Wednesday, June 3, 2009

Will We See Growth in the Third Quarter?

From Barron's:

The recent flow of data continues to be consistent with a bottoming out of the economy this summer and the resumption of growth sometime in the second half of the year (we believe it will be the third quarter). Against this backdrop, there is ongoing concern that the backup in long-term Treasury yields will spoil the party. However, as we've pointed out before, the slope of the yield curve (which has widened), not the level or rate of change in Treasury yields, bears the strongest leading correlation to future GDP growth. The rate of change in corporate-bond yields (which have fallen as Treasury yields have risen) also bears a significant leading (inverse) correlation to future GDP growth.

Lastly, the spread between risky and riskless bonds (which has narrowed as Treasury yields have risen) also bears a significant leading (inverse) relationship with future growth. In sum, as Treasury yields have backed up, the yield curve has steepened, corporate-bond yields have receded, risk spreads have compressed, and other risky assets (equities, emerging-market stocks) have been rallying. This is consistent with faster future growth, not a tipping-over of the recovery process.

In other words, massive fiscal stimulus, monetized by the Fed, appears to be ramping up demand, which the financial markets should discount in advance.

What the article says (essentially) is bond traders are better forecasters.

Personally, I think this is a but premature. Instead, I think the 4th quarter is the most likely target for when growth might turn positive.