Signs of Hope?

Amid all the gloom there are a few signs that the economy’s downward spiral may be ending and that a slow recovery later this year is in the offing. It will soon be Springtime after all, so how far away can the warmer and better days be?

Take the credit markets. Three month LIBOR, one of the rates banks use to lend to each other has come down sharply from a peak of around 5% to below 1.5%. That is a sure sign that confidence is rebuilding in the financial world. Other spreads in the credit markets are well down also from their dire peaks, which supports this view. And the market for newly issued corporate debt has shown some life after being practically dormant for months. So evidently there are some investors with cash who are beginning to have a more optimistic outlook.

In the real economy wages have started to rise: inflation adjusted hourly wages rose 4.5% in January after a 3.3% rise in December. Orders for capital goods [stuff with a useful life of more than few years] rose last month for the first time in a while which suggests businesses are taking the opportunity to refit while interest rates are so low. Both consumer and producer prices have also started to rise, which is usually a sign of pressure due to limited supplies and increasing demand. And the Institute of Supply Management [ISM] which measures manufacturing sentiment in monthly surveys reports that the contraction is slowing quickly: inventories are falling, new orders rose slightly, and the overall ISM index rose from its low point, although it still indicates shrinkage.

None of these things are certain indicators of recovery. They are all fragile one or two month changes for the better and could be swamped easily by an adverse event like a big bank failure. Plus consumer confidence is at an all time low which tells me that consumption is not about to kick into gear. And like all economic statistics one or two months are not a trend.

Still, just like the longer days portend Spring, these scattered indicators may be the first sign that the worst is almost over. The road to full recovery will be lengthy given the damage done, the depth of the hole into which we fell, and the need to restore savings which implies less spending than before. So we won’t see positive quarterly GDP until later this year or even early next, but there are a few signs of life.

Maybe.