There’s Nothing Normal About this Recovery
Wherever you look these days, headlines just keep contradicting one another. One says that more Americans have lost their jobs, while another is all excited about a new bull market in stocks. One product sells well, another doesn’t. First, lending is improving. Then, lending is at all-time lows. Which one is it: a recovery or a double-dip recession?
I wish there were more coherence in the financial media, but I understand why such a wide range of opinions and, ultimately, the inability, even among the smartest people in the world, to determine where the global economy and markets are going. Simply put, there is nothing normal about our world in the post-bursting of the credit and asset bubble environment.
Perhaps this is why clichés such as the “new normal” are so hot among economists and strategists. For example, four quarters after World War II ended, the U.S. real GDP was more than six percent (annualized). In contrast, today’s real GDP has barely expanded to 2.4%. Making things worse are economic forecast revisions and realizations that the crash of 2008 was even worse than we knew or expected it to be. According to the new statistics, today’s real GDP is actually one percent below its pre-recession peak.
We have 55 years worth of post-war data to reflect on. If this were a normal recovery, then two and a half years after the beginning of the recession, the economy should be peaking and breaking above the pre-recessionary high (GDP of eight percent). Well, that is clearly not happening! Additionally, real final sales as of June 30, 2010, came in at less than 1.3% on an annualized basis, which is only 0.1% higher than the rock bottom that the economy hit about a year ago. Now, real final sales typically expand to four percent on an annualized basis in the year or so after the recession is proclaimed over. The conclusion is simple: either this is the worst kind of recovery in recorded history, or not a recovery at all, but a prelude to a double-dip recession.
The same goes for the labor market, which is truly in a sorry state. Typically, 30 or so months after the economic recovery peaks, the U.S. payrolls would already show excesses of up to 1.1 million new jobs, or 2.3%. Today, however, the U.S. labor market is in a precarious position. Since peaking in December 2007, we are still 7.7 million jobs, or 5.6%, in the hole.
Wall Street has certainly been busy convincing us that everything is back to normal. Yet, none of the confidence gauges out there are showing that the convincing is working. For example, the University of Michigan consumer sentiment index for July is still sitting at rock bottom at 67.8. What was the average sentiment score during previous recessions? That number is 73.8. And, what is the average sentiment score during economic expansions? Well, that number is a whopping 90.9.
Not to be skewed by looking at only one market sentiment data provider, there is also the U.S. Conference Board consumer sentiment index, which was sitting in July at 50.4 on an annualized basis. The index average during recessions is 70.4 and 102 during expansions. There is also the National Federation of Independent/Small Business optimism sentiment index, which in June was 89 on an annual basis. However, the average during a recession was significantly higher at 91.9 and during an expansion at 100.2.
I don’t know about you, but the way all this looks to me is as if we have not yet resurfaced from the crash of 2008. What appears very clear is that the trough has started from a much lower point in the cycle than anyone initially believed, and that whatever progress was made subsequently was erroneously classified as a sign of recovery.