— Jeremy Grantham“The reality is that when it comes to the risks of the market, we have learned absolutely nothing from the past two years. Just as we learned absolutely nothing from the tech bubble and the calamities of markets past.”—Mark Cuban
THE WEEK AHEAD
Wednesday, May 13: The U.S. Commerce Dept. will report retail sales for April. Sales have been erratic over the past few months and analysts are expecting anything from a modest gain to a tiny decline.
Friday, May 15: Statistics Canada will report manufacturing shipments for March, and analysts are hoping for a strong gain of more than one per cent thanks to rising commodity prices.
Friday, May 15: The U.S. consumer price index will be released. All signs of inflation have evaporated. The focus now is on falling prices.