At the time of our February report, financial markets at home and abroad were under intense strains, with equity prices at multiyear lows, risk spreads for private borrowers at very elevated levels, and some important financial markets essentially shut. Today, financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain. Nevertheless, on net, the past few months have seen some notable improvements. For example, interest rate spreads in short-term money markets, such as the interbank market and the commercial paper market, have continued to narrow. The extreme risk aversion of last fall has eased somewhat, and investors are returning to private credit markets. Reflecting this greater investor receptivity, corporate bond issuance has been strong. Many markets are functioning more normally, with increased liquidity and lower bid-asked spreads. Equity prices, which hit a low point in March, have recovered to roughly their levels at the end of last year, and banks have raised significant amounts of new capital.
That’s the backdrop to our current situation. And here the picture turns brighter, as we glimpse the first solid signs since the recession started more than a year and a half ago that economic growth may be poised to resume. Indeed, I expect that to happen sometime this year. Financial conditions have improved markedly in recent months. The stock market has rallied and investor appetite for corporate bonds and other assets has rebounded, restoring access to capital at reasonable rates for many healthy companies, including financial institutions. Measures of stress in the markets for short-term funding have also diminished. At the same time, the housing sector finally seems to be stabilizing. Housing starts have leveled off and, in an encouraging sign, sales are beginning to improve. Meanwhile, house price declines may finally be abating. Consumer spending may also be stabilizing. Payrolls are still shrinking at a dreadful pace, but at least the momentum of job losses has slowed a bit in the past two months.
You'd think they were both readers of this blog...