Still, I continue to think that improvement in business activity is not too far off. Interest rates are low and financial conditions are improving, albeit unevenly. Major fiscal policy stimulus is now under way and should add to aggregate demand in a timely way unless consumers and businesses turn exceedingly cautious. Moreover, adjustments which typically occur in a contraction ultimately help to lay the foundation for renewed growth. For example, as business continues to reduce output and employment, inventories shrink, and at some point aggregate supply falls below even the diminished level of demand, leading to increases in hours worked, net new hiring, and a general pickup in activity. There are, moreover, signs that consumer spending is in the process of stabilizing after its sharp fourth-quarter decline and that progress has been made in working off the inventory of unsold, unoccupied homes and condos.
We all know about interest rates; they are now as low as they possibly can be. Let's take a look at commercial paper:
Click on all images for a larger image
The above chart shows interest rates spiking but now returning to 2008 levels. That tells us the credit crisis is easing.
The above chart shows which paper was responsible for the big upward spike in commercial paper rates. The big culprit was a2/p2 non-financial paper.
Notice there has been a big drop in asset-backed and financial commercial paper issuance. A previous commenter noted that asset-backed issuance could have been in a bubble caused by the securitization binge of the last 5-7 years. Therefore its drop is a natural consequence of the credit bubble deflating. The drop in financial paper is the result of the lack of trust financial institutions have regarding the health of any other financial institution. Hence, there is a drop in activity.
I talked about consumer spending yesterday. I don't think there is enough data to say with any degree of certainty that they consumer is "coming back" -- especially after the last drop in 2008.
At best, I think we can say retail spending might be decreasing a bit less than before -- especially considering this:
Wary shoppers weren't in much of a buying mood in March, keeping a tight lid on spending and pushing sales at Wal-Mart and many retailers below views.
But reports from some chains painted a brighter picture for days ahead.
Sales at stores open at least a year fell 1.6% vs. a year ago, says Ken Perkins, president of Retail Metrics. Wall Street expected a 0.4% dip. A hefty 60% of retailers missed views.
And consider the accompanying chart:
And then there is this:
Among the positive indicators, the government said exports rose in February for the first time in seven months. Initial claims for jobless benefits fell more in early April than any week since the start of the year.
Note that exports rose "for the first time in 7 months." That means the latest month's figures are counter-trend. And unemployment claims are looking ugly as well:
In general, I do agree that we'll see a turnaround by the end of the year. But let's not get carried away with the strength of the recovery or the "emerging signs of an economic turnaround." There are still plenty of problems out there.
