Friday, April 24, 2009

When Will the Recession End?

Actually, I think this will wind up being a multi-prong set of articles because the answer will probably evolve over time.

Over the last few weeks there have been calls of a bottom in the economy, or green shoots or signs of hope or whatever. The central message has been things are getting better -- or at least declining at a less severe rate. I have been extremely reluctant to make that call for several reasons. First, the data is at best preliminary and therefore subject to revision in either direction. Second, it's only a few months worth of data at best. In general, the best that can be said of any of the this new information is it is running against a compelling downward sloping trend.

That being said, in recent conversations I've had about the economy two points have come out -- two points that I think must be conclusively resolved before I am comfortable saying we're through the worst.

1.) The problems in the financial system have to be resolved. This will take some time. Under the Geitner plan a bank that gets a poor grade on the stress test will have 6 months to find new capital or get a government injection of cash. The underlying idea here is the bank will try and sell itself during that time if it is possible. However, it still leaves us with a six month period during which the situation will be unresolved.

2.) The auto situation must be resolved as well one way or the other. Frankly, I don't think the US economy could withstand an auto bankruptcy right now. There are so many industries that feed into the auto industry and provide ancillary services that a bankruptcy would threaten a fairly wide swath of the economy and send any recovery into a tailspin. We have to come out of this with a sense of "we're totally out of the woods" before we can say we're coming out of a bottom.