Economic Update

Current Reports - A weekly review of the implication of current and expected economic data.
Trendlines - Periodic perspective on the outlook for economic growth, inflation and interest rates.
Federal Reserve - These reports will analyze current and upcoming Federal Reserve policy.

Current Reports

The Elephant in the Room
The Official Recession Is Likely Over But The Employment Misery Continues

With the October Unemployment Rate breaking into double-digit territory, the media and the political arena will focus even more attention on the continuing weakness in labor market data. Abundant anecdotal information and consumer confidence surveys reveal that jobs today and jobs down the road are the consumer’s #1 concern. Initially, this heightened policy debate may add to these confidence woes. With the 2010 election season already underway, new Washington job proposals seem increasingly likely.

Despite the current gloomy employment conditions, the overall economy is still likely to generate roughly moderate growth close to 3% in Q4 2009 following the officially estimated roughly Q3 3.5% E1. Even as the consumer continues to struggle, the favorable inventory swing is gaining momentum and the largest part of Stimulus Plan spending lies ahead.

Historically, Fed policy has been highly sensitive to labor conditions. The Fed has usually waited to raise the Fed Funds Target Rate months or quarters after labor conditions have improved. The Fed’s announcement following the November 3,4 FOMC meeting endorsed this approach. The Fed commented that household spending "remains constrained by  ongoing job losses". While the Fed believes that a strengthening of economic growth is developing, it is committed to maintaining "exceptionally low levels of the federal funds rate for an extended period". At the same time, the Fed remains committed to continued gradual implementation of its Exit Strategy; for example, reduction in its purchases of mortgage-backed securities and agency debt.

Trendlines

October 2009
Opinion Editorial - Economic Outlook

When a recovery doesn't look - or feel - like a recovery, or what does the CFL have to do with today's economy?

While we have not heard the official word yet, it seems likely that the Great Recession is history. Even Federal Reserve Chairman Ben Bernanke in a recent public speech at the Brookings Institute said it was "very likely" that the recession was over.

In today's parlance, someone should be saying, "Wait for it," because those looking for broad, consistent signs of recovery will likely find themselves waiting. Housing is still weak. Auto sales have collapsed to pre-clunker levels. Consumer confidence remains near historic lows (though it's improved in recent months). Unemployment is high - about 10 percent nationwide - and likely headed somewhat higher. Is this what we call the end of a recession?

Luckily for all of us trying to understand the economy, football is back - the good old CFL season. No, not U.S. college football, but our friends to the north in the Canadian Football League. The CFL's rules allow for multiple players in motion before the ball is snapped. This movement can be confusing, and the rule allows for players to build maximum momentum when the play begins.

Economically, we are at the beginning of a CFL play, and we have momentum in some areas that point to an end of the recession and recovery. Most telling is that there has been some growth in manufacturing activity, the most recent Beige Book showing a "generally stronger" increase in manufacturing orders. Manufacturing output increased 1.2 percent and 0.9 percent, respectively, in August and September.

The average consumer saw a reduction in inventory, as store shelves became barer and barer over the last year. With the coming holiday season, low inventories are building somewhat - both because the cupboard was empty and in muted hopes for the holiday shopping season. As the recovery begins, the initial momentum in the economy is from replenishment of these drawn-down inventories and from slightly increasing but still weak demand.

From this point, it gets less clear. Returning to the football analogy, momentum often meets momentum. The economy is still weak, in need of more of the already-approved stimulus spending. We face headwinds of high unemployment; the end of beneficial governments programs, such as the home-buyer credit; longer-term threats, such as the devalued dollar; and the costs incurred to spend our way out of the recession: a tremendously increasing national debt.

It may be that the rules of our current economy are different in more ways than the conventional economic game we've seen for 30 years. We see two things that ultimately lead in the same direction - toward a slow, stretched-out recovery.

The government has only some influence over these headwinds. Unemployment will likely remain high into the middle of 2010 because companies will not begin hiring aggressively until AFTER a sustained level of increased demand requires it.

And that increase in staffing may be slow to develop because of something we've seen in consumers. More and more, consumers are choosing to build personal savings and pay down existing debt. There is a bit of "chicken and egg" idea here, but basic economic changes do have a lasting effect on consumer behavior, and vice versa.

In prior recent recessions, consumer spending provided the greatest momentum emerging from downturns. But the consumer does not have this ability or willingness this time. The business sector and government spending must carry the greatest load.

The official recovery is likely underway, but the speed and steepness of the recovery are being dampened by consumer behavior. Today, consumers have a limited capacity and interest in spending outside of necessities, and they are paying down debt. This will likely make the current recovery seem less like the feverish pace of the CFL motion offense and more like the hard-fought advances of 1950's-style U.S. football - slow, methodical, with a reliance on "three yards and a cloud of dust."

Federal Reserve
September 23, 2009

The September 23 Fed announcement included a shift in its economic outlook to a better tone -- the first time in a very long time! As universally expected, 1] the FOMC maintained the Fed Funds Target Rate at 0.00% to 0.25% and 2] announced a small step in market activity to reduce stimulation. The Fed is likely to continue to reduce its recent massive stimulative program in small steps as the economy moves along a tentative, post-recession path. The next meeting is scheduled for November 3, 4.

RC Allsbrook, CFA
Chief Economist
Regions Financial Corp.

Information contained herein is based on data obtained from recognized sources believed to be reliable. This information has not been verified by us and we do not make any representations about accuracy, completeness or reliability. Any opinions expressed are solely those of the author and are subject to change without notice.