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.