Gloomy Data: Whither Those Green Shoots?

The accumulated data releases over the past few days indicate that the economy remains deeply mired in recession. For every one of Bernanke’s ‘green’ shoots there seems to be a counterfactual.

Today we hear that durable goods orders sank dramatically during the first quarter. The drop in March was 0.8%, which caps off a fall of 27% for the first quarter as a whole when compared with the same quarter last year. Clearly that’s not good. Remember that durable goods are things with longer lives and generally higher prices: the kind of stuff you furnish a home with. The hit to manufacturing is enormous: production is fell at an annualized rate of 20% in the first quarter, the sharpest decline since the end of World War II.

One statistic I am watching carefully is the ratio between inventories and production. This ratio gives us an idea of the likelihood of future manufacturing trends Obviously if inventories are increasing rapidly businesses will tend to reduce output so as to avoid having to carry excess inventory. Conversely if inventories appear to be running low businesses will tend to step up output so as to avoid the loss of potential sales. There had been early signs that inventories were reducing, which is why I began to argue that we might see an ‘inventory led’ recovery later this year. Unfortunately that decrease reversed course slightly in March, putting off even further one possible reason for optimism.

To demonstrate how desperate we are for good news this morning’s release of the new home sales data, which under normal circumstances would have been treated as awful, brought a certain cheer to stock prices. The March decline of 0.6% was greeted as being a hopeful sign that the housing market may be reaching its nadir. I am a little skeptical. Yes there indeed signs of fairly strong home sales in regions that have been particularly hard hit by the collapse of home prices: California especially. But approximately half of those sales are of distressed properties whose prices are often 20% – 30% below the already severely depressed prices of other homes in the same neighborhood. So while houses are being bought and sold the pressure on prices is still downward which indicates even more trouble for the mortgage lenders as previously good loans gradually turn bad as whatever equity remaining in some homes is eroded away. Couple this erosion with rising unemployment and the outlook for recovery in real estate remains very weak.

So, overall, the economy is still shrinking. Some forecasters are now saying they expect GDP to have declined by an astonishing 6% annual rate in the first quarter. Such a decline pulls us even further from the potential of the economy and opens up the gap between our optimal utilization of our resources and where we actually are. Getting back to health just seems to get harder.

Clearly we still have a very big hole to dig out of. So while there may be a few, infrequent, ‘green shoots of spring’, I think it fair to say we remain stuck in the deep winter of this recession.