Vital Signs: Recession's End Comes Into View

The end of the worst recession since the 1930s is coming into view--slowly. It’s still a ways off, but for the first time since the economy began to stumble in 2007, several traditional pre-recovery patterns are popping up.

First of all, the declines in many key indicators are getting smaller. That’s the first sign of a transition from contraction to stabilization to actual growth. Fading weakness is already evident in consumer spending and housing sales and starts. Plus, the record decline in business inventories in the first quarter is a big reason to expect firmer output in coming months. As companies eliminate their excess stockpiles, reordering rates will pick up, and so will production. Already, purchasing managers’ surveys of both manufacturing and nonmanufacturing activity in April point to less of a drag on growth.

All this is happening just as the first elements of the fiscal stimulus, including cuts in tax withholding and a special payment to Social Security recipients, are supporting household incomes and adding a steadying influence to demand. Consumer spending rose in the first quarter, and April retail sales, due this week, will offer further evidence on how consumers are faring. This week’s reading on May consumer sentiment will also shed light on the household mood. Although jobs remain consumers’ No. 1 worry, their spirits have been buoyed by the belief that Washington’s economic policies will improve economic conditions, according to the Reuters/University of Michigan Surveys of Consumers.

There are even signs of hope coming from the job markets. In particular, first-time claims for unemployment insurance have fallen decisively in recent weeks. The four-week average of claims, which fell to 624,000 per week on May 2, appears to have peaked in early April at 659,000 per week. Based on historical patterns, a drop in claims of that size, if sustained, is a sign that GDP growth is stabilizing. However, claims would have to fall well below 500,000 to indicate any meaningful move toward a stabilization of payrolls.

One problem is that traditional gauges of recovery prospects may be of less value in the current untraditional recession. Economists know that an upturn depends crucially on three factors specific to this downturn. First, the fear of bank insolvency has to be removed from investors minds, if the stock market is to play its usual recovery role in shoring up wealth. In that regard, public disclosure of the government’s stress test results appears to be helping. Second, outside the banking sector, credit-market functioning must continue to improve. The Federal Reserve's asset purchase programs are showing positive results there. And third, housing sales and starts must continue to stabilize in order to generate the expectation that home prices will stop falling. That will have positive feedback effects on the prices of mortgage-related assets.

Investors appear to be encouraged by all this. That’s important, since the stock market always turns up decisively before the economy does. Right now, the best you can say about most economic data is that it’s less bad, but past business-cycle patterns show that is always the first halting step toward recovery.

Here’s the weekly economic calendar, from Action Economics:

Top Economic Reports
Top Reports Date Time For Median Estimate Last Period
Trade Balance ($Billions) Tuesday, May 12 8:30 a.m. March -$28.0 -$26.0
Goods & Services Exports ($Billions) Tuesday, May 12 8:30 a.m. March $125.0 $126.8
Goods & Services Imports ($Billions) Tuesday, May 12 8:30 a.m. March $154.0 $152.7
Treasury Budget ($Billions) Tuesday, May 12 2:00 p.m. April -$65.0 -$192.3
Retail Sales Wednesday, May 13 8:30 a.m. April -0.1% -1.1%
Retail Sales (Excluding Autos) Wednesday, May 13 8:30 a.m. April -0.1% -0.9%
Export Price Index Wednesday, May 13 8:30 a.m. April -0.2% -0.6%
Import Price Index Wednesday, May 13 8:30 a.m. April 0.4% 0.5%
Business Inventories Wednesday, May 13 10:00 a.m. March -0.9% -1.3%
Producer Price Index Thursday, May 14 8:30 a.m. April 0.3% -1.2%
Producer Price Index (Excluding Food & Energy) Thursday, May 14 8:30 a.m. April 0.1% 0.0%
Consumer Price Index Friday, May 15 8:30 a.m. April 0.0% -0.1%
Consumer Price Index (Excluding Food & Energy) Friday, May 15 8:30 a.m. April 0.2% 0.2%
Empire State Index Friday, May 15 8:30 a.m. May -13.0 -14.7
Industrial Production Friday, May 15 9:15 a.m. April -0.5% -1.5%
Capacity Utilization Friday, May 15 9:15 a.m. April 68.9% 69.3%
Consumer Sentiment Index (Preliminary) Friday, May 15 9:55 a.m. May 63.0 65.1
Other Reports and Events
Reports/ Events Date Time For
SPEECH: Fed Chairman Bernanke Monday, May 11 6:30 p.m.
NFIB Survey (Small Business) Tuesday, May 12 7:30 a.m. April
ICSC-UBS Store Sales Tuesday, May 12 7:45 a.m. May 3-9
Johnson Redbook Weekly Store Sales Tuesday, May 12 8:55 a.m. May 3-9
Job Openings and Labor Turnover Tuesday, May 12 8:30 a.m. March
SPEECH: Boston Fed President Rosengren Tuesday, May 12 8:30 a.m.
Mortgage Applications Wednesday, May 13 7:00 a.m. May 3-9
SPEECH: Fed Governor Duke Wednesday, May 13 10:30 a.m.
Initial Unemployment Claims Thursday, May 14 8:30 a.m. May 3-9
Treasury International Capital Report Friday, May 15 9:00 a.m. March
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