When will the recession end ? Part 32 You can't hope or wish a recession away

Two of the world's greatest economic cheerleader were out in public yesterday, promoting the opinion that the recovery is taking hold. As much as I'm a born optimist and I would like to believe both these gentlemen at face value, I can't ignore the opposing facts,  that are staring me boldly,  right in the face.

US Federal Reserve chief Ben Bernake, who was just named Time Magazine's Person of the Year, for sidestepping a depression, (weather that's good or bad is another story-see next paragraph) said that the "deterioration in the labour market is abaiting and the housing sector shows some signs of improvement." It ignores the fact that the many CEO's of the Business Roundtable in the US are continuing with  layoff plans for the next 6 months of 2010, which won't improve general consumer confidence and spending. What's worse, the USA has to create 11 million new jobs, just  to make up for the 7.2 million jobs lost in the recession from Dec 2007 and more new population growth, that will be entering the labour market ( stats from the Washington-based Economic Policy Institute).

The Organization for Economic Co-operation and Development (OECD) has unveiled the first indications of how the economic slump has affected entrepreneurship in the United States and eleven other countries in 2008 and most of 2009. The report shows that new firm formation declined (peaking in 2007 and 2008 in many countries ) and exits (polite way of saying failures) increased, which economists say could have significant implications for job creation. The United States and the United Kingdom (and to a lesser extent Spain) observed a decrease in firm entries already in 2007, when most other countries were still reporting a steady rise. The subsequent strong fall in firm entries during 2008 and 2009 has resulted in fewer firm entries than in 2005 (except for France and Belgium).

As far as housing is concerned, just because builders are building more houses, doesn't mean that homeowners can afford to maintain them, even with today's historically low interest rates. Housing starts in the US (and Canada) may be marginally up, but so are the foreclosure rates. 30, 60 and 90 day deliquency rates in mortgage payments are rising in the US too.

[personally, I think that the US would have been better off to suffer a year or two of deep depression, retire all it's debt, deleverage all it's excess capacity and start fresh,  instead of the potential of a decade -long economic malasie that it's about to enter. Remember that the great depression in the USA lasted 15 years after the roaring 1920 from 1929 to 1943, and was only punctuated and catalysed by WWII..In the last Great depression, it was the newly created global exporters that suffered the most ,such as the USA. We may yet see that today's chief global exporers such China, India, Singapore,  and Japan, may be weakened in a post stimulus global environment. Self-sustaining, innovation based economies all seem to be doing better in this recessionary period ie Using unemployment as a proxy indicator, we see that a number of countries are doing better than Canada and the USA such as Norway (3.1% Sept 2009); Switzerland (4.1% Nov 2009); Denamrk (4.2% Oct 2009);  Netherlands (%.2% Oct 2009) etc   ----what's better ? short acute pain vs prolonged chronic pain?--Walter Derzko]

Across the boarder, Bank of Canada governer Mark Carney echoed the same themes of stablization   ....ditto for Canada, which could still face a similar residential housing bubble collapse, as we saw in the USA.

Both cheerleaders warned however of excessive household debt, but paradoxically on the other hand, are indirectly encouraging spending, with low interest rate borrowing, which is what got us into this mess in the first place. 

Here's what a Canadian bank, Bank of Nova Scotia and Scotia Capital is  advising its clients this morning:

Derek Holt says:

 

"Going forward, we remain structurally bearish on a growth story that has legs to it into 2010H1, but then stumbles again once fiscal steroids and inventory cycles settle down as largely artificial growth supports that don’t translate into sustainable earnings growth after the first round effects of operating leverage. It will take until at least 2011H1 to evaluate whether the U.S. economy has legs to it at a growth pace that will ultimately deliver  what markets have already priced in, or not. Having clarified that, we don't think the  more bullish shops than Scotia Economics (which is expecting growth to drop back down to a 2-handle after a temporary over-shoot) are making a terribly good case for being bullish in a stylized facts sense."

Walter Derzko

 

 

 

Author of the soon-to-be published book- Opportunity 45 Scenarios to Drive Your Business in Challenging Times,

published by J. Wiley and Sons

ISBN13: 978-0-470-73761-3

ISBN10: 0-470-73761-1