Is There Any Good Economic News?

How Bad Has It Become?
When I last looked at the severity of the recession, on February 7th -- just a few short weeks ago, it appeared to be the 12th worst recession in US History (excluding early recessions for which good data are not available.)

What a difference a few weeks make! A severe downward revision to the 4th Quarter GDP estimate has significantly escalated my projection of where the recession ranks -- and bear in mind that this only includes what has happened through the 4th quarter of last year as we don't yet have the damage estimate from the first quarter of this year.

(1) The Great Depression -- 1929-1933 -- 26.6% contraction
(2) The Post-WW2 Bust -- 1945-1947 -- 12.9% contraction
(3) The 1957-1958 Recession -- 3.8% contraction
(4) The Great Depression 2 -- 1938 -- 3.4% contraction
(5) The 1981-1982 "Double Dip" -- 2.9% contraction
(6) The 1953-1954 Recession -- 2.7% contraction
(7) The 1974-1975 Recession -- 2.5% contraction
(8) The 1980 Recession -- 2.2% contraction
(9) The Post-WW2 "Double Dip" -- 1949 -- 1.8% contraction
(10) The 2008-2009 Recession -- 1.7% contraction
(11) The 1960 Recession -- 1.3% contraction
(12) The 1990-1991 Recession -- 1.3% contraction

So far, we have the 10th worst recession in American history. We've now far surpassed the 1990-1991 recession, meaning you would have to go back to the early 80s for a comparably bad economy. A 1.7% contraction would be very recoverable if we are at the end. But we are not.

If the pace of decline we saw in the 4th quarter of last year continues through the 1st quarter of this year (and all indicators are that things are at least as bad if not worse so far this year), this recession will climb to 5th on the list -- on par with 1981-1982 and flirting with being the worst since the 1940s.

So when will it get better?

To quote a great many economists -- it has to first start getting worse.

Continued Trouble Signs
As I previously wrote, the stock market is generally thought of as a leading indicator of economic conditions. And in case you have been hiding out for the past month, the market has gone from bad to worse. All of the gains in the past 11 years in the broad market indices have been erased. And it is not clear yet that things have bottomed out. The market moved up today -- this could be the sign of a trough, or just a temporary blip in a continued downward spiral.

Auto sales are anemic. Every major foreign and domestic auto maker save Kia and Subaru are in some kind of talks to try to get a bailout from their home governments (Ford has asked for a bailout only as a contingency.) At the current rate of sales, we are on close to a 30 year replacement cycle for the automobiles in this country.

Home sales also continue to fall and inventory remains well above the benchmark 6 months that is needed for price stability. At the current sales and inventory levels, prices will continue to fall.

Wall Street earnings reports have been awful. Aside from the carnage in the auto and financial industry, a broad swath of companies are losing money and slashing or removing dividends. Everybody from International Paper to Office Max to GE is cutting payouts to shareholders by large amounts. Only Wal-Mart and McDonald's appear to be unimpacted or positively impacted by the current conditions, but this is consistent with recessionary behavior.

Finally, consumer confidence remains at record low levels, indicating a low likelihood that consumers will start spending again.

Signs of Hope?
The conference board, which tracks both current economic conditions and a leading indicator that is designed to show likely conditions six month out, released a February report that showed (no surprise) that current economic conditions continue to deteriorate (the CEI -- measuring current economic conditions declined by 0.5% each month for the past 3 months), the leading indicator actually showed a modest gains in December and January (0.1% and 0.2% respectively) after steadily falling since June of 2008. Since the LEI was pretty accurate in foretelling the collapse at the end of last year, it bottoming out and gaining slightly indicates that the contraction may end in the May or June timeframe this year.

This does not, however, mean that things will return to normal. The conference board's analysis indicates the most likely scenario is a stagnant or slow growth economy which may persist for some time, meaning that things may stop getting worse by mid-year, but not get much better for a while.

Also encouraging is that the current rate of auto sales is unsustainable. People can't make cars last 30 years. Purchases are being delayed, not cancelled altogether. Sure, some people may cut back on car ownership. But others will buy eventually, even if they trade down. It's hard to believe that the auto industry isn't near the bottom. Used car prices are spiking suddenly as people seek used cars in place of new. This will have the natural effect of moderating the market and pushing some people back into new cars.

And low interest rates and falling prices will eventually lure people back into home buying. I don't think home values (particularly in overheated markets in the West and Florida) will return to their highs, they may at least stabilize and the inventory may start to get worked off.

What's Needed
My simple plan:
(1) Spend that stimulus -- NOW! -- consumers need money in their pockets to get the economy moving
(2) Much better execution on bank stabilization -- banks must lend for money to flow through the economy
(3) Get mortgage recovery going now -- this will help the banking situation, stabilize home values and restore consumer confidence
(4) Get positive! -- consumer confidence is partly psychological -- if people think things will get worse, they probably will, if they think they will get better, they probably will

Presidential Campaign Misdirection
In 1992, Bill Clinton ran on "it's the economy, stupid!". The economy was already in recovery by the time he showed up and his administration focused largely on balancing the budget through tax increases, defense cuts and welfare reform.

In 2000, George W. Bush ran downplaying foreign policy experience. He spent the bulk of his administration waging two wars in Iraq and Afghanistan.

In 2008, Barack Obama ran on getting us out of Iraq. Now we are staying about the same length of time that we would have if John McCain had won and the issues at stake are largely economic.

Guess we should start paying attention to a candidate's entire platform, not just what we think is important today.