The month of June 2009 was marked by the ongoing struggle between the optimists who believe that the worst of the economic downturn is behind us and the pessimists who believe that the global economy has not yet reached its nadir. In the first half of June, the optimists were winning out, as there was a feeling in the market that economic recovery was right around the corner and that the U.S. Federal Reserve would be forced to raise interest rates soon to combat the threat of higher inflation. The second half of the month witnessed a sharp reversal, where economic data pointed to a bleaker picture and the ongoing absence of the ever popular "green shoots." In short, stocks had priced in a meaningful economic turnaround in early June and as the month progressed investors became increasingly impatient when substantive proof of economic recovery had failed to appear.
This investor impatience may lead to an error of pessimism and the mistaken belief that the end of the recession is dead on arrival when recovery is just around the corner. Although we are skeptical of the sustainability of government induced economic "green shoots", we do believe that the massive government stimulus will eventually have a very favorable, but transitory impact on the economy. Paul Kasriel, Chief Economist at Northern Trust and an early forecaster of recessionary conditions, recently analyzed economic activity during the Great Depression. He found that federal government spending and Fed money printing in the 1930s promoted economic recovery in the middle of the Great Depression. Paul further cautioned with respect to the current economic crisis "…never underestimate the initial positive impact on aggregate demand of that powerful combination of increased federal spending/tax cuts and a central bank running the monetary printing press at a high speed (emphasis added)."
In closing his article, Paul encouraged investors to monitor the leading economic indicators to discern whether or not an economic recovery is at hand. To this end, we have been on the lookout for actionable information on leading economic indicators. A recent issue of Grant's Interest Rate Observer noted that "there is good reason to believe that the U. S. economy is mending, not relapsing" based upon the work of Economic Cycle Research Institute (ECRI). ECRI is an independent institute dedicated to economic cycle research in the tradition established by its founder, Geoffrey H. Moore, whom The Wall Street Journal called "the father of leading indicators."
Like an alchemist searching for the elixir of life, ECRI has been studying and transforming economic data series into economic crystal balls since the 1950s. The June edition of ECRI's "U.S. Cyclical Outlook" indicated that their leading economic indicators are on a tear to the upside. ECRI stated that "What we have are pronounced, pervasive and persistent upswings in a succession of leading indexes of economic revival - the most powerful possible predictor of a business-cycle recovery (emphasis added)." Although ECRI's impressive use of alliteration in their economic forecast is a close runner-up to Mother Goose's classic tongue-twister, "Peter Piper picked a peck of pickled peppers …", the real question is whether this harmony of economic alchemy and alliteration makes their forecast "good as gold."
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