September 2009

The unemployment number for July was announced and surprisingly it declined. It was the first decline since April 2008. The non-farm payroll number showed a loss of 247,000. While that number is unacceptable, it was lower than feared. The stage was set, at least for a short period of time as the DOW and S&P 500 rallied to levels almost fifty percent higher than the lows of March 2009. As the equity market rallied, the bond market sold off, lowering prices and raising yields. For example the two year Treasury note traded above 1.31 percent. The fear factor had been removed, at least temporarily.

Each day brought a new set of economic statistics and as soon as they turned a little less bullish, the markets began to correct. Stories in the daily financial papers started to talk about the markets being overdone. They had gotten ahead of reality and a correction quickly followed.
Economic statistics such as retail sales, unexpectedly declined and loss of jobs was pointed out as the culprit. Another unexpected decline came in the consumer confidence number that was lower than forecasted. Now might be a good time to question the economists who may have gotten a bit too exuberant in their forecasts. Once again concern over jobs and wages were blamed for these shortcomings.

At the same time these economic statistics were being released, the Federal Open Market Committee (FOMC) was holding its two-day session in Washington, D.C. What was going to be done with the funds rate, which is currently at zero to .25 percent! The answer of course is nothing. It will remain unchanged for the foreseeable future.

The reason for their decision is painfully obvious. While I, and many others believe the recession is over, the recovery is still in its early stages. As I said before, while some of the heavy lifting has been done, a great deal still remains. According to the White House, President Obama reiterated his belief that unemployment will still reach 10 percent later this year. And let us not forget housing. While there appears to be signs of life, housing problems are far from over.

So what kind of a recovery can we expect, and what shape will it take? In the March 2001 FYI, we discussed the various letters that describe an economic recovery. Those letters are; L, U, V and W. First let me admit that I am no better at predicting the future than you. Having said that, I believe the letter that best describes the future economic recovery is the letter “L.” It is certainly not the letter I would have hoped for to describe the recovery. An “L” shaped recovery is best demonstrated by Japan’s “lost decade.” Make no mistake, no one is suggesting the recovery in the United States is going to take a decade to complete, but I believe an extended period of time will be required. 

It appears if I am correct, a journey of two steps forward and one step back will take much longer to complete than I first envisioned. All I can do is hope I am wrong.