On July 20, Leading Economic Indicators were announced and they were up .7 percent in June. Big deal, right! Well in fact, it was a very big deal. This increase marked the first time the index has been positive for every month within an entire quarter since 2004, for those counting, that’s five years.
It was a big enough event for a story on Bloomberg to be titled “Recession in U. S. May Have Already Ended, Leading Index Shows.” This is earlier than I had expected. I wrote in an FYI a few months ago, that I believe we have seen the lows in the stock market in March. I also believed there was more work to be done before the recession was over. While I was talking about the third or fourth quarter, a statement such as this in the first month of the third quarter seems early. Now you can appreciate why I said that the increase in the Leading Economic Indicator’s (LEI) number was a big deal.
If the recession is officially dated by the National Bureau of Economic Research (NBER) as having ended in June or July of this year, it doesn’t mean we should break open the champagne. Why I say that is painfully obvious; the consumer continues to suffer. We are saving our money. We are de-leveraging and not using our homes as an ATM machine. The number of folks buying new homes and new cars is limited. The average age of an automobile is over nine plus years old. The unemployment number continues to approach ten percent. It would appear the consumer, who makes up two-thirds of GDP, is not a large part of the recovery.
So how can this recession be ending? I believe it is approaching an end as the result of excess liquidity. Let’s be more specific, by liquidity I mean money. There are literally trillions of dollars on the sidelines waiting to be invested. This excess liquidity is a result of actions taken by the Federal Reserve and the Administration. All we need to do to demonstrate this is to look at the rates on the current treasury yield curve. With all of the excess funds available, even the huge supply of treasuries coming to market is overpowered by the demand.
These funds are held by extremely competitive investors who do not want to be out performed by their peers. If the consumer can’t buy their way out of this recession, there is certainly enough other money available to accomplish the task.
