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7 Faint Signs That The Economy’s Bottom Is In Sight

There are opaque and early signs that the U.S. econ­omy has started the begin­ning of a bot­tom­ing process. Just like a div­ing sub­ma­rine needs to stop its down­ward motion and reach its low­est depth before it can resur­face, the econ­omy needs to go through the steps of slow­ing its decline and sta­bi­liz­ing before it can start ris­ing again. Some recent eco­nomic data seems to sug­gest that the rate of eco­nomic decline has started to slow and that some­time in the sec­ond or third quar­ter the bot­tom maybe found.

Of course, exter­nal events such as a large nat­ural dis­as­ter, war or a regional eco­nomic col­lapse (like of China, Japan, the EU or East­ern Europe) will push the U.S. into a renewed freefall. But, assum­ing the rest of the world isn’t dead weight on the U.S. econ­omy, we are head­ing into a period of crummy eco­nomic per­for­mance with a dra­mat­i­cally dimin­ished base of recur­ring eco­nomic activ­ity. The eco­nomic bot­tom­ing won’t feel like recov­ery because it won’t be; it will merely be an arrested freefall of a dam­aged economy.

Recent news on con­tin­ued home price defla­tion and sales, Bernanke’s tes­ti­mony that the econ­omy could be worse than expected and record low con­sumer con­fi­dence all mean the econ­omy is still shrink­ing. The econ­omy is, how­ever, start­ing to show signs of shrink­ing at a slow­ing rate which is the begin­ning of the bot­tom­ing process.

The early signs of find­ing a bot­tom include:

  • Money sup­ply is essen­tially sta­ble and in the case of M1 slightly down (on a sea­son­ally adjusted basis) since the begin­ning of Jan­u­ary.


    Money sup­ply (as mea­sured by sea­son­ally adjusted M1 and M2) has sta­bi­lized and is no longer grow­ing at weekly dou­ble digit rates. Sea­son­ally adjusted M1 is actu­ally slightly down since the begin­ning of Jan­u­ary and sea­son­ally adjusted M2 has been essen­tially unchanged since the mid­dle of Jan­u­ary. Expo­nen­tial money sup­ply growth is a sign that the Fed­eral Reserve is try­ing to per­form eco­nomic resus­ci­ta­tion while slower money sup­ply growth indi­cates that the Fed­eral Reserve believes that the econ­omy is start­ing to sta­bi­lize. Hope­fully the Fed­eral Reserve knows more about the econ­omy than we know.


  • Excess reserves, while still at his­tor­i­cally unprece­dented lev­els, are drop­ping.


    Excess reserves at the Fed­eral Reserve are a barom­e­ter for the amount of cash hoard­ing that is tak­ing place by banks. When banks hoard cash they increase their deposits at the Fed­eral Reserve and “excess reserves” are cre­ated. On Jan­u­ary 13th Ben Bernanke gave a speech where he said that when banks start lend­ing again excess reserves will decline. Excess reserves peaked in early Jan­u­ary at approx­i­mately $843 bil­lion and have been steadily declin­ing so that as of Feb­ru­ary 11th excess reserves were down to $611 bil­lion. While the cur­rent level of excess reserves don’t mean that the econ­omy is healthy (prior to the cri­sis excess reserves were around $2 or $3 bil­lion), the direc­tion of excess reserves is down which is a good sign.


  • After 5 straight months of pro­ducer price defla­tion, PPI increased by 0.8% in Jan­u­ary.


    The econ­omy won’t slow its freefall as long as there is defla­tion. The PPI data for Jan­u­ary was very good news regard­ing pro­ducer prices. While one month of pro­ducer price increases doesn’t mean defla­tion is gone, the amount of the increase and that there were increases in fin­ished goods sug­gests sta­ble demand at cur­rent depressed inven­tory, price and pro­duc­tion levels.


  • Con­sumer prices increased in Jan­u­ary by 0.4%, before sea­sonal adjust­ments, which indi­cates that the risk of run­away con­sumer price defla­tion has got­ten lower.


    Just like the PPI num­bers were a good sign of restored supply/demand equi­lib­rium, the CPI num­bers also sig­naled that con­sumer prices maybe find­ing a floor. If the econ­omy is going to find a bot­tom con­sumer prices can­not be drop­ping. January’s CPI num­bers were a good sign for the economy.


  • Hous­ing con­struc­tion and auto­mo­bile man­u­fac­tur­ing are hit­ting bot­tom; after all $0 of sales is the absolute bot­tom and the U.S. is get­ting close to that boundary.

    These two sec­tors prob­a­bly can only go up from here. When pro­duc­tion and sales hit post WWII lows and approach “$0″ of sales, there isn’t much far­ther to fall which by def­i­n­i­tion puts them at a bot­tom. And, believe it or not auto­mo­bile sales are show­ing the signs of future strength. Used cars sales were rea­son­ably strong in Jan­u­ary with some price hard­en­ing tak­ing place. When used cars go up in price that is usu­ally a pretty good pre­dic­tor of new car sales rebounding.


  • A few weeks from now fis­cal stim­u­lus will start kick­ing in.


    Pay­roll tax cuts from the fis­cal stim­u­lus will begin in the next few weeks and will start to pro­vide some added dis­cre­tionary income to con­sumers. If the stim­u­lus works as planned this should pro­vide some addi­tional cash for con­sumer which will prop up demand. Also, con­struc­tion spend­ing from stim­u­lus bill will start to help the econ­omy in the next few months.


  • The newest ver­sion of TALF hasn’t started yet but when it does it will pro­vide addi­tional cash to prop up con­sumer demand.

    TALF is a tril­lion dol­lar pro­gram that should almost imme­di­ately help con­sumers get financ­ing for pur­chases of auto­mo­biles, edu­ca­tion and other con­sumer related items. TALF will also pro­vide some relief for SBA lenders and small busi­nesses. As TALF kicks in it should pro­vide some addi­tional under­ly­ing sup­port for con­sumer demand and pro­vide sup­port to the economy.

Let’s hope that what the U.S. econ­omy is look­ing at the bot­tom and not its own reflec­tion before being pulled down into a deeper abyss.

Posted in: BANKS, Bernanke, CPI, Credit Crisis, Deflation, Economic Statistics, economy, Federal Reserve, Finance, Fiscal Policy, Inflation, M1, M2, monetary policy, Money Supply, Obama, Politics, Public Policy, TARP

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