Recession May Have Bottomed
A sharp rebound in consumer confidence and other upbeat indicators suggested Friday that the recession may have found a bottom and a recovery could be in the cards early next year.
Consumer sentiment improved markedly in early December as the shock of Sept. 11 began to wear off and Americans anticipated better days, according to a monthly survey by the Conference Board.
In addition, sales of new and existing homes jumped last month, orders for some big-ticket durable goods rose, and new claims for unemployment benefits increased but less than expected. Analysts watch consumer spending closely because it accounts for about two-thirds of all U.S. economic activity.
The positive reports cheered investors and surprised analysts. At a minimum, they said, it signaled that the economy is shrinking at a slower rate and should begin to expand again by mid-2002, if not sooner.
“If we’re contracting now, we’re contracting at a much slower pace, and it’s possible the economy is already hitting bottom,” said William C. Dudley, chief domestic economist at Goldman, Sachs & Co. “I think it’s fair to say this recession is shaping up as a very mild one.”
Even so, it will be months before the improvement begins to show up in the nation’s battered job market, economists cautioned. More layoffs are coming, they said, and the jobless rate will keep rising until businesses become firmly convinced that the turnaround is real.
“Certainly it’s very encouraging to see more and more leading indicators turn around. But just because leading indicators turn up, it doesn’t mean the recovery is starting,” UBS Warburg economist Susan Hering said. “With some lag, we’ll see a recovery.”
Lower Energy Prices an Unexpected Windfall
Although predictions vary from one statistic cruncher to another, most economists believe that the turning point will come during the first half of 2002. The optimists say the economy could begin expanding within a few weeks; more cautious analysts expect the downhill slide to continue until late spring or summer.
“It’s pretty standard in the middle of a recession to get a pause, when it almost looks like you’re getting a recovery, but it’s followed by another down leg,” Merrill Lynch senior economist Stan Shipley said. “We think we’re in the midst of that pause here.”
Based on corporate restructurings in the works, Shipley said his company expects more rounds of substantial layoffs in January and February. The carnage is likely to cause confidence to decline again, taking consumer spending with it.
Household spending has held up surprisingly well during the current downturn, cushioning a sharp contraction in the business sector after the bursting of the technology investment bubble in early 2000.
Even if the recession lingers for a few more months, economists said the ingredients are in place for a robust recovery by midyear. The Federal Reserve has lowered interest rates 11 times this year, providing a powerful monetary stimulus. Congress primed the pump with nearly $40 billion in tax rebates in the summer, $40 billion in emergency spending after Sept. 11 and a $15-billion airline bailout. In the private sector, the massive liquidation of excess inventories will end at some point, setting the stage for an industrial rebound as businesses begin restocking.
In addition, the nation has received an unexpected windfall from lower energy prices, which are expected to boost consumer income by as much as $80 billion this winter. That’s twice as much as last year’s rebate checks.
Consumer Expectations Surge in December
OPEC ministers, meeting in emergency session in Cairo, agreed Friday to implement another temporary cut in oil production in an effort to shore up petroleum prices. But economists said they doubted that the reduction would cause prices to rise substantially.
“Lower energy prices have made people feel more wealthy and more comfortable,” said Peter E. Kretzmer, senior economist at Banc of America Securities. “They’ve taken away some of the feeling that all things were going wrong.”
The optimistic tenor of Friday’s economic reports lifted spirits slightly on Wall Street. The Nasdaq composite index increased 0.6% to 1,987.26, the S&P; 500 rose 0.3% to 1,161.02, and the Dow Jones industrial average inched up 0.1% to 10,136.99.
Several economists said they were particularly impressed by the big jump in consumer confidence reported by the Conference Board, an industry-funded research organization that surveys 5,000 households every month.
The overall confidence index surged to 93.7 in December from 84.9 in November, the first increase in six months. Many economists had expected the reading to post a slight decline.
Even more significant, some analysts said, a separate index of consumers’ expectations about conditions six months from now rocketed to 91.5 from 77.3 the previous month. The expectations index is considered a good indicator of an economic turnaround.
More evidence of economic strength was evident in the housing sector. Sales of new homes jumped 6.4% in November to an annual rate of 934,000, the highest level recorded since the recession began in March, the Commerce Department said. In a separate report, the National Assn. of Realtors said existing-home sales rose 0.6% to an annual rate of 5.2 million.
Home sales have been buoyed by low interest rates, providing another cushion for the declining economy. Some economists had feared that the housing market would soften, deepening the recession, but there is no sign of a slowdown yet.
Another positive signal was provided by the Commerce Department’s monthly report on orders for cars, appliances and other expensive durable goods that tend to sell poorly during recessions. Although overall orders fell 4.8%, the decline was almost entirely attributable to a big drop in defense spending on aircraft and other military hardware.
Orders for non-defense durable goods increased 2.7%, with gains across the board. Auto orders, boosted by no-interest financing, were up 4.5%. Machinery orders increased 2.4%, and computers and other technology hardware rose 2.7%.
Still more optimism was generated by the weekly tally of new claims for unemployment benefits. Although jobless claims rose 7,000 to 392,000, the increase was less than expected, and a less volatile four-week moving average fell to its lowest level since the week of the Sept. 11 terrorist attacks.
Wells Fargo chief economist Sung Won Sohn said the confluence of positive signals has persuaded him that the current downturn will turn out to be unusually shallow. He expects the economy to contract 1% from peak to trough, compared with a postwar average of 2%.
“This will be one of the mildest recessions of the postwar period,” Sohn said. “We are probably hitting the bottom right now.”
